Realogy Holdings (RLGY) Richard A. Smith on Q2 2016 Results - Earnings Call Transcript

| About: Realogy Holdings (RLGY)
This article is now exclusive for PRO subscribers.

Realogy Holdings Corp. (NYSE:RLGY) Q2 2016 Earnings Call August 4, 2016 8:30 AM ET

Executives

Alicia Swift - Senior Vice President-Investor Relations

Richard A. Smith - Chairman, President & Chief Executive Officer

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Analysts

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Will Randow - Citigroup Global Markets, Inc. (Broker)

John Campbell - Stephens, Inc.

David E. Ridley-Lane - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Brandon B. Dobell - William Blair & Co. LLC

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Anthony Paolone - JPMorgan Securities LLC

Michael G. Dahl - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Ryan McKeveny - Zelman & Associates

Brad Burke - Goldman Sachs & Co.

Operator

Good morning, and welcome to the Realogy Holdings Corporation Second Quarter 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 until August 18.

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

Alicia Swift - Senior Vice President-Investor Relations

Thank you, Shannon. Good morning, and welcome to Realogy's second quarter 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 three 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 the 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, August 4, 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 financial measures is included in our earnings press release.

Now I will turn the call over to our Chairman, CEO and President, Richard Smith.

Richard A. Smith - Chairman, President & Chief Executive Officer

Thank you, Alicia, and good morning everyone. Our results for the quarter were mixed. The continued growth at RFG and TRG was offset by weakness at NRT, which put our overall transaction volume growth at the low end of our guidance range. Before I get into the business unit specifics, let me highlight the progress we have made on our long-term financial goals.

Today, we announced the initiation of a quarterly cash dividend policy. The board has declared a cash dividend of $0.09 per share of the company's common stock payable on August 31 of this year to shareholders of record as of the close of business on August 17, 2016. The dividend complements the company's existing $275 million share repurchase program announced in February of this year.

During the second quarter, Realogy repurchased approximately 1 million shares of common stock in the open market at a weighted average market price of $31.50 per share for $34 million. Year-to-date, we have repurchased $67 million or approximately 2 million shares. We continue to believe our stock price is trading below its intrinsic value. During the quarter, the company successfully completed the refinancing an extension of its Term Loan B, providing a more attractive maturity profile. And finally, we are executing on our initiatives to reduce expenses and improve services.

Our current annualized run rate savings target is now $60 million, a 50% increase from our first quarter forecast, $30 million of which we expect to realize this year. Now to the business unit highlights, for the second quarter, our Realogy Franchise Group, we refer to as RFG franchisees, reported increases of 7% in transaction volume, 4% in transaction size and 3% in average sales price. Combined across all Realogy brands, the RFG average sales price for the second quarter was approximately $274,000.

As a reminder, RFG manages our portfolio of brands and our franchisees operate domestically in all 50 states. Our franchisees continue to see solid demand in the Northeast with the most prominent gains occurring in Massachusetts and New York State. RFG's 13% volume increase in the Northeast was comprised of 9% on sides and 4% on price. The Midwest and South both had approximately 9% volume gains, split fairly evenly between sides and price.

Conversely, the West region was RFG's weakest region with only 2% volume growth which reflects a 3% increase in average sales price, offset by a 1% decline in sides. As to franchise sales, RFG added $103 million in new franchisee and sales production gross commission income in the second quarter; that's 21% increase over the second quarter of last year. And through the first half of this year, the sales team has recorded $192 million in new GCI, gross commission income, a 24% increase year-over-year.

On the technology front, we are excited to report that the ZAP technology platform rollout for RFG is going quite well. We are ahead of our original forecast with over 1,000 franchisees in the platform. We expect 1,500 franchisees would be live on ZAP by year-end 2016, along with 20,000 active agent users. Our long-term plan is to get the majority of our franchisees operational on the ZAP platform by the end of 2017. As our franchisees go live on the ZAP platform, our focus is on driving agent engagement. We have already begun the process of measuring agent productivity. And although results are based on a small data set, we are encouraged by what we are seeing.

In June, we announced the organization of ZapLabs as our innovation and technology hub headquartered in the San Francisco Bay area. Formerly operated as ZipRealty's technology development group, this new positioning as ZapLabs more clearly identifies its focus on new product research and development for the entire company. Its near-term priority is the successful rollout and enhancement our proprietary ZAP platform to our franchisees, after which it will focus on emerging technologies and new product development.

Moving to NRT, for the quarter, our company-owned brokerage operations reported approximately 98,000 closed home sale sites, a 1% decrease from the second quarter of last year and an average sales price of approximately $486,000; that's 2% less than last year. NRT's performance stems from a combination of agent attrition and weakness at the high end of the housing market which includes NRT's key markets; the New York Metro area, the Hamptons, key coastal Florida markets and Northern California and Southern California.

One a regional basis, the Midwest was NRT's best performing region with a 10% increase in volume, up evenly between sides and average sales price. In the Northeast, transaction volume was down 4%, driven by an 8% decline in average sales price. If you exclude The Corcoran Group, which is New York City-based, and the NRT-owned Sotheby International Realty operations, Northeast volume increased 5%. The West was the weakest of our NRT markets with volume down 6% due to a decrease of 7% in transaction sides. California was the weakest single state with a volume decline of 8%.

Northern California transaction volume was down 10% and Southern California transaction volume was down 6%. It is important to point out that high-value property sales were still occurring, but in smaller than expected numbers. California, Florida and the New York City Tri-State Area are NRT's top markets. And volume was down in all of those markets in the second quarter. These market areas combined accounted for 60% of NRT's revenue in 2015. Collectively, these markets were down 8% in the quarter on a volume basis compared to last year, while the remainder of NRT's markets were up an average of 6% on transaction volume. These are among the most valuable real estate markets in the country and long term will continue to be beneficial to Realogy.

At the core, this quarter's performance in NRT is a combination of high-end softness in its major markets and the cumulative effect of competition towards top producing sales associates. Our agents are some of the top talent in the industry and, as such, have historically been targeted by the competition. This trend has recently become more pronounced as new entrants to the industry as well as assorted established firms use short-term economic incentives to build market share.

Our experience tells us that economic incentives need to be complemented by a strong level of support to the agent, which we uniquely provide. We take great pride in the fact that we've built a comprehensive full-service platform of best-in-class, marketing, technology and professional education that makes it possible for agents and agent teams to significantly build their businesses.

Our track record of retaining and recruiting agents at all production levels is based in part on the strong value proposition we provide to our agents.

For these reasons and more, we consistently retain over 90% of our top two quartile sales associates and annually recruit a significant number of new agents. Still, we recognize the need to keep pace with a more competitive market for agents. To address this challenge, we have implemented a multi-point plan, the outcome of which is a stronger focus on agent retention and agent team recruiting. The benefits of our plan will be realized over the next 12 months to 18 months. While we expect near-term moderate pressure on costs from these initiatives, the expected increase in revenue should more than offset the related costs, producing improved financial results for NRT and the Realogy business units that benefit from NRT's volume gains.

In addition to these efforts, NRT continues to invest in activities that create company-generated leads that add to our value proposition to our agents. Company-generated relocation leads, it's ZipRealty brokerage expansion and consumer website leads, which together in 2015 comprised approximately 10% of NRT's close business, all generate home sale closings that have higher margin characteristics than agent generated business.

Finally, we are redoubling our efforts to improve operating leverage with a focus on NRT's cost structure. NRT's current fixed cost base of approximately $970 million mainly reflects the expenses related to the employees and the field operations teams that support approximately 800 leased offices and 47,000 sales associates in 50 metropolitan areas. Our initiatives are focused on further streamlining our business and improving responsiveness to the needs of our agents, buyers and sellers.

Specifically, we are centralizing systems and processes in order to more efficiently deploy our field support management and services so they can focus on their most important job, making our agents more productive. We're increasing our total company annualized run rate cost savings from $40 million to $60 million, which we expect to accomplish by mid-2017. The increase of $20 million is all related to NRT. As I commented earlier, $30 million of the expected savings will be realized in 2016.

It was a challenging quarter for NRT. That said, we have a solid action plan in place to more significantly increase agent retention and new agent and agent team recruiting, the outcome of which will be stronger long-term profitability in 2017 and beyond. The eventual strengthening of the high-end market will leverage these enhancements.

In addition, our growth plan for NRT includes tuck-in acquisitions in both core and adjacent businesses. This quarter, NRT acquired The Collaborative Companies, a full-service residential real estate marketing firm focused on vertical urban and suburban development in the greater Boston area. This is similar to our very successful Corcoran Sunshine Group that is based in New York City.

After the close of the second quarter, NRT acquired the largest independent brokerage firm in Boston, Hammond Properties, which will enhance our already strong position in the Metro Boston market. Also in July, Property Frameworks, NRT's property management company, acquired ONEprop, a multi-state single-family residential property management company headquartered in Dallas. The firm operates in eight states and manages about 5,700 single-family homes. With this acquisition, NRT's single-family property rental management business now operates in 15 states and is one of the largest of its kind in the country. We continue to gain a more meaningful presence in this facet of residential real estate, which we believe represents an important strategic opportunity for NRT.

Both Cartus, our relocation company, and TRG, our title and closing services company, are performing at expected levels. TRG continues to explore the expansion of its geographic coverage through both organic growth and strategic acquisitions. Cartus is managing several pilot programs through its Affinity Partners business that show great potential. The Affinity business provides Cartus-managed real estate services to members of large Affinity membership programs. This is a growing business channel for Cartus that creates incremental high-quality real estate leads that are served by our franchisees and company-owned real estate brokerage operations.

Now let me provide more context as to the current and forecasted state of the housing market. We continue to believe that housing is on a growth trajectory and still has years to go before it reaches peak levels. The industry is benefiting from low mortgage rates and strong demand at the entry and move-up market levels and, in our view, has years to go before it is fully recovered. We believe there are a number of variables, but two in particular are still challenging, credit and inventory.

Credit terms, although improving, continue to be unnecessarily restrictive, evident in the very high FICO scores. And low inventory levels in most markets are holding back the strength of this recovery. According to the National Association of Realtors, there are 4.6 months of inventory, which is substantially less than the six to seven months we have seen historically.

As you can see on slide four, the five industry forecasters we follow are forecasting 8% transaction volume growth for full year 2016. This has remained relatively consistent since the beginning of the year. Based on our current visibility and the expectation that the trends and NRT markets will continue through year end, slide five shows our third quarter guidance of 1% to 4% home sale transaction volume growth. The components are transaction sides growth of 1% to 3% and average sales price between flat to up 1%.

RFG home sale volume in the third quarter is anticipated to be in the 4% to 6% range while NRT transaction volume for the third quarter is expected to be down between 1% to 3%. Before I conclude, I want to recognize our newest independent board members, Matt Espe and Chris Terrill. Matt has extensive leadership experience as a former CEO of two publicly traded companies, most recently at Armstrong World Industries and has a comprehensive knowledge of the homebuilding supplies market. Chris is the CEO of HomeAdvisor.com, a leading national home services digital marketplace. He's a seasoned Internet veteran with extensive experience in online housing-related business services.

The collective experience that Matt and Chris bring to Realogy will serve our board, the company and our shareholders quite well. In summary, we have a demonstrated commitment to our long-term financial goals, delevering our balance sheet and returning capital to our shareholders. We recognize the challenges and opportunities ahead of us and are moving aggressively to address the issues within our control and influence.

Simultaneously, we remain focused on our long-term growth strategies; the continued investment in our core brands, the strengthening of our value proposition, the solid execution of our long-term business strategies and the investment in ZapLabs and emerging technologies. These strategies reinforce our number one position in the housing industry.

So with that, I'll turn the call over to Tony to review our second quarter financial performance. Tony?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Thanks Richard. Let's go through our financial metrics for Q2 starting on slide six. Revenue for the quarter was $1.66 billion, up 1% compared with the same period in 2015. Operating EBITDA was $275 million, a 4% increase over the prior year. Last quarter, we introduced operating EBITDA, which is EBITDA before restructuring costs, early extinguishment of debt and former legacy – former parent legacy items.

Adjusted basic earnings per share was $0.74, representing a 16% increase. The increase was due to higher operating EBITDA as well as lower interest expense before non-cash mark-to-market changes on our swaps as well as lower depreciation and amortization. We generated $208 million of free cash flow, which is $65 million less than Q2 of 2015, and the decrease is primarily due to the timing of net borrowing under our securitization program and working capital movements. Last year, our relocation receivables and related borrowings increased $43 million to accommodate a large corporate client group move; that those borrowings were subsequently repaid.

Relating to working capital, lower bonus accruals this year compared to last year, as well as cash restructuring costs incurred, required a $19 million use of working capital in the period relative to last year.

As of June 30, our net debt leverage was 3.8 times, an improvement from the first quarter year and year-end 2015 results. In July, we reduced the size of the Term Loan B by approximately $760 million to $1.1 billion using proceeds from a new $355 million Term Loan A, revolver borrowings as well as cash on hand.

Turning to slide seven, which is key revenue drivers, Realogy combined home sale transaction volume for the quarter was up 3% compared with the second quarter of 2015. Broken out by business unit, RFG home sales size increased 4% and average sales price was up 3% compared with the same period last year. NRT transaction volume decreased 3% in the quarter compared with the same period last year as transaction sides declined 1% and average sales price decreased 2%.

Average broker commission rate at RFG decreased one basis point during the quarter while NRT's average broker commission rate increased three basis points. Net effective royalty rate for RFG year-to-date was 4.5%. For the full year, we expect it to be flat to prior-year levels. NRT commission splits increased 20 basis points on a year-to-date basis. For the full year, we currently expect commission splits to be in the range of 20 basis points to 30 basis points above prior-year levels.

Now we'll go into some more specifics on the second quarter, starting with an NRT revenue walk down on slide eight. NRT revenue decreased $21 million in the latest quarter compared to the same period last year. Here we have broken out NRT's revenue changes between those periods into three categories. First, revenue changes from home sale transactions at $2.5 million and above, revenue from acquisitions completed prior to the second quarter and revenue changes for the remaining home sale transaction volume occurring with average sales prices below $2.5 million and this also includes other NRT revenue changes. A drop in NRT's home sale transactions priced above $2.5 million caused its revenue decline approximately $35 million. The decline in this segment was due to softness in the high-end market as well as agent attrition. As a point of reference, for the second quarter of 2016, NRT sales volume at the $2.5 million and above level was 16% of total volume and that's down from 19% in the second quarter of 2015.

Transaction volume for homes with prices below $2.5 million on a same-store basis, offset by other revenue increases at NRT, was down $3 million year-over-year and this was influenced by agent attrition.

Turning to slide nine, NRT operating EBITDA decreased $12 million as a result of the reduced revenue as well as lower PHH Home Loans joint venture earnings of $3 million and higher marketing costs of $2 million. This was offset by lower commission expense and lower employee-related costs.

At RFG, revenue increased $8 million or 4% and that was driven by domestic franchise volume increases as well as a $4 million increase in other revenue, primarily related to marketing-related activities. RFG's operating EBITDA increased $6 million or 4%. Revenue gains were partially offset by a $3 million increase in expenses related to the timing of brand conferences and franchisee events.

Cartus' operating EBITDA increased 3% due to revenue being up 1% as well as favorable FX movements. TRG's operating EBITDA increased $6 million due to higher purchase and refinance volume as well as the inclusion of the results from its acquisition of Independence Title last August.

Corporate expense decreased $10 million year-over-year primarily due to the absence of a legal settlement that occurred in the second quarter of 2015. Year-to-date corporate cash interest decreased 21% to $83 million in the latest six-month period as a result of refinancings completed over the past year. Book interest expense for the first six months of 2016 was $132 million and was adversely impacted by a $34 million increase in our non-cash mark-to-market adjustment on our interest rate swaps. Excluding this effect, book interest decreased $20 million on a comparative basis. For the full year, we expect corporate cash interest to total approximately $170 million.

Richard spoke earlier about our third quarter transaction volume guidance. Turning to slide 10, for the full year, we expect total transaction volume to be between – up between 3% and 5%. RFG transaction volume will increase 5% to 7% and NRT transaction volume will range from down 1% to up 1%. As a result, for the full year 2016, we expect adjusted EBITDA to be between $845 million and $885 million. This is on revenues of approximately $5.75 billion to $5.95 billion. And we expect the adjusted EBITDA margin to range from 14.7% to 15%.

Operating EBITDA for the year is forecast to be between $760 million and $800 million, yielding $450 million to $500 million in free cash flow for the full year. As a point of reference, this will add to the $1.2 billion in free cash flow generated by the company over the past three years.

Slide 11 provides guidance for specific cash flow items below operating EBITDA.

In conclusion, despite a challenging quarter, our business continues to generate significant cash flow. We will continue to be thoughtful about its deployment. We're progressing ahead of schedule on returning capital to shareholders and believe that the combination of a quarterly cash dividend and our existing share repurchase program is an efficient and sustainable way for us to deliver on that commitment. We're also maintaining a focus on our continued growth and will continue to make opportunistic acquisitions and deleverage the balance sheet.

With that, we will open the lines up to M&A – for Q&A, excuse me.

Question-and-Answer Session

Operator

Your first question comes from the line of Jason Deleeuw from Piper Jaffray. Your line is open. Please go ahead.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Thanks and good morning. Just a question on the guidance range for the full year. Can you help us kind of understand what's driving the range from the low-end to high-end in terms of the agent retention assumptions and the high cost market trends? Are you expecting stabilization on those trends or further worsening? If you could just provide a little color there.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Sure. As we mentioned, we expect a continuation of those trends in Q3. But when we get into Q4, we're seeing some offsets due to the impact we had on TRID last year that we don't expect to have this year. So it's a mixed picture, but continuation in third quarter and then more strengthening in the fourth quarter, but really based on the comparisons.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Okay. And then in terms of for NRT, the agent splits were higher and now we're guiding to a higher split for the year. But I guess I was a little surprised to see the broker commission rate also increase there. And I guess I would've thought that maybe that rate would've gone down with maybe the high-end agents doing better. So if you could give us some color on the split trends and the commission trends in NRT.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Sure. The commission went down, I believe. I have to look at my – the commissions went up and, as you'd expect, when the price goes down. So I think that followed what you'd expect with the high-end weakness that we saw.

And then on splits, I'd say that the increase we're seeing this year is reflective of the beginning of our response to some of the intensified competition. But the most important thing, Jason, is we expect to generate more revenue than the increased split, so our overall profitability will improve as a result of the actions we're taking.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Yes. And then just a follow-up, the competition for the agents, is that mostly in the high-cost, high-end markets? Or are you seeing that more nationwide?

Richard A. Smith - Chairman, President & Chief Executive Officer

Jason, this is Richard. Real estate is a local business, so it varies market by market. It is generally intensified in the higher-priced markets, but we see a little bit of it here and there. These are not major adjustments. They're cheering up to the market. But if you had to pick a market, it would be predominantly the high-end markets.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

All right. Thank you very much.

Richard A. Smith - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Will Randow. Your line is open. Please go ahead.

Will Randow - Citigroup Global Markets, Inc. (Broker)

Hi. Good morning, guys. And thanks for taking my questions.

Richard A. Smith - Chairman, President & Chief Executive Officer

Good morning, Will.

Will Randow - Citigroup Global Markets, Inc. (Broker)

In terms of your net debt leverage, you guys are at about 3.8%, which I think implies you have about $200 million of buyback capacity. With the stock at about $29 in the pre-market, how aggressive do you think you'd be looking at the next quarter and a half, if you will?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Well, we're not limited necessarily to 4 times. We have other baskets in our credit agreements that allow us to do significantly more. So that's not a limiting factor. Having said that, we have $275 million authorized. We've only used $66 million, $67 million of that and we continue to believe that our stock is priced well below its intrinsic value. So we'll be looking at repurchases, continue to look at them opportunistically.

Will Randow - Citigroup Global Markets, Inc. (Broker)

And then on an unrelated follow-up. You spoke of some of the, I'll call it, competitive pressures. In terms of agent poaching, I know you guys recently got the head of recruiting from Compass, for example. Can you talk about some of those competitive dynamics in deeper detail? You'd think with the high-end off, some of those folks would be thinking about exiting the business. And in addition, you have this recent Zillow acquisition of Bridge Interactive.

Richard A. Smith - Chairman, President & Chief Executive Officer

Will, this is Richard. Listen, the market is always competitive for agents. As the market is getting stronger, you get more start-up competitive pressures, you get some pressure from existing well-established firms based on the strength of the market. The talent pool is very competitive.

And we were very focused on the balance sheet. We got the balance sheet where we needed it and made it possible for us to now be even more aggressive and far more competitive than perhaps we have been in some markets on a split basis. And we absolutely intend to do that. So we're going to generate more volume. We'll generate more EBITDA as a result of this. But you'll see some movement in the costs related to the recruitment of top-producing agents. So it's market-by-market, it is nothing extraordinary. It is pretty commonplace.

As to the Zillow acquisition, good for them. We don't see any meaningful issue as it pertains to us. We wish them well. And as to recruiting, we're always looking for talent, both at the staff level as well as the agent level. And Corcoran's always done a terrific job of recruiting and retaining the top-producing brokers in New York City and beyond markets, so.

Will Randow - Citigroup Global Markets, Inc. (Broker)

Thanks, guys. And congrats on the free cash flow growth continued progress.

Richard A. Smith - Chairman, President & Chief Executive Officer

Thank you very much.

Operator

Your next question comes from the line of John Campbell from Stephens, Inc. Your line is open. Please go ahead.

John Campbell - Stephens, Inc.

Hey, guys. Good morning.

Richard A. Smith - Chairman, President & Chief Executive Officer

Good morning.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Morning.

John Campbell - Stephens, Inc.

Just on the upsized cost reduction plan, good work with that. But how do you guys plan to achieve that within NRT? What are the key levers there?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

The key levers are really centralization of a lot of the functions that are spread throughout the country and doing them much more efficiently and effectively for our agents. So that's really the main change from what we were looking at in the first quarter versus second quarter. We worked really hard in the second quarter to come up with an improved plan that really make – it's going to make NRT a much more agile organization and much more effective for our agent population.

John Campbell - Stephens, Inc.

Okay. That's helpful. And then on the dividend, it seems like you guys are kind of getting a little bit more aggressive on the capital returns. So I guess, A, what's driving that? And then, B, as you guys plan for that going forward, is that more of a disciplined payout ratio or is there a desired dividend yield you guys are managing to?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

I think we're getting – I agree with you we're getting more aggressive. And I think it's because we generate a significant amount of free cash flow. And we think the most efficient use of that cash flow is, at this point, given where our balance sheet is, we're definitely biasing our use of cash flow towards returning capital. And we think having a balanced approach between a dividend and share repurchase is most effective for our shareholders. So that's what we elected to pursue.

John Campbell - Stephens, Inc.

Okay. And is there a disciplined kind of payout ratio you guys are managing to or is that kind of still in the works?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

The board will review it from time to time. And this was where they felt it was important to start the process.

John Campbell - Stephens, Inc.

Okay. Thanks for taking our questions, guys.

Richard A. Smith - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of David Ridley-Lane from Bank of America. Your line is open. Please go ahead.

David E. Ridley-Lane - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Sure. Can you walk through the monthly trends you saw in NRT? Was there any improvement from March, which I believe was pretty weak, as you went through the quarter?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

They weakened during the quarter, especially at the high end. They softened. And I think what's really impacting the high end, we believe, is we've had three kind of stock market jolts over the last year. We've had – we've obviously had the strengthening of the dollar that has impacted the foreign buyers. They just really haven't adjusted to that new reality yet.

Our view is over time, the high-end will strengthen and rebound. And we've seen that before in the recession, in the housing recession and the recession in general, the high end was the first to recover. And it really operates on a different sort of track than the entry and the move-up market. So we're encouraged that that's going to snap back.

Richard A. Smith - Chairman, President & Chief Executive Officer

David, this is Richard. There's also a bit of some market adjustment because the high-end markets got pretty frothy from a valuation perspective. So pricing was sort of outstripping demand for some period of time. So now pricing is settling in. And what's important characteristic for us as operators, when a seller reduces their price, the wish, on the list price of the home to what seems to be more market, the buyers buy. But until they find that sort of price discovery, there's a stalemate. And we think that's what's playing out in the major markets. So that's actually – we view that as good signs because the buyer is still there and still transacting, but at lower price points.

David E. Ridley-Lane - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Understood. And then could you see any benefit from higher risk financing levels in the second half from your PHH joint venture in the TRG segment and would that potentially be upside to your guidance if that did in fact occur?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

I don't believe it would be significant enough to cause upside to the guidance.

David E. Ridley-Lane - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Got it, thank you very much.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

And David, that's based on what we're seeing on the opens at TRG and PHH. So – on refi open, so it's definitely strong as you point out. It's definitely much higher than last year, but it's not going to be enough to move that needle out of the range.

Richard A. Smith - Chairman, President & Chief Executive Officer

David, a stronger refi market would clearly benefit TRG. So we'll see – we'll see how the market plays out. But as to PHH, Tony is right, it would not be material to us.

David E. Ridley-Lane - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, okay. Thank you.

Richard A. Smith - Chairman, President & Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Brandon Dobell from William Blair. Your line is open. Please go ahead.

Brandon B. Dobell - William Blair & Co. LLC

Thanks. Maybe want to try and connect to data points. One just a comment about, I guess, being a little more aggressive on the splits and recruiting and things now that you've got the balance sheet squared away. And then also the cost containment efforts within NRT. Is one serving as a source for the other? Do you need to be more aggressive on the cost side in order to get more aggressive on the recruiting side, which I'm trying to reconcile how you guys think about those two things in concert?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Those – I'm sorry, Richard.

Richard A. Smith - Chairman, President & Chief Executive Officer

Do you want to go ahead?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

They're both important and we don't view them sort of a dollar for dollar funding type of thing. We just view that we think there's a more efficient way to operate NRT and that's what we're going to do. And we think it's important to meet the – meet the challenges on the agent retention and recruiting side. And that's what we're going to do. And the common theme of those two things is that our EBITDA is going to improve as a result and not only at NRT, but also the royalty piece at RFG and TRG units and that sort of thing. So we think it will help Realogy overall.

Brandon B. Dobell - William Blair & Co. LLC

Okay. Are there certain markets, or I guess parts of NRT where you've got, maybe, call it, evidence or a case study where you say we can run this a certain way and now we need to apply that way across the broader network or is this just say we're going to start with some fresh ideas across the entire platform?

Richard A. Smith - Chairman, President & Chief Executive Officer

Brandon, as a product of decades of experience, been there, done that. We know how this works. We can – the beauty of the model is we can do both. And don't look for a correlation between cost reductions and agent recruiting. We continue to maintain very high service levels to our agents and especially in markets where that is important to top producing agents. So I don't – there's no correlation between the two. As to being more competitive, the market – the landscape is changing a little bit and we intend to be aggressive and retaining our top producing agents and sales associates. So there's no tie between the two. We can do both.

Brandon B. Dobell - William Blair & Co. LLC

Okay. And then final one for me. Within Cartus, how do I think about the trajectory of that business in the back half of the year relative to the first half of the year and referrals down, I guess, high single digits or so in the first half. Is that just a timing issue, is there something more structural there? Just want to make sure I understand how the back half looks versus the first half.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

The trajectory – the initiatives they're working on building their Affinity business are going to play out over 12 months to 18 months, it's not going to be in the back half. I think the back half is going to be pretty similar to the first half, not a big change in 2016 anyway.

Brandon B. Dobell - William Blair & Co. LLC

Okay, great. Thanks a lot.

Richard A. Smith - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Bose George from KBW. Your line is open. Please go ahead.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Hey, guys, this is actually Chas Tyson on for Bose. Thanks for the detail on the amount of transactions that are happening, above $2.5 million in NRT, is there a way we can think about the margin differential between transactions above $2.5 million and below $2.5 million from an EBITDA perspective?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

It's really – it's going to be market-specific. So I'd say in general, the margins are a little lighter, but it's not that material. It really depends if they're happening on the West Coast or East Coast and that sort of thing.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay, the margins are lower on the higher transactions?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yeah, because for two – yes and there's also at the higher end – there is lower commission rates because the – at those prices, you don't get the 5% necessarily for much larger transaction size.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Right, yes. I mean, is there a way to think about the average commission rate on large transactions or it's just kind of transaction-specific?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yes, it's pretty much specific to the transactions and where they occur.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. And then you guys talked about – a little bit of the stalemate that you're seeing in some of your higher end markets. I mean, are you seeing that break up at all in 3Q and heading forward, I mean, I think one market where there's been a significant amount of inventory increases has been San Francisco. So just curious if you're seeing that and it seems to be that people reacting to the high prices and hopefully getting some transaction volume going again?

Richard A. Smith - Chairman, President & Chief Executive Officer

Price adjustments occur over time. People buying at that level are not necessarily urgent and they're – and trying to execute their – their purchase of a high-end property. So they're patient and we see that playing out. Great deal of patience, no sense of urgency. Generally, these are cash transactions. They're not worried about financing. They – you know, this buyer and seller play in the market, and so good news is when price discovery concludes, with the price that both parties are happy with at a much – at a lower level obviously.

They're transacting – we see that as a good sign. So varies by market, but generally across the board, there's price discovery going on and we still see a lot of activity and we expect that to continue this year and jury is out as to whether that continues in the next year. But we see it, we observe it and we continue to be a participant. So it looks encouraging, but it's too early to tell when this plays out.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yeah. And our guidance for NRT is down 1% to 3% for the quarter, so that's a – it's a continuation of what we saw in the second quarter.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Right, yes. And then typically, I mean, I know you guys have given the amount of NRT revenue that comes from California, that comes from New York and from some other markets. But is there a way to think about specifically what comes from San Francisco and what comes from New York?

Richard A. Smith - Chairman, President & Chief Executive Officer

We don't break it out. As we've indicated, it's about 60% of NRT's revenue and we don't – for a lot of reasons, we don't break it out specifically. But you know that we're a major player in San Francisco.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yeah. It's about – we do break it out, it's about 24% is in the New York Tri-State Area. It's about 30% California and a little bit less than 10% in Florida.

Richard A. Smith - Chairman, President & Chief Executive Officer

We just don't break it out by city. So...

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

No, no, no.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. Thank you very much, guys.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yeah.

Richard A. Smith - Chairman, President & Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Anthony Paolone from JPMorgan. Your line is open. Please go ahead.

Anthony Paolone - JPMorgan Securities LLC

Thanks. Good morning. Can you talk about how to think about spending like $100 million on acquisitions and getting that those folks into the organization over the year versus kind of this competitive idea about losing agents to competitors and perhaps matching what the competitors might be offering? I'm just trying to think about that. I'm just trying to think about how that trade-off looks when you guys think about it.

Richard A. Smith - Chairman, President & Chief Executive Officer

Well, let me begin and Tony can chime in. We do both. We're going to continue tuck-in acquisitions for especially like CB United, where we're moving into markets that are strategic where we had no presence from an operating perspective. So we don't view the two as being necessarily connected. So we're going to continue to do tuck-in acquisitions, they're very accretive. They meet very high ROI standards, they're long-term acquisitions. We're not acquiring them for the moment or for the quarter.

The other issue is an ongoing operating issue. So one is strategic acquisitions, which we built the entire company on the basis of that and our knowledge of the markets. And the other is an operating issue. And we don't intend to match competitors, we don't have to. We have a stronger value proposition. But we can be more aggressive now and we intend to do that.

So don't look at the two as being linked necessarily. One is deployment of capital in an efficient way and the other is operating the business more aggressively in certain markets with respect to splits and the economic relationships we enjoy with agents. That's an ongoing issue.

Anthony Paolone - JPMorgan Securities LLC

Okay. And so then on the competitive side, can you put any brackets around what to expect in terms of perhaps like agent splits? Should we expect those two to creep up a bit? Or can you hold those where they've been?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

No, we should expect them to creep up a bit. But the more important thing is that our EBITDA, our revenue will be greater than the expense increase and our EBITDA and our profitability will overall improve.

Anthony Paolone - JPMorgan Securities LLC

Okay. And then you alluded I think to maybe like the stock market as being a factor on the high end and this rediscovery of price. If we notch down to below 2.5 million, maybe even to the $1 million to $2.5 million range on your major coastal markets, what do you think drives that segment? How big is that for you all? And what's the risk to that level if the economy starts to stall out or something like that? How should we think about it?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Well, getting into that range, it's more about credit availability, mortgage rates, wage growth, so that range down to the full gamut. So clearly, what we're seeing is very attractive mortgage rates, although it's still challenging to get a mortgage. And then inventory levels at historically low levels, so that's putting downward pressure on unit growth, but it's obviously putting some upward pressure on price.

So, again, we don't see the trajectory of that main market moving that much. Again we think we have a long way to go before we get to peak and we think we're in the 6%, 7%, 8% growth in those markets for obviously unless some exogenous event gets in the way. But we feel pretty good that the housing market is going to recover on a steady pace that we're seeing now, especially at those levels for the foreseeable future.

Anthony Paolone - JPMorgan Securities LLC

Okay. And in terms of the weakness in the major metros or coastal markets, how much of that was do you think share versus just the high end, how do you split the two of those?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Roughly, we think it was like two-thirds the high-end being weak and a third attrition. And of those two things, we can control one, which we talked about we were going to control and we're going to regain that. And the other one, it's just we don't obvious have control over that.

Anthony Paolone - JPMorgan Securities LLC

Okay. And on the buyback program, I think you may have had twice as many days in the second quarter open to use it versus the first quarter, but you did fairly comparable amount. Just trying to understand the thought process behind your appetite to use it and pace and so forth.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

That was the cadence. We just started doing it. That was the cadence in the first quarter. We felt it appropriate to have that same cadence in the second quarter. Going forward, again, we have the $275 million authorized and we'll continue to judge or look at what the market opportunities are and move from there.

Anthony Paolone - JPMorgan Securities LLC

Okay. Thanks.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yep.

Operator

Your next question comes from the line of Mike Dahl from Credit Suisse. Your line is open. Please go ahead.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Hi. Thanks for taking my questions. Tony, just as a follow-up to the split rate question, I think you made the comment that the full year is going to be up 20 basis points to 30 basis points if the action started in 2Q. And you were 50 basis points weaker and implies 40 basis points or so in the back half. Presumably, there's a carryover effect at least through the first quarter of next year before you annualize it. So ballpark, it puts you out like 68.7 basis points. Is that, in your mind, the run rate that your new strategic initiatives are targeting? Or do you think that as you ramp up these initiatives, there could even be some further pressure beyond that?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yeah, I think we are open to having it go up higher, but we're not open unless the bottom line has improved. So I think we're going to get more aggressive. We have the balance sheet and our leverage is in a good place. So I think we can be more aggressive on that and we're going to be. And – but the bottom line is it may impact margins, but the cash flow and EBITDA results will be very positive.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Right. Okay. And is there – I think some of Richard's earlier comments were also saying, look, these things go in cycles. Sometimes you tend to see short-term incentives and agents jump to kind of get the highest bid. But is there anything different about today's competition from maybe a cost structure standpoint that would lead you to believe that this may be something that competitors can sustain for beyond just a year or so?

Richard A. Smith - Chairman, President & Chief Executive Officer

Listen, it varies market by market. We've seen this come and go in the past and these types of competitive pressures are part of the industry; that's how the industry works. We manage through all of them and we intend to manage through this one as well. And now we're in a position to capitalize on the weaknesses, we believe, exist in some of those models that are only incentive-driven because our basis of the relationship with the agent is not just driven by the economics, it's driven by the full suite of values that we provide to them. So we're a full-service shop. We don't compete just on the economics. We compete on a full-value relationship. So this is something you manage through and that's what we're doing and we don't see it as being terribly different from any in the past.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Okay, got it. And last question for me is, have you seen any impact from some of the treasury rules around disclosure in New York and South Florida and any idea of just if you're – how to think about the impact in the back half as that expands out to California and some of the other New York boroughs also?

Richard A. Smith - Chairman, President & Chief Executive Officer

Yeah, as you know, this is limited to certain states. It's – applies to the industry more broadly. We see no impact and we don't anticipate it. Just another full disclosure obligation on the part of practitioners and I think the industry has met that obligation. I know we have. So, we've seen no impact on transactions.

Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker)

Okay, great. Thank you.

Operator

Your next question comes from the line of Ryan McKeveny from Zelman & Associates. Your line is open. Please go ahead.

Ryan McKeveny - Zelman & Associates

Hi. Thank you and good morning. On the M&A side, with a slower high-end market, the focus on improving recruitment and retention and driving efficiencies in the business, I'm just curious if this changes the way you think at all about acquisitions in the current environment versus if NRT's footprint was growing at a faster rate, let's say.

Richard A. Smith - Chairman, President & Chief Executive Officer

Ryan, as you know NRT's assortment of acquisitions go all the way back to 1995, 1996. So we know this – we've been through a number of markets. So we know how market conditions impact valuations. That will be reflected in our acquisition activity going forward. It certainly has been reflected in our acquisitions in the past. So we continue to be, as we indicated, in the market, from a tuck-in perspective, I don't see anything materially beyond tuck-in acquisitions. But we'll be selective and our interest will be determined by the state of the market conditions of the industry and all the things, all the variables we've used in the past. So we'll see how the market shapes up.

Ryan McKeveny - Zelman & Associates

Got it, thanks. And just one more, I don't mean to beat a dead horse. But on the recruitment and retention and the cost side of things within NRT, could you give some examples of what exactly is being driven out from a cost perspective in the efficiencies because the offset I'm trying to balance against is assumingly through greater focus on recruitment and retention. Assumingly, it's partly driven by better services, better offerings to the agents. So just trying to balance that in a bit more detail on what exactly is potentially being removed out from a cost side.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

It's really the back office. It's consolidation of the back office functions and putting them into centers of excellence and then using those to provide support for the 800 offices and 800 office managers and the 47,000 agents that we have and really to focus – and to be able to allow the focus of the managers and the regional management to focus on sales, on being the best sales organization we can be and make our agents as productive as possible, so they're not mired in the day to day stuff. We're going to deal with that at corporate and they're going to deal with making sure our revenue is strong as it can be with our strong agent base.

Ryan McKeveny - Zelman & Associates

Got it. Thank you. And if I could squeeze one last one in, that slide eight is very helpful. I'm showing that the split of the $2.5 million price point. Do you have the data of what percentage of transaction volume would be above and below that threshold to help frame those numbers?

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Yes. It was 60% above.

Ryan McKeveny - Zelman & Associates

Got it. Okay. Thank you.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Thanks a lot.

Operator

We have time for one more question. Your final question comes from the line of Brad Burke from Goldman Sachs. Your line is open. Please go ahead.

Brad Burke - Goldman Sachs & Co.

Hey. Good morning, guys. Thanks for squeezing me in. Richard, you mentioned that the high end of the market has been giving back some of the frothiness that we've seen over the last few years, but NRTs average price is up about 1.5% over the last three years. And I realize that CB United and presumably some other acquisitions hurt that comparison. But it's still fairly modest increase. Do you think that NRT has been able to participate in the higher end home price appreciation that we've seen on the way up? And if it hasn't, are there some reasons that would explain that disconnect?

Richard A. Smith - Chairman, President & Chief Executive Officer

No, absolutely. We're in the markets where it matters and we have well-established influence in those markets and we've participated based on our share of those markets. So we have no concern there at all. The – now that said, we've intentionally moved NRT organically and through acquisitions and to markets that are not at those higher price points, that's by design.

The CB United acquisition is a classic example of that. We moved into a highly attractive long-term demographic-driven market at lower price points. So over time, you'll see that kind of, I think, influence on the average sale price as we move into markets that have higher volumes, longer – better stability over time, that are going to be at lower price points.

Brad Burke - Goldman Sachs & Co.

Okay. In the interest of getting off before we hit an hour, I'll drop off now.

Anthony E. Hull - Chief Financial Officer, Treasurer & Executive VP

Thanks Brad.

Richard A. Smith - Chairman, President & Chief Executive Officer

Thank you.

Alicia Swift - Senior Vice President-Investor Relations

We thank you for joining our call today and we look to speaking with you over the next quarter. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!