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Realogy Holdings Corp  (NYSE:RLGY)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Realogy Holdings Corporation Full-Year 2018 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 website replay will also be made available on the company's website.

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

Alicia Swift -- Senior Vice President, Financial Planning and Analysis, and Investor Relations

Thank you, Krista. Good morning and welcome to Realogy's full-year 2018 earnings conference call. On the call with me today are Realogy's CEO and President, Ryan Schneider; and Interim Chief Financial Officer, Tim Gustavson.

As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, many of which are beyond the control of management. Actual results may differ materially from those expressed or implied in the forward-looking statements. For those who listen to the rebroadcast of this presentation, we remind you that the remarks are made herein as of today, February 26, 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 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 CEO and President, Ryan Schneider.

Ryan M. Schneider -- President and Chief Executive Officer

Thank you, Alicia. I've now been in the CEO role here at Realogy for a year. It's been an incredibly exciting time. Exciting, because the residential housing business is fascinating, exciting because the opportunity for technology and data driven innovation is there for the taking in this industry, exciting because Realogy has amazing potential given our market leadership, great brands, technology and data scale, and cash flow generation and exciting because I get to interact with our great agents and franchisees. We are driving substantial changes at Realogy; culture changes, strategy changes, product changes, value proposition changes and talent changes, just to name a few. We are more agile, we're using data better and we are delivering better technology. And we're making all the changes at a time when the housing market has been pretty tough. 2018 was a challenging year in housing because of the headwinds in the latter half of the year. But even with those 2018 challenges, we entered 2019 with more optimism than you might expect. Our changes are making a big difference inside the company and for our agents and franchisees. We're seeing some wins in the market from strategic initiatives we launched in 2018. We're seeing less upward pressure from agent commission costs. And finally, I'll tell you our view of the housing market for 2019, and what that means for our near-term financial results and our capital allocation.

Pulling way up, we are focused on driving organic growth using technology and data innovation to improve our value proposition, recruit more agents, and enhance agent productivity. In a world where agent commission costs are rising, we must drive incremental volume to change the result trajectory of our company. I can see the path where growth from our strategic investments would give us the opportunity to exceed market growth going forward. So let me start by closing out 2018.

2018 turned out to be a tough year for residential housing. Industry transaction volume was basically flat compared to plus 6% in 2017 according to NAR. Most of the challenge in the 2018 housing market showed up in the last four months of the year. Industry transaction volume was down 7% in September, down 4% in Q4 and ended the year with especially down month minus 10% in December. The topics we've been talking about throughout 2018, low inventory levels, affordability challenges and higher mortgage rates combined to drive the big transaction volume declines in late 2018. Realogy in 2018, we participated in 1.4 million housing transaction sides generated $6.1 billion of revenue and modestly expanded our market share to 16.1% from 15.9% in 2017.

Q4 operating EBITDA was $106 million, down $38 million from 2017. The decline is primarily driven by Q4 transaction volume down 5% during the very challenging end of the year market. 2018 operating EBITDA was $658 million, $74 million below 2017. Three main issues drove this decline. First, agent commission costs rose $52 million. Second, with only 1% transaction volume growth, we did not have revenue growth to offset the commission pressure. As we signaled throughout the year, the upward pressure on commission costs moderated each quarter in 2018 with Q4 up 111 basis points compared to 181 basis points for the full-year 2018. Third, 2018 did not have the onetime $22 million gain on sale from our 2017 former mortgage joint venture closeout.

Now, when I look forward to 2019 and touch on three big topics, our current view of the 2019 housing market progressed on our strategic initiatives and important takeaways for 2019's earnings, commissions and capital allocation. While we can't predict the future, we think it's helpful for you to know how we view the 2019 housing market. Our current view is that the first half of the year is likely to have negative transaction volume growth with Q1 especially weak before shifting to positive transaction volume growth in the second half of the year. So why do we think the first half of the year may be negative? The housing market entered 2019 on a very tough trajectory as I mentioned with transaction volume down 4% in Q4 and December transaction volume down 10%(ph).

The January data also shows transaction volume down. Our proprietary MLS analysis showed national transaction volume down 9% in January. NAR just reported January transaction volume down 8% and our January actual transaction volume was also down 8%. The fundamentals that made 2018 a challenging year, low inventory, rising mortgage rates and affordability issues were really present at the end of 2018 and we're still having a big impact, which is what affects the early 2019 closings. And finally, while the numbers vary, most forecasters are also predicting a challenging first half of the year. So, for example, NAR is forecasting volume down 5% in Q1 and down 2% in Q2. However, like most forecasters, we believe there is substantial potential for the second half of the year to be quite positive for transaction volume. So first, the fundamentals are improving, which should have a positive impact as we go in later into 2019.

We believe consumer demand is very strong, and those fundamentals that really held the consumer back, especially in the back half of '18 are easing. So, mortgage rates are down about 60 basis points from November to about 4.3% right now as we enter the start of the selling season. This improves not only actual affordability but also consumer sentiment about affordability. Inventory has been rising year-over-year, our January national MLS analysis shows up about 6% and is up more than 20% in the major cities west of the Rockies. We believe the more attractive available inventory should continue to unlock the pent-up consumer demand. And the positive macro outlook for the US, including low unemployment, low inflation wage growth and stable interest rates should all help housing. And so while the numbers vary, most forecasters are also predicting a positive second half of the year, for example, NAR is forecasting volume up 3% in Q3 and up 8% in Q4.

Now let me update you on our strategic initiatives. While we cannot control the housing market, we won't settle for performance simply in line with the market. First, we expect to drive incremental revenue in 2019 as our strategic initiatives begin to show results. We've changed many aspects of our business to improve our value proposition and drive growth via both greater agent recruiting and greater productivity. While I can't share too much for competitive reasons, let me give you some examples. First, we're piloting new commission plans in most of our markets already today to drive recruiting and revenue growth. We like the early results. We now have multiple examples of 5% plus net agent growth compared to 2018's flat net agent growth across the whole business. And our machine learning analytics are helping us better identify high potential agents and prioritize them and recruiting. We are also rolling out new marketing technology and lead generation products to enhance our agent value proposition. We like our pace of change and our new products are having a positive impact. One, the Listing Concierge product I mentioned on our last call, where agents purchase an enhanced listing marketing package continues to expand across our own brokerage footprint. Agents are using this product to win more listings, more interestingly agents using Listing Concierge are getting higher commission rates from home sellers compared to agents who don't use the product in the same market across every price band.

We like the impact of this new product for the agents' economics, for recruiting and as a real example of enhancing our value proposition. Another, one of our recent technology product, Desk, allows agents to access our technology offerings and to access third-party technology offerings in a seamless way. This product symbolizes much of what we're trying to deliver for agents; an open architecture, easy to use, driving greater agent efficiency and greater productivity and even though Desk has only been in the market for a few months, it's already been adopted by approximately 20,000 agents in our owned operations and this is a really exciting adoption rate for this industry.

As one more example, we like the early results of cataLIST, our I-buying product with Home Partners of America. We are live in three cities and we plan to expand. Unlike most other I-buying products, with cataLIST, our agents are kept at the center of the transaction participating in both the purchase and the sale of the property. Data from agents are showing the cataLIST is helping agents get listing appointments and win listings they otherwise would likely not have gotten.

Second, on the strategic side, we are proactively investing in the business to strengthen our position over the medium-term. Some examples of our new investments in 2019 include launching Corcoran in early 2019 as a franchise brand, investing in new technology and data products for both agents and franchisees, starting new lead generation partnerships and expanding our suite of new marketing products to enhance our agent value proposition. Third, we are reducing our facilities and back office operations costs. We expect to create approximately $70 million in cost savings this year from these specific areas. Similar to last year, you should think of these reductions as partially offsetting inflation and other costs.

Finally, let me share some important takeaways for 2019 earnings commission and capital allocation. On earnings, reflecting the broader market trends, we are modeling negative transaction volume growth in the first half of the year and positive transaction volume growth in the second half of the year. We are also including some additional upside in the back half of the year as our strategic initiatives rollout more broadly. Q1 is always our weakest quarter seasonally by far and this year that Q1 seasonal weakness compounded by negative transaction volume and agent commission cost headwinds does lead us to expect negative Q1 operating EBITDA. On commissions as you saw in 2018, without volume growth, the upward pressure on agent commissions has a substantial negative impact on our P&L. We expect upward pressure on agent commission rates in 2019, but we do not expect that pressure to look anything like what we saw for the full years 2017 and 2018. This continued upward pressure is a major reason why our strategic initiatives are so focused on how to drive above market organic growth in the future.

Finally, on capital allocation, our most important priority is always to invest in the business, and while we do that every year, I've shared some additional investments we will be making this year to protect and enhance our market leading position with new technology, brands, products and partnerships. I feel good being at a company that generates cash flow to invest in the future even in a tough housing market. We ended the year at 4.6 times leverage ratio and we face an uncertain housing market. Remember that Q1 is always cash flow negative and we expect our leverage ratio to be above 5 given that cash flow seasonality. Given this in the first half of the year, you will see us focus on debt pay-down. We will be watching closely how the macro environment evolves. You should expect the weaker the housing market, the more we look to debt pay-down; the stronger the housing market, the more we look to share repurchases.

Now, let me turn it over to Tim to discuss our financial results in more detail.

Tim Gustavson -- Interim Chief Financial Officer

Thank you, Ryan. Turning to Slides 5 and 6; for 2018, revenue was $6.1 billion, which was $35 million less than 2017 due to lower revenue at NRT. Our overall homesale transaction volume growth was 1% year-over-year driven by a 4% increase in price mostly offset by a 3% decrease in sides. Operating EBITDA was $658 million, a decline of $74 million from 2017. 2018 net income was $137 million compared to $431 million in 2017. The 2017 net income included a tax benefit of $216 million resulting from the change in the US corporate tax rates. Adjusted net income per share was $1.52 compared to $1.59 in 2017. In the fourth quarter of 2018, revenue of $1.4 billion declined $90 million versus the fourth quarter of 2017, largely due to lower transaction volume at NRT. Q4 operating EBITDA of $106 million declined $38 million in the quarter due to a 5% decline in homesale transaction volume and the absence of $14 million of net earnings related to the sale of our former mortgage joint venture. The company generated free cash flow of $325 million in 2018 and returned $447 million in share repurchases and dividends to investors during 2018. Over the past 3 years, the company has returned approximately $1 billion to investors through share repurchases of $896 million and dividends of $120 million.

Slide 7 and 8 provide information about our business unit operating performance in 2018 versus 2017. RFG revenue decreased $10 million year-over-year, largely due to a decrease in royalties from NRT and the increase in sales incentives. RFG operating EBITDA increased $4 million to $564 million as a reduction in employee costs and other expenses more than offset the reduction in revenue. NRT revenue decreased $36 million in 2018, largely due to lower gross commission income associated with lower transaction volume. Operating EBITDA decreased $91 million to $44 million due to lower revenue, higher agent commission splits and the absence of $22 million of net earnings related to the sale of our former mortgage joint venture, partially offset by lower employee costs. If you look at NRT, including the royalties it pays to RFG, NRT contributed $350 million of the company's $658 million of operating EBITDA for 2018. Cartus revenue decreased $4 million in 2018, primarily due to a decrease in international revenue.

Operating EBITDA increased $1 million to $86 million as cost saving initiatives more than offset the decline in revenue. TRG revenue for the underwriting business increased $20 million with $19 million of variable underwriting costs resulting in an incremental EBITDA of $1 million. TRG core title business revenue was down $8 million, driven by a decline in refinancing revenue. Overall, operating EBITDA for TRG was down $10 million to $49 million from the refinancing revenue decline plus other operating expenses. Corporate expenses decreased $22 million in 2018, largely due to the absence of an $8 million legal settlement and $8 million related to the transition of the CEO, which occurred in 2017.

Now, let me turn it back to Ryan for some closing remarks.

Ryan M. Schneider -- President and Chief Executive Officer

Thank you, Tim. As I shared in my opening remarks, the past year has been an exciting and challenging time at Realogy and in the housing market. We are driving substantial change in [Technical Difficulty] 26:51 many of our organic growth focused initiatives are beginning to get traction, while we're in the midst of a tough housing market, the changes we have driven so far, give me early confidence that we can change results trajectory of our company, which we are dedicated to doing.

With that, Tim and I will take your questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Jason Deleeuw from Piper Jaffray. Please go ahead.

Jason Deleeuw -- Piper Jaffray -- Analyst

Thanks for taking my question and good morning. The first is on the cost saves, the $70 million of cost saves, it sounds like we should expect cost inflation and other cost that partially offset that, but can we think of like net EBITDA gains, net $70 million, as we think about the full-year benefit to Realogy.

Ryan M. Schneider -- President and Chief Executive Officer

I wouldn't go that far until you see how the volume goes out, Jason, the biggest place we're likely to get some -- hopefully get some cost inflation relative to 2018 is actually volume hopefully being up, as a lot of people are forecasting, especially in the back half of the year. So depending on what happens with volume, it could end up being, there may be less inflation on that front. But there is some volume inflation in a few other places; we are making some investments that I talked about that have some costs uptick to them. So, I wouldn't go so far as to make it a net EBITDA gain at this point until we see a little more how the year plays out. But we wanted to give you a sense of the magnitude of the cost takeout we're doing to offset all, some of the investments we talked about, but more importantly, hopefully some of the volume driven costs that would come with a much higher volume year than '18 was.

Jason Deleeuw -- Piper Jaffray -- Analyst

Great, thanks for that. And then for the second question, just an update on the agent recruitment strategy. Just looking for a little bit more in terms of how we should think about the organic agent growth for the year and then relative to EBITDA growth, because it sounds like you're making some gains with the markets you've piloted these new commission plans on, but then we've got the pressure from the commission split. So, is there any help you can give us, I am thinking about organic agent growth and how that's going to translate in the EBITDA growth for the year?

Ryan M. Schneider -- President and Chief Executive Officer

Probably the easiest way to, a couple of things to think about, so, we were flat on agent growth in 2018. But as we started doing our pilots in kind of the middle of the year, we now have these many different multiple markets, where we actually in those markets started to show with the new commission plans on some new products, we were like 5% and offset(ph) great for what we're trying to drive, the economics of that stuff typically has a lag of you know, 6 months to 12 months, both as people come over to you, but also as they then kind of build their business and the more that we -- a certain amount of doing that offsets whatever agent commission pressure there is, we tend to look at it like for every 30 basis points of upward pressure on agent commissions, you want to kind of drive a point of volume to stay kind of even.

And so the more growth we can get on the agent side, independent of what happens in the market, the easier is to kind of offset that kind of upward pressure and again that ignores any market volume growth and benefit that may be out there for the year. So I can't give you the -- quite the specific guidance you're looking for. But if we can drive that kind of recruiting growth, it's going to pay off on an EBITDA basis. Because again you can -- you kind of hold your own with just kind of growing with the market a bit if the market grows a few percent, but we're shooting for above market and we've got some early evidence that we can do that. So we're -- that's actually why we got more optimism than you might expect even in what's been a pretty tough last 4 months or 5 months for housing.

Jason Deleeuw -- Piper Jaffray -- Analyst

It's very helpful, thank you.

Operator

Your next question comes from the line of Matthew Bouley of Barclays. Please go ahead.

Matthew Bouley -- Barclays -- Analyst

Hi, thank you for taking my questions. So, Ryan, you mentioned upside from your strategic initiatives in the second half of the year. I was wondering if you could elaborate a bit on what you mean by that, is that a comment on moderating commission splits or are you speaking about an ability to kind of take more market share, just any additional detail there on what you meant by that? Thank you.

Ryan M. Schneider -- President and Chief Executive Officer

Yeah, I think it's a little more on the latter, commission splits are obviously, as I just said, are going to be a lot less of an increase in pressure points than they've been in the last couple of years and there's a whole story there if you want me to go into that, but, so that makes me feel good because it's just -- it's still upward pressure, but it's a lot less upward pressure and that's lot easier to fight against. The biggest thing is, is can we get traction on the recruiting as Jason's question asked, and can some of those new products that I talked about drive value for agents, that either helps on their productivity or like on the Listing Concierge's one helps on their commission economics that they get from the home seller, and we've got enough evidence from these early pilots, that we've got to think, hey, if these things -- we can scale these things much across our whole footprint, we could drive some incremental volume that would show up in taking a little bit of share and that would really help to build on top whatever market volume there is in helping our bottom line both in the year and especially in future years. One of the nice things about this business back to the recruiting side is that it is a compounding thing. The economics of a great recruiting year in 2019, a little bit of them show up in '19, but the real power of them is in like '20 and '21. So we think we've got some early things, this is really the first call where we're giving you some actual examples with a few numbers associated with them that are actually making a difference that if they roll out more broadly over the course of this year could make that kind of difference. That's why we were pretty explicit that we are -- we think in the back half of the year, we're going to have some incremental revenue on top of whatever happens in the market and that's because we've got that early confidence that these things are starting to get traction.

Matthew Bouley -- Barclays -- Analyst

Okay, I appreciate that detail. And then I guess along the lines of what you started off saying you mentioned kind of a lessening of upward pressure this year on the split side still and obviously there are some puts and takes in there you're lapping some of the retention efforts --

Ryan M. Schneider -- President and Chief Executive Officer

Yeah.

Matthew Bouley -- Barclays -- Analyst

Perhaps there is some geographic mix in there with California being a bit weak, obviously you've got the new strategy, so is there any additional color you can give on how to think ballpark the trend of commission splits in 2019?

Ryan M. Schneider -- President and Chief Executive Officer

Sure, yes. So, the first thing I'd say is, I'd basically say ignore the geography. Yes, there's always a little bit that around, but it's just not a material thing when you look at kind of our last couple of years or even what we were forecasting for '19. The biggest thing that is, in 2017 and '18, our splits were up like a 180 basis points a year, right, and that's a huge headwind, right, that we obviously we're dealing with, but remember that comes off like three years of holding splits flat. And so as I think I said and as Richard had said, there was a version of that were not only were we dealing with the market forces of upward pressure but we were dealing with our personal Realogy catch-up. I believe the personal Realogy catch-up is actually now over and we're now much more going to be a function of just what happens with kind of the market price out there. And so we think 2019 will be -- won't look anything like that pressure in '17, '18, we think it will look much more like the fourth quarter of '18 and better or -- and/or better kind of on a full year basis, so the fourth quarter is about 111 basis points and accordingly it may move around, because of mix or whatever happens with volume and stuff, but we think the whole year, the pressure will feel like half of the pressure, plus or minus that we felt in 2017 and '18.

And while that's still pressure we got to deal with, that's a much easier challenge to confront when you're trying to drive growth to offset that and actually improve your bottom line than when you're confronting the 180 and the catch-up in the kind of Realogy unique stuff. So again, maybe more optimistic than you would think, still a big issue, still an important thing to deal with, still a critical issue in our industry, but (inaudible) it feels great to think that this is what we're facing for the year, not what we faced in '17 and '18.

Matthew Bouley -- Barclays -- Analyst

Alright. I appreciate the detail. Thanks a lot.

Operator

Your next question comes from the line of Stephen Kim from Evercore ISI. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, thanks very much. Ryan, just a follow up on the questions on commission splits here, just, I thought you did a really good job with that answer, but just to clarify a little bit, when you acquire agents, are they excluded or included in the split calculation for the first year. And could you give us a sense for the degree to which you think 4Q splits may have been weighed down by the slower housing market that you experienced particularly in the fourth quarter?

Ryan M. Schneider -- President and Chief Executive Officer

Yes, so, on the first question, when we acquire someone, they are included. So it's an all-in-kind of thing, anybody who is on the books, they're included. So there is that. I actually even though the housing market in Q4 was down 4% for the industry, we were down 5, we did not see in our data that there's a huge change in splits on that. You know in the past call, Steve and I have told you that a bad housing market has a little bit of a splits over lining that you pay a little less in splits because people work their way less far up the rebate tables basically or they earn -- they don't work their way after earning the highest splits kind of thing. But you know the fourth quarter is not the biggest quarter in housing, right, it is the third largest of the four and by the time you're out the fourth quarter, people have got most of the year behind them, they kind of mostly work their way up to the higher part of the split table. So when we asked ourselves that same question, we actually didn't think that the fourth quarter was really a function of the weaker market and a little more, just kind of the market forces, in a real down housing year and last year was flat, you know real down housing year, there may be some, there was(ph) some silver lining on splits. But we don't think we experienced it in the fourth quarter, which is why I think when we think about '19, we think the fourth quarter or better is kind of representative of what the market forces are going to be for the year.

Stephen Kim -- Evercore ISI -- Analyst

Got it. And Ryan, just to clarify, when do you mean by better and relative to the fourth quarter, you were talking about the year-over-growth -- year-over-year growth in splits.

Ryan M. Schneider -- President and Chief Executive Officer

Yeah.

Stephen Kim -- Evercore ISI -- Analyst

So to put a finer point on it you're looking for something like a 73.5(ph) is kind of like the range you're talking about for '19 Ryan on the split?

Ryan M. Schneider -- President and Chief Executive Officer

Look, I think about is in the upward -- look, I think the thing -- the message I'm always trying to say is there still going to be upward pressure. So, you know, whereas the upward pressure was 180 basis points the last two years. The signaling I just try to give you is, think of the '19 upward pressure is like the fourth quarter or better. So, you know, something like that.

Stephen Kim -- Evercore ISI -- Analyst

Got it. Yes, that's what I thought. Okay. Second question I had relates to some of the initiatives you've done and you talked about some exciting stuff, you talked of the agent Concierge's results and you talked about cataLIST agents winning listings they otherwise wouldn't have gotten and that kind of thing. So, on the agent Concierge, you talked about a higher commission rates that the agents are getting versus those that aren't using this software. I just want to make sure you're talking about an improvement in their commission rate, correct, for these agents?

Ryan M. Schneider -- President and Chief Executive Officer

I have talked about improvement in the average broker commission rate that the seller pays them. So not the commission we pay, but the negotiation they do with the seller when we analyze our data and we got thousands of listings, you know, to -- and executed transactions to look at. When you look at the market, if an agent is using Listing Concierge versus the ones who don't, same market, same price band, the average broker commission rate is higher for the people using Listing Concierge than our agents who do not, and that -- we didn't do it because we expected that but anecdotally now, when I talk to agents, they say that not only does this help them win the listing but when the customer tries to negotiate a lower commission one of their responses is, well, no, I'm trying to deliver real value and you know my commission lets me do things like this marketing plan I just showed you and they're winning more of them at higher average broker commission rate and this is across thousands of examples when you have the statistics. I've heard the anecdotes individually from agents, but it's a nice value proposition addition that we didn't actually necessarily expect, but we think is kind of fascinating and the exact kind of thing where we can deliver more value to agents. It's going to help on recruiting and could help on the agents bottom line, which is a way to potentially to offset split pressure over time is help them on productivity.

Stephen Kim -- Evercore ISI -- Analyst

That's great, thanks very much guys.

Operator

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

Ryan McKeveny -- Zelman & Associates -- Analyst

Hi, thank you and good morning, a couple of higher level questions, one on RFG and one on NRT. So, RFG first, so year-over-year the margin has continued to expand, that's been for the last few years, nice trend. I'm thinking about the moving pieces going forward, specifically, we've obviously seen the pressures at NRT. So I'm curious first, if you can comment on the strength of the actual franchise owners in your network if they're feeling those same pressures just how you think about the strength of the actual franchisees and secondarily, in the sense of just thinking about franchises that may have started up since the recovery, let's say, over the last 7 plus years. I guess I'm assuming that there's more franchise agreements starting to come due now than maybe in the past few years. So any pluses and minuses, you can call out on retention efforts with franchises that might be coming due and/or incremental growth with franchise sales that you could talk to? Thank you.

Ryan M. Schneider -- President and Chief Executive Officer

So, a lot in that Ryan, let me just hit a couple. So, we don't have some like big cycle of new franchisees that started in 2009 and '10 coming due in '19 and '20. So we have a pretty smooth kind of even bank(ph), there's no big spike of that just to knock that one out. Look, I think our franchises feel the same market forces we feel, and many of them are incredibly good operators and to be blunt, most of -- more of our market share growth came from the franchise side and it came from the owned side in the past year and that's a good thing, but I'd be remiss if I didn't remind you something I've said in previous calls, which is, we've gone over the past few years like 3,000 franchise to 2,500, not because they leave us for other people, but because the smaller ones who are struggling with technology and things like that are being consolidated by some of our bigger, stronger ones. So we got a lot of franchisees with a lot of strength who are driving growth. Our top 10 franchisees have gone from in the high 50% to now like 66% of our franchise mix, (inaudible). And so they are subjected to the same pressures we are, but there's a lot of good performance out there and people who are struggling tend to get consolidated often within our franchise. We've had a lot of interest in our Corcoran franchise, which we're launching here in early 2019 for franchise sales. We had an all-time high year for franchise sales in 2018 and so we feel good about the franchise sales side, but we know also to keep driving that we've got to deliver good technology, lead generation, et cetera for our franchisees to help them deal with the market pressures. So there was a lot in your question, I covered a lot in the answer and I'm happy to take more and a follow-up.

Ryan McKeveny -- Zelman & Associates -- Analyst

Yes, you did. Thank you for that, Ryan. So the question on NRT then is, I hear you on the Concierge Listing's and the better rates there is good to hear. But if we look at the average for the fourth quarter 2.42% on the ABCR, I think that's the lowest we've seen on a quarterly basis in at least the history of public data. So I'm just curious, are you starting to see pressure from weather disruptors, discounters, however you want to call it and ultimately, how do you think about the sustainability of that broker commission rate moving forward? Thank you.

Ryan M. Schneider -- President and Chief Executive Officer

Yes, that's a great question. Yes, and first of, the Listing Concierge thing is only probably in about a third of our own markets today. And so I wouldn't expect it to change the overall trajectory. That's an example of something that we got to roll out more broadly, which is why we think it's more of the second half of the year that we can drive more results. Look, on ABCR, we've looked at the data pretty closely, it's been dropping kind of one to two points a year for the last eight or nine years basically and -- but a lot of that drop remember is mix when you look at it on a price band basis, the ABCR today in the $250,000 to $500, 000 or $500, 000 to $1 million is basically the same as it was in like 2011. And what's really driven most of the drop is continued price appreciation, moving people into higher categories of price and so we watch that closely. We haven't seen the disruption thing at all move it down and we've done that analysis in Redfin markets and versus non-Redfin markets, et cetera, et cetera. And so we watch it pretty closely, but I still think that kind of 1- to 2-basis point decline over the last seven or eight years is probably something we all need to be thinking about, but do remember and I'm happy to share more detail, it's mostly been driven by this mix phenomenon of, higher priced homes do just have a lower ABCR both historically and today. And so when we looked at our fourth quarter stuff, we didn't see anything different in disruption affecting that there is a little bit of the mix thing. But, those are my kind of more macro thoughts on ABCR.

Ryan McKeveny -- Zelman & Associates -- Analyst

Very helpful, thank you Ryan.

Operator

Your next question comes from the line of Jack Micenko from SFG. Please go ahead.

Jack Micenko -- Susquehanna Financial Group -- Analyst

Hi, good morning. I was wondering if you could touch on the leverage ratio comments and looking to move that number down. I know it's dependent on the market and anybody's view at this point is as good as anybody else's, but if we think about the 4.6 at the end of the year, how should we think about that in sort of a, I don't know if '19 is it down 5, flat, plus 5. How would that number change? How do we think about that looking at the debt going forward?

Ryan M. Schneider -- President and Chief Executive Officer

Well look, I think there's, let me go back some previous calls, Jack. Also look, I think the two things obviously drive that. One is how we use our free cash flow and the other is what happens with our bottom line and the stronger the housing year, the better the bottom line is just kind of by definition. And so -- so, we're watching kind of both those things. I've said in calls before, given the strength of our balance sheet, how our maturities are spread out, the size of our revolver that I was fine with our leverage ratio kind of in the 4s and so I'm not -- I'm not stressed out over the 4.6. But I've also said in calls that I think when you get up into the 5 plus range, that's a little bit of a different animal for our company. And so we pretty explicitly, we tried to say, for the first half of the year, you're going to see us focus on debt pay-down which is trying to kind of as we get through the seasonality of cash flow at least hang out in that same range. And then look, the stronger the housing market is, the more I'd rather return capital to shareholders through share repurchases. But the weaker the market is, whether it's flat or negative, and those both are kind of weak markets in my view, the more we probably want to stick with more debt pay-down to try to kind of hold that leverage in the 4s as opposed to letting it run too far away. But just go back to the first half of the year, focus on debt pay-down and then weaker housing market more debt pay-down, stronger housing market more share repurchases and I tried to, just gave you the balance of where I think the leverage ratio may float as those things move.

Jack Micenko -- Susquehanna Financial Group -- Analyst

Okay, that's helpful. And then on Cartus, it looks like initiations are up nicely now two quarters in a row. Is that business, are the improvements that you've made to that -- the change you've made to that business kicking in or is that business less, I guess, maybe impactful to shorter-term moves in rates because it's more of a corporate reload job health(ph) sort of decision.

Ryan M. Schneider -- President and Chief Executive Officer

Yeah, I think some of the initiatives that we were -- that we put into place are definitely taking hold, so initiations are up about 6% year-over-year and the affinity business is doing well. Cartus as you know, it continues to be a very valuable part of our value proposition, bringing qualified leads to our network of affiliated agents at NRT and RFG.

Jack Micenko -- Susquehanna Financial Group -- Analyst

Okay, thanks.

Operator

Your next question comes from the line of John Campbell from Stephens. Please go ahead.

Gordon -- Stephens Inc. -- Analyst

Hey guys, this is Gordon(ph) taking the place of John. More on the Corcoran and Climb franchises, what is the average upfront sales price for each and from an accounting standpoint, I believe that RE/MAX has been recognizing franchise sales revenue over a deferred period, are you guys doing the same, and if so, how much of revenue profit impact is that to you in '18?

Ryan M. Schneider -- President and Chief Executive Officer

Tim, do you want to take the deferred revenue on franchise sales question.

Tim Gustavson -- Interim Chief Financial Officer

Could you repeat that one more time?

Gordon -- Stephens Inc. -- Analyst

Yes. RE/MAX has been recognizing franchise sales revenue over a deferred period and I was just wondering if you guys are doing the same?

Tim Gustavson -- Interim Chief Financial Officer

No, we're not.

Ryan M. Schneider -- President and Chief Executive Officer

Okay. So on Climb, Climb really hasn't launched yet, we haven't even filed the FTDs. So the question you're asking there isn't public. We can't really talk about it yet. So we'll hold off on that. Climb has always been planned to launch later. Corcoran is where kind of the most interest in the -- is the more ready to launch, given that the massive brand name and success it has as a company. Look our franchise fees kind of start out there at about 35,000(ph) kind of initial franchise fee, 10,000(ph) for a branch and a couple of grant(ph) for a limited purpose kind of thing. And then we have a royalty scale that's public. This is a more premium brand, and so its royalty rate even at the top end is kind of north of 4%. So those are some of the economics around that kind of franchise and does that get to your question.

Gordon -- Stephens Inc. -- Analyst

Yeah, that's perfect. Yeah that answers it. Appreciate that. And on the cataLIST i-buying program, can you expand a bit more on the expectations for that? Do you know what percentage of your 4Q transaction volume if any came from that? What are your expectations are for '19.

Ryan M. Schneider -- President and Chief Executive Officer

Yeah, look, it's really small in Q4. I mean, we are literally in three cities and we launched all three cities effectively in those last kind of three or four months of the year, we're probably not in a position yet to share what we think for '19. Given that unlike some other people who do this stuff like we're already in $1.4 billion home side transactions, even if we grow massively would still be a very small piece of what we do. But we're really excited about it, we got a partner who their business is not flipping houses, their business is buying houses, renting them, selling them and we bring our agent network in distribution to that, it's very capital-light, because we have a partner who that's again what they do for a business, so it's capital-light for us. But we love adding it to our value proposition for agents and most of the time people say no to the offer, but then we keep the Listing and so we really like the value proposition here in the three cities that we've piloted in the last kind of five months and we're definitely going to be expanding it. We can't tell you where and when yet, but we look forward to sharing that. Because again, we're the one i-buying thing where the agent really is at the center of the transaction itself and we think that's powerful for the seller of the house, we think it's powerful for the offer of I-buying and we think it's obviously powerful for our agents. So we're excited about it, but in a $1.4 million transaction business, it's very small so far, and we'll keep you posted if it -- as it expands.

Gordon -- Stephens Inc. -- Analyst

Got it. That's helpful. Thanks guys.

Operator

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

Tom Michaud -- Keefe Bruyette & Woods -- Analyst

Hey, guys. This is Tom Michaud(ph) joining on for Bose. Given the slight under performance that you guys reported in transaction volumes relative to the NAR national average, would you attribute that more to maybe certain geographic exposures or higher average price point or anything else?

Ryan M. Schneider -- President and Chief Executive Officer

I think, thanks for joining Tommy. Look that -- we're putting that one pretty much all on geography at this point. New York remained pretty weak in Q4. California in Q4 was incredibly weak and we have over -- we're over weighted in both of those relative to NAR and to our competitors. So that's really the difference in our mind between the 5 and the 4 kind of thing and you hit it on the head.

Tom Michaud -- Keefe Bruyette & Woods -- Analyst

Okay. And then separately, remind me the earnings from Guaranteed Rate JV, is that flowing through earnings and what was the contribution in 4Q, and then for full year 2018?

Ryan M. Schneider -- President and Chief Executive Officer

Yeah, that is flowing through our equity earnings line. So that was -- but we lost about $2 million more this year than last year. As you know, 2018 was really the start of the year. So, we do expect profitability in 2019, but it was more of a ramp up year-end. The mortgage business in 2018 had a lot of margin compression, it was tough for the industry kind of given the rates movement.

Tom Michaud -- Keefe Bruyette & Woods -- Analyst

Got it, thanks guys.

Operator

Your next question comes from the line of Chris Gamaitoni from Compass Point. Please go ahead.

Chris Gamaitoni -- Compass Point -- Analyst

Good morning guys, thanks for taking my call. Can you give an outlook on what your cash interest expense is for next year and your free cash flow conversion of EBITDA?

Ryan M. Schneider -- President and Chief Executive Officer

From a cash interest perspective, I think it's probably around 195(ph) or so for next year, from a free cash flow perspective, we're not at a point at this time that we'll disclose that number, for right now, we had $325 million for last year, Q1 we've already expressed there is going to be some pressure from a numbers perspective and we will see how the year develops as far as disclosing that later on.

Chris Gamaitoni -- Compass Point -- Analyst

Okay. Higher level when -- with your new strategies to recruit agents. What is your value proposition versus their existing brokerage or another(ph) brokerage? What are you leading with? Why are they changing, just so we can have a better understanding if these programs will be successful or not heading into the back half of the year?

Ryan M. Schneider -- President and Chief Executive Officer

Yes. So like, you know, we've always had a good value proposition, I think, across all the different brands in our ecosystem, whether it's on the franchise side or on the owned side. If we talk about the owned side in particular where most of the economic leverage is, our core value proposition has been kind of an all-in package of dedicated support, marketing, brand, technology, lead generation from Cartus and other places, et cetera, with a competitive commission split hopefully, and that value proposition has done quite well over a very long period of time, so under -- but recently a little more under pressure with the agent commission stuff. Most of what we're trying to change has two or three aspects to it. One is for new recruits, we're not foreseeing our existing agents to change, but we're setting up these new commission plans for new recruits that are very aspirational, that can really incent them to shoot for a lot of growth and we'll pay them for a lot of growth but only for a lot of growth and so we're trying to be much more aspirational on those commission plans as one component, as another component is to improve the value proposition around technology, marketing, lead generation and partnerships to add value to agents to help their productivity and bottom line beyond what they can get at other brokerages either because we can invest more in technology than the next person. We can develop better technology. We have better data to do more data analytics to help them be successful or because of our national presence, we can set up national partnerships or do things at scale like the i-buying thing I've mentioned that a small and medium or even some of our bigger broker competitors haven't been able to actually do. And so there's a lot of aspirational pricing to drive new recruiting, but there's also a lot of how do you just deliver a lot more value to make them more successful and productive that makes us a more exciting place for agents to be because with our size and scale, we should be able to do some unique things that small and medium brokers definitely can't do, I mean even a lot of our largest competitors are not doing and we have some early wins that give me early confidence, but we got to roll these things out nationwide. We got to make them work nationally, but we've been on this consistent theme here for multiple quarters with you and each quarter I'm trying to give you more evidence of where we've been having success for reasons to believe and in a world where there's less commission pressure on us now than there was the last 2 years, I like our odds in that environment no matter what happens with the housing market, we can't control that, we can definitely try to control how we perform on a relative basis.

Chris Gamaitoni -- Compass Point -- Analyst

Right, now, I guess that gets me to my final question is operating EBITDA margin down to 1% NRT. Is there a cost curve for a kind of a business reimagination you can do to change that outlook or at this point is it really a volume game whether your initiatives or the overall market?

Ryan M. Schneider -- President and Chief Executive Officer

So I think it's mostly a volume gain, but we have not given up at all on the cost side. I talked about what we're doing from a facilities and a back office standpoint and in both those places, we have some reimagining going on. I don't want to get into too many details to get too far ahead of what I told my own teams but where we're reimagining our offices both their footprint and their design to really take a lot of that money out. We're reimagining how we do a lot of the back office support, you know, if you think about processing commissions and all the other kind of costs that go with the brokerage in ways that are pretty different than before. And so we're trying to do that but I would say most of our focus is on making agents more productive and more recruiting because the volume part has the bigger leverage in terms of really changing the trajectory even in a world where margins have been compressed like they have been in the last three or four years.

Chris Gamaitoni -- Compass Point -- Analyst

All right, thank you very much.

Operator

Your last question comes from the line of Anthony Paolone from JPMorgan. Please go ahead.

Anthony Paolone -- JPMorgan -- Analyst

Okay, thanks. I know we've talked a lot about this already, but can you maybe comment given the comfort level of split pressures easing in 2019, kind of why you don't expect the competitive landscape to potentially keep pushing further, it seems when you read the trade rags and things, it seems like the larger competitors still have pretty robust growth mandates and just what are some of the things that you just feel comfortable that you're not going to see another kind of step-up on that front?

Ryan M. Schneider -- President and Chief Executive Officer

Well, look we aren't discounting the competition at all here and we still think there will be upward pressure and we talked about that and kind of some of the magnitude of that. But we also think that part of the reason our numbers were so big in '17 and '18 was us having to catch up from that three-year period of flat, and as we told you last year at the start of the year, we did expect that moderation every single quarter because we thought it was the Realogy specific part that was going to begin to disappear and what we are going to be left with is the market forces and that moderation did actually occur in every single quarter and kind of got us from the over 200 in Q1 to that 111 in Q4. So look, we can't predict exactly where it's going to go, but based on everything we saw at the end of '18, what we're seeing in '19 and where we know we are relative to the market now compared to where we used to be relative to the market, we just think we're subject to market forces and that we asked -- we think '19 will be a lot more like the fourth quarter of '18 or slightly better compared to what it was in '17 and '18. If competition fundamentally changes or triples down in some ways that drive that higher, then we're going to have to deal with that. It will show up in our numbers and we will have to be back to talk to you about what's changed in that, but we don't have any assumption of less competition or anybody shutting down or anything like that when we make that statement, but it's probably the biggest issue in the industry and we will -- we just want to share our best thinking with you as we started this year.

Anthony Paolone -- JPMorgan -- Analyst

Okay. And then in the past, Ryan, you've kind of mentioned how, if you think about Zillow they tend to control the consumer experience and when you hear about your initiatives and your business it's about sort of the agent focus and that's where the resources are. How do you think about taking that path versus shifting resources and initiatives toward directly to the consumer and initiatives to have more control over that end market?

Ryan M. Schneider -- President and Chief Executive Officer

Yes, that's a great strategic question. We've looked at it and I think we'll probably keep looking at it. At least given where we are now and where we think the biggest leverage is to change our company's operating performance, we do believe it is focused on the agents and so you're likely to see us stick with that. We -- it doesn't mean we have no focus on the consumer. I mean, if you at kind of the lead generation we get from our consumer-facing websites and add it up, it's actually the same as what Redfin gets in total. And I think they have the best consumer facing kind of website in our industry, but we kind of equal them if you add up all of our brands stuff. And so it's not like we don't put any effort into it, but I think where we are, the agent focus will be the thing for the near-term, we may come back -- we will be coming back to ourselves and asking that question on a regular basis. I would say we ask it to ourselves, every quarter already but we keep coming back to the leverage of the agent and Zillow is really impressive company, it has got a lot of stuff, they sure made a lot of news in the past week, there's a lot to digest with that, but we got to stay very focused on executing our strategy along with watching those competitive moves and we're trying to do both pretty thoroughly.

Anthony Paolone -- JPMorgan -- Analyst

Okay, thanks.

Alicia Swift -- Senior Vice President, Financial Planning and Analysis, and Investor Relations

Great. That concludes our call. I want to thank you all for joining us today and look forward to speaking with you over the coming quarter.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect. Have a great day.

Duration: 58 minutes

Call participants:

Alicia Swift -- Senior Vice President, Financial Planning and Analysis, and Investor Relations

Ryan M. Schneider -- President and Chief Executive Officer

Tim Gustavson -- Interim Chief Financial Officer

Jason Deleeuw -- Piper Jaffray -- Analyst

Matthew Bouley -- Barclays -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Ryan McKeveny -- Zelman & Associates -- Analyst

Jack Micenko -- Susquehanna Financial Group -- Analyst

Gordon -- Stephens Inc. -- Analyst

Tom Michaud -- Keefe Bruyette & Woods -- Analyst

Chris Gamaitoni -- Compass Point -- Analyst

Anthony Paolone -- JPMorgan -- Analyst

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