Re/Max Holdings Inc (RMAX) 2018 Q2 法說會逐字稿

Good morning, and welcome to the RE/MAX Holdings Second Quarter 2018 Earnings Conference Call and Webcast. My name is Kim, and I will be facilitating the audio portion of today's call.

At this time, I would like to turn the call over to Andy Schulz, Vice President of Investor Relations. Mr. Schulz?

Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings Second Quarter 2018 Earnings Conference Call. Please visit the Investor Relations page of remax.com for all earnings-related materials and to access the live webcast and the replay of the call today. If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation.

Turning to Slide 2. Please remember our prepared remarks and answers to your questions on today's call may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. Examples of forward-looking statements include those related to agent count, franchise sales, revenue, operating expenses, financial guidance, Motto expansion, booj integration and RE/MAX technology initiatives, housing market conditions and dividends, non-GAAP financial measures as well as other statements regarding our strategic and operational plans and business models, and any remedial measures taken in response to the special committee investigation.

As a reminder, forward-looking statements represent management's current estimates. RE/MAX assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review our second quarter financial results press release, which includes more detailed discussions about these forward-looking statements, including factors that could cause results to differ materially from the forward-looking statements and the definitions and reconciliations of non-GAAP financial measures contained in the second quarter financial results press release, which is available on our website.

Our Chief Executive Officer, Adam Contos; and our Chief Financial Officer, Karri Callahan, are joining me today on our call. Ward Morrison, President of Motto Mortgage will join us for the Q&A.

With that, I would like to turn the call over to RE/MAX CEO, Adam Contos. Adam?

Thank you, Andy, and thanks to everyone for joining our call today. Looking at Slide 3, our business continued to perform well during the second quarter, and steady performance across our major operating drivers led to double-digit revenue growth. Some of the high points of the quarter included total agent count, one of our key operating metrics, grew in line with our expectations and increased almost 7,000 agents year-over-year. Motto expansion continued, highlighted by an acceleration in office openings. Adjusted earnings per share increased more than 15% due almost exclusively to the 2017 tax reform as we continue to invest meaningfully in technology and Motto's growth.

The integration of booj is off to a great start as we shape the future of real estate technology at RE/MAX and another significant report recently reconfirmed our status as the industry leader in agent productivity, continuing a multiyear trend of independent recognition will start here.

Turning to Slide 4. REAL Trends recently announced its annual real estate agent rankings. One of the most widely followed reports in our industry, REAL Trends America's Best Real Estate Professionals ranks participating U.S. agents based on their 2017 residential transaction sides and volume. For the fourth consecutive year, RE/MAX is home to more top-ranked agents than any other brand. In fact, nearly 1 in 4 of America's best were RE/MAX agents. No matter what else might be happening in the real estate space, RE/MAX continues to attract and develop the industry's top-producing professionals. It remains the defining characteristic of our brand and value proposition.

We should note, however, that being the world's most productive real estate network is just one of our many competitive advantages. RE/MAX is also recognized for our unique agent-centric model, for having an unmatched global footprint, and for being the #1 name in real estate. Nobody in the world sells more real estate than RE/MAX in terms of residential transaction sides and that leadership position creates business opportunities for every member of our organization.

Turning to Slide 5. With our acquisition of leading real estate tech company, booj, the future of RE/MAX technology looks increasingly bright. Development work, fueled by input from RE/MAX affiliates, is already underway on what will become a full ecosystem of products on a single platform. Everything is being designed to help RE/MAX brokerages, agents and teams grow their businesses, connect with clients, and operate more efficiently and strategically. Providing the best online and offline experience for RE/MAX affiliates and consumers is one of our primary strategic technology goals. We purchased booj in order to help develop a best-in-class technology platform that creates an online advantage for RE/MAX agents and teams and their clients, an online platform that will deliver substantial value to consumers and allow RE/MAX agents to connect with homebuyers and sellers in a more meaningful and efficient way. Offline, our experienced, highly productive, industry-leading agents and teams already provide a second to none experience.

Leveraging booj's existing technology stack, we're developing a custom-built integrated platform with products that interact and evolve with one another. Included will be a CRM integrated with agent office and team websites, lead cultivation tools, marketing resources, social integration and more, all built with today's increasingly mobile agent in mind. We will also leverage the capabilities of other strategic partners as we develop advanced technology solutions for the RE/MAX network.

We are extremely pleased with the progress to date. Process is critical in tech development, and we are engaging our affiliates in the design and development of the platform every step of the way. We work collaboratively with our network to gather continual feedback for ongoing refinement and enhancement. And we look forward to reporting on additional milestones achieved in the months to come.

The booj acquisition is one of many RE/MAX technology initiatives designed to further bolster our unmatched value proposition. Behind each initiative is the goal to automate, simplify and customize, making our highly productive agents and teams even more efficient and successful.

For example, our recently improved design center now automatically generates marketing materials within hours of an MLS listing being created. This automated marketing platform creates comprehensive, customizable marketing packages, including flyers, social posts, e-cards, virtual tours, videos, brochures and single property websites that are sent straight to our agents' inboxes at no additional cost.

Whether it is just listed, just sold, a price change or somewhere in between, we are automating as much marketing as possible for our agents. Enhancements like this automate time-consuming tasks and make our agents and teams' lives easier and more efficient. And that presents a big advantage in both recruiting and retention.

The network recognizes the added value of innovation such as design center automation. We're providing a tangible service that helps agents and teams win listings, please their sellers, get properties sold, and save time and money. The program is a win-win for brokers and agents alike.

Moving to Slide 6. Motto Mortgage franchise sales expanded and office openings accelerated modestly since our earnings call in May. We have now sold over 90 franchises in over 30 states since inception in late 2016. The Motto team's vision and dedication has helped more than 60 franchisees open their doors and compete in their local marketplaces. Motto is a start-up business. Like all successful start-ups, it is data driven and intensely focused on measuring and continuously improving upon its key performance indicators.

One of its KPIs is the time between the sale of a franchise and when the office opens and begins operations. We want this period to be as short as possible, leveraging the help of our initial cohort of Motto franchisees and 45 years of experience onboarding RE/MAX franchisees, the Motto team has done a terrific job of improving the onboarding process and reducing the time between sale and opening. Continuous improvement of the process has been a hallmark of Motto since day 1, and we expect this focus to pay dividends in the future.

Looking ahead, interest in owning a Motto franchise remains solid, and we feel good about our pipeline. We're pleased with Motto's progress and look forward to even more positive results in the future.

Turning to Slide 7. Halfway through 2018, the story in the U.S. housing market is inventory, or more precisely, the lack of inventory. Prices are at record highs, inventory is at record lows, and home sales are trailing 2017's pace according to the RE/MAX National Housing Report based on June MLS data for 54 metro areas.

June sales were 5.5% lower than June 2017 in the 54 metro areas surveyed, marking the seventh consecutive month of year-over-year declines.

Headed in the opposite direction, the June median sales price of $258,500 was at an all-time high in the 9-year history of the report. It was 5.1% higher than the $246,000 recorded last June. In each of the previous 5 years, June has posted the highest median sales price of the year.

Year-over-year prices have been climbing for more than 2 years now, which is great news for homeowners and sellers. In the hottest markets, demand is especially high, notably at the entry-level price point, because there simply aren't that many homes for sale. The slower sales figures we're seeing are tied to inventory more than anything else.

To some extent, the slower market is affecting the sales totals of agents across the industry. 42 of the 54 metro areas reported a year-over-year drop in inventory. That trend is reflected in the month's supply of inventory dropping to 2.7 months this June, down year-over-year and the smallest figure ever recorded for June in the 9-year history of our report. Fewer houses for sale generally results in a faster sales process. Homes sold in June averaged just 42 days on market, 5 days less than June 2017 and 3 days under the previous 9-year low of 45 days, which occurred in July 2017.

Lack of inventory has become a theme for the year. Having fewer homes to choose from, especially at the entry-level price points, poses a challenge for buyers, who need to be ready to act decisively and quickly. Working with a full-time professional RE/MAX agent can help guide them and prepare them for that.

Moving to Slide 8. We finished the second quarter of 2018 with just over 123,000 agents in our global network, an increase of almost 6% year-over-year. It's a steady growth rate, in line with projections, and we feel good about it, especially given the competitive recruiting landscape in the U.S. and Canada. Our global agent count outside the U.S. and Canada continues to surge. We added more than 5,000 agents over Q2 2017, a 16% gain. Strong showings in South America, parts of Europe and Southeast Asia drove this robust international growth. Countries such as Portugal, Italy, Argentina and India were among our better performers.

As Slide 9 shows, we added more than 1,500 agents year-over-year in the U.S. and Canada with growth in almost every region of the 2 countries. On the left, you can see the U.S. growth of over 1,200 agents year-over-year driven by increases in many states. 2 of the states showing larger gains, New Jersey and New York, were recently acquired and formerly operated as independently owned regions. Our operations in these key states continue to outperform, and we are making inroads in markets where we're focused on building a greater brand presence.

As always, we continue to evaluate future growth opportunities, which may include acquisitions of additional independent regions or transactions that are strategic and can deliver long-term shareholder value. As shown on the right, our Canadian agent count grew by over 300 agents, highlighted by steady gains in Eastern Canada and Québec.

To put some color and context on these results, especially in the U.S., it's good to recognize a few factors within the current recruiting environment. First, the competition for agents is as fierce as it's ever been. Second, unemployment is at historic low. And third, the number of new well-financed, slickly marketed competitors with varying business models is unlike anything the industry has ever seen. There's a lot of noise out there right now. It's taking a great deal of effort on the corporate, regional and brokerage levels to cut through that noise and help agents see the value of joining the worldwide leader.

Moreover, unlike many of our competitors, RE/MAX is selective in our agent recruiting. We have to be; our culture and economic model demand it. It's both the beauty and the necessity of entrepreneurship. RE/MAX isn't for everyone, and we're very different in this regard.

For example, with the number of agents joining the industry approaching an all-time high, the percentage of new realtors is going up as well. In 2017, over 20% of the National Association of Realtors had been licensed less than 1 year, a quadrupling of what the percentage was just 5 years ago. In contrast, less than 10% of RE/MAX agents were licensed less than 1 year. RE/MAX is interested only in highly productive agents or those who aspire to be highly productive. That high standard is one reason why RE/MAX agents accounted for almost 25% of REAL Trends America's Best Real Estate Professionals.

With that, I'd like to turn the call over to Karri.

Thank you, Adam. Good morning, everyone. Overall, we had a solid second quarter as mid-single-digit organic growth combined with our recent acquisitions led to double-digit overall revenue growth. Adjusted EBITDA remained flat to the prior year as we continued to invest in Motto's growth and our strategic RE/MAX technology initiatives. We also generated a healthy amount of free cash flow, converting 60% of adjusted EBITDA to free cash flow on a trailing 12-month basis.

Moving to Slide 10. Revenue increased 11.4% to $54.3 million in the second quarter. Organic growth added almost 5%. Acquisitions increased revenue by 6% and favorable FX movements contributed 0.5%.

Our Q2 results highlighted the multitude of contributors to solid top line performance, including agent count growth, rising home prices, Motto expansion, pricing and the acquisitions of booj and Northern Illinois.

Looking at Slide 11. Selling, operating and administrative expenses were $28.3 million for the second quarter of 2018, up $7.6 million or 37% over the prior year quarter. The increase in SO&A was primarily due to the acquisition of booj, investments in technology, Motto and Northern Illinois, as well as other increases in personnel costs. Strategic technology investments related to the ongoing development of the booj platform ramped slightly slower than initially anticipated resulting in modestly better-than-expected Q2 results. As we expect, this is just a timing issue. The overperformance in Q2 is not expected to translate into higher profit for FY 2018.

Turning to Slide 12. One item to note before I update our outlook for Q3 and fiscal year 2018. The increasing interest rate environment is getting a lot of attention. Many experts forecast at least one more, if not two, 0.25 point rate increases in the fed funds rate this year. Although we do not provide guidance at the earnings per share level, we wanted to remind those who are modeling our results of our sensitivity to interest rates. Keeping it simple, each 0.25 point rate increase is expected to translate into approximately $600,000 more of pretax interest expense annually at our current debt levels.

Now onto our outlook. The company's third quarter and full year 2018 outlook assumes no further currency movements, acquisitions or divestitures. For the third quarter of 2018, we expect agent count to increase 5% to 6% over third quarter 2017, revenue in a range of $54 million to $56 million and adjusted EBITDA in a range of $27 million to $29 million. For the full year 2018, we expect agent count to increase 5% to 6% over full year 2017, revenue in a range of $213 million to $216 million and adjusted EBITDA in a range of $103.5 million to $106.5 million.

Now I'll turn it back to Adam.

Thanks, Karri. Turning to Slide 13. In conclusion, RE/MAX Holdings had a good first half of 2018, highlighted by double-digit revenue and adjusted EPS growth, steady agent count additions, Motto expansion and contributions from the strategic acquisitions of booj and Northern Illinois. We're off to a great start integrating booj as we work aggressively to define our own future. And once again, more RE/MAX agents represent America's Best Real Estate Professionals than any other brand. We look forward to more success in the second half of 2018.

With that, operator, let's open it up for questions.

(Operator Instructions) Your first question comes from Jason Deleeuw from Piper Jaffray.

I'm just wondering if we could get a little bit of color on how you're feeling about the 2% agent growth in the U.S.? It's good to see that it's kind of stabilized at this level. I know there was the brand refresh, you have the new technology offering. Can you just give us a sense for how you're feeling about able to sustain this 2% growth level or maybe even improvement? Just any color in some of the factors you're considering there?

Jason, it's Adam, and thank you, glad to have you on here today. Yes, I mean, 2% in this type of market, we feel, is pretty good, and we're confident that -- we hope to continue that and hope to feel that, that is hopefully a floor in the lowest levels. But we're -- we like the 2% right now given all the noise in the marketplace. And we've always said, we want to hit between 2% and 4% in agent growth. So we're going to continue to push that. We've got some great activities coming up later on in the year, a lot of our regional retreats, where we get our brokers together to discuss recruiting strategy and how to continue to move the ball forward, discuss the marketplace, things like that. So that's what we're looking at continuing.

Yes, and Jason, just to kind of build on what Adam was saying. You mentioned a couple of things from an investment perspective, and we're really focused on that, really honing in on the value proposition and looking at, really the investments that have been made over the last 12 months, and really leveraging that from a recruiting and retention perspective to drive that agent count growth on an organic basis on a go-forward basis.

Thanks, that's helpful. And just to stay on the agent growth topic and competition since this is like the key issue that a lot of investors are focused on. Could you just help us understand, when RE/MAX loses out on recruiting a high-producing agent, what are the factors for why you typically lose out? I think that would just be helpful for people to kind of understand some of the dynamics around the recruiting environment.

So it's interesting in this marketplace. So many of the agents have different reasons for operating the way that they do, and that's the beauty of the real estate industry overall is everybody is an independent contractor for the most part. And they run their business the way that they want to and they select a model that fits their needs. That's also the strength of our system because we are a professional system that has a higher tenure in the real estate industry than pretty much anybody else. Our agents outproduce the competition on average 2 to 1, and it's where do you want to be and how do you want to run your business. The higher producers look for particular marketing pieces, particular business tools to run their particular business. And that's why we continue to iterate on that and work very closely with the field.

Overall, we look at ourselves as a business that builds businesses. And we adjust with the marketplace, the needs of those high producers to help accommodate them in those particular places. And that's how we continue to iterate, which is one of the reasons why we integrated booj into our set of offerings here coming up in the future, and we are talking a lot to a lot of these top producers to make sure that we help integrate their needs into the product set there.

Your next question comes from Vikram Malhotra from Morgan Stanley.

Canada seems to have surprised me, at least, and perhaps you as well, with just how strong it's been in terms of agent growth despite maybe talk of the market peaking there. Can you talk about what are you monitoring there? And maybe what you're seeing by the submarket or region that may make you sort of step back and pause?

Vikram. Yes, Canada continues to surprise everybody. But the beauty of Canada is we have such a strong presence there that, that strength continues to show during any sort of headwinds or crosswinds and what we continue to see in Canada is what we call rebalancing. And such a strong housing market, such high home prices, but it continues to show a great deal of strength with the strong -- with the high producers in the marketplace. So we feel that our strength there lies in the network itself, the fact that we have such substantial market share and we have such high-producing agents and teams up there.

So we feel that Canada will continue to work on their housing market. They are trying to avoid any sort of major economic instability in the housing market, and they're testing lots of different things throughout the country in order to do so. The flexibility of our system allows our high producers to adjust with that, and that's what we're seeing. I see on a daily basis on social media and the different listing platforms, the number of new listings continuously emerging in Canada, and so many of them continue to be with our agents. So we are always watching Canada because of this rebalancing that always occurs, but we're also always pleasantly surprised by the strength of our system.

Okay, that's helpful. And then, maybe just turning to Motto. It seems like you've had good success at penetrating in terms of just overall number of franchises. Can you maybe give us some sense of how much of that incremental from the 60 you reported last time is RE/MAX agent driven versus non-agents and maybe just give us a sense of where do you think that number could go over the next 12 months?

Vikram, this is Ward. Yes, we're continuing to expand our customer base. We -- the lion's share still continues to be RE/MAX franchises. That's our connection, that's our relationship and that's okay. But we do continue to broaden the base. We are seeing some new interest from LOs, who are looking to set up their own shop in this particular market, who also understand the entrepreneurial model we're offering them. And we have also expanded into some independent real estates, investors and even some of our competitive brands already. So we're excited to see that, and see if that traction will continue.

Got it. And any sense sort of size upside, just thinking about, could that number double over the next year? Is it -- just give us some sense of, maybe, like a range. Where do you think the numbers could shake out? I'm not looking for specific guidance, but just to sort of help us model, maybe help us think about the revenue ramp from the 90 you've sold into next year?

Yes, I mean, we continue to see that our sales are lumpy as the brand gets out there. It still looks like we're probably going to be similar numbers to last year. So we'll continue to be in the tens of models each year. Obviously, like in our graphic there, it takes between 14 and 17 months to get them to ramp up to their fully -- full royalty fee base of about $4,800, $4,500 being the royalty, $300 being the ad fund. So it's still in that same range. We're trying to speed up our opening process, and we're seeing some success there with our team, our service team, and continue to just try and help them get up and running as quickly as humanly possible, so they can then start making money and sort of share the best practices out there to the industry.

Got it. And just maybe one last, if I can, Adam, if could. You made a comment regarding the competitiveness of the market and all the new models that's come in. Is it the case that high productive brokers are considering these new models? Or can you maybe just describe the competition a bit more?

The competition is, I mean, to describe it is just describing a vast field of attempts to enter the space, and it's an interesting space to be entering from so many different angles. People have a lot of investment opportunity right now in the marketplace with the economy. And that's what we're seeing is people trying a lot of different things. Ultimately, we've seen this happen before. We see it in different changes in the economic landscape. This one happens to be because of marketing capabilities, digital marketing, social media, things like that, happens to be what seems to be noisier than before.

But ultimately, it's interesting; you see a lot of high-producing groups within our network taking a step back and saying this is my opportunity because people are being distracted. They always take a look at -- and you can't be blind to the competition, and I know that a lot of our brokers and us, we all get together and discuss these different business models. But ultimately, it's to determine, "Okay, is there something that we can learn from these to make our course corrections and adjustments throughout the marketplace."

So -- in considering something, I think it would be impulsive for somebody to just make a jump based upon a short-term view of something that's out there that hasn't been proven through a multitude of different economic conditions. And our program -- our system has been proven through a multitude of different economic conditions. So they look at it, they're interested in it, they see what they can do to make adjustments and answer the questions out there; because if there's a question, it creates a story, and that story may not necessarily be true. Our story is true. It's proven. And that's what they rest on, is understanding, okay, we continue with the basics of the business, the business gets more complicated and challenging than it ever has been and it needs a professional like ours to sustain that business model.

So that's the way we do it. It's activity in the marketplace, which is healthy, causes evolution, but ultimately, you need a strong foundation to rest on and that's what RE/MAX is.

Your next question is Stephen Sheldon from William Blair.

I also kind of wanted to ask a little bit about the environment right now. I wanted to specifically ask about turnover trends that you're seeing both at RE/MAX and then maybe more broadly across the industry. And specifically, do you sense that real estate agents are becoming more transient industry-wide than maybe they have been in the past? Or is it easier now for agents to kind of brand up?

Stephen, it's Karri. I'll start it off. So I think one of the things that's always important to keep in mind is just the low barrier of entry that we have from an industry perspective. And as Adam noted on the call, the industry just in general is noting a significant influx in more inexperienced agents. And I think that's one of the things that really differentiates RE/MAX and differentiates our model and that we are the home of the top producer and we are the home of the agents who are either highly productive or aspiring to be highly productive. And that characteristic really translates into our turnover and how that compares from an industry perspective.

I think historically the industry turnover has been around kind of that 30% range. We're actually seeing some positive movement at our end. We talked earlier about agent count growth and how we're pleased with that. We're kind of closer to that 20% range. And so overall, we just really continue to iterate on the value proposition of RE/MAX, what it means to join RE/MAX from an entrepreneurial perspective and from a productivity perspective. And we're just really pleased with kind of the results -- with the results that we've had in the quarter and through 2018.

And it's Adam. I'll add just a little more color to what Karri said. There is a big difference between industry turnover and segment turnover. And if you look at the segment turnover in the industry it continues to churn at the entry level and the lower end of the -- the lower segments in the industry overall, kind of what Karri said. And that's really what you need to focus on is where is the churn occurring and where are people moving.

And what you find traditionally in the industry, which is a big strength of our network, is those that put down their roots in a brand and work their business in a brand, typically that churn is way lower than it is of somebody who doesn't carry listings, has very limited investment in their business -- because keep in mind, every penny that an agent is spending on their business comes from their pocket. So it's easy to move when you don't have much to move. And ours are doing a lot of business, they have a lot of great customers that realize the power of their affiliation with the brand. And that's a little more challenging to move and that's why we continue to iterate on our value to them as to keep them satisfied and in place.

Got it. That's helpful. And then, I got a second here, was curious about the accelerating growth you've been seeing in annual agent dues on a year-over-year basis. Is there anything specific that may be driving that? It picked up a little bit higher this quarter than agent growth.

Yes. So I mean, there's a couple of things. We did institute a price increase on July 1, 2017. So we're just continuing to see some tailwinds from that. So that's really the biggest driver. There's a little bit of a tailwind as well coming from FX as we look at Canadian agent annual dues as well, but the biggest driver is that price increase.

Your next question comes from Bose George from KBW.

This is Tommy on for Bose. Are you guys surprised that agent growth, both at RE/MAX and kind of at an industry level, has been able to sustain such good growth, while sides appear to have really kind of flattened with the supply constraints out there?

Tommy, no; not particularly. When you look at the market overall, we look at --- we see fluctuations in the market, but overall, we still see the high-producing, high-level agents continue to -- they're doing their work. In fact, I keep hearing from quite a few agents, "I'm having my best year ever," and "I've already hit my 2017 numbers," things like that from a lot of these producers. It's -- fundamentally, you look at the 80-20 rule in the marketplace, and those that are doing business are pretty much continuing to do business because the shifts in the industry are not drastic enough to knock them off of their core business model. And we're not seeing this massive change in how houses are bought and sold right now in this economy like we were in, say, 2008, 2009, when everything -- so much shifted to short sales, REOs, things like that.

So really it's -- we're -- the movements mostly, I think, are occurring in the low end of the market. Everybody feels pressure, of course, but those that adapt are seeing the results in their business from the adaptation. So ultimately, this is a professional's business now, a professional's market, and that's what we're resting on is, is the quality of our agents and our system. And that's why we continue to push iteration on that to keep making them better.

And separately, could you break out the 6% acquisition-related revenue growth that you guys reported year-over-year. How of much that breaks down between reacquiring independent region versus the booj acquisition or anything else you might have done?

Yes, Tommy. So with respect to that 6%, about 40% of it is coming from the acquisition of the Northern Illinois region, and about 60% of it is coming from booj. So booj is included in franchise sales and other in that line item on the financial statement.

And then last one. You mentioned regional retreats coming up later in the year. None of those have the financial impact that the annual conference has, right?

That's correct.

Your next question comes from Alan Ratner from Zelman & Associates.

So wanted to ask something more on the macro housing side. Your comments on just the tightness of resale inventory. Certainly, we hear that is a big challenge as well towards driving a stronger transaction volume. Some of the data suggest that inventory has been picking up a little bit here in the last few months. I think, on the NAR data in June, it was actually up slightly year-over-year for the first time in a few years. And it's still at extremely low levels, but we've been a little bit surprised on a few of the homebuilder conference calls this quarter. They've actually cited rising resell inventory as a bit of a headwind to buyer urgency and just the overall environment. And certainly, with as tight as the inventory is today, it's hard to imagine that a little uptick here would really have a dramatic impact on buyer activity, or urgency, or anything like that.

So I was curious, what are you seeing on the inventory side? Has the -- the pickup over the last couple of months, is that enough to flip the modest declines in sales to a gain in the back half of the year? And ultimately, do you think the market can absorb a little bit more inventory? Or is the buyers a little bit too sensitive just given all the various moving pieces with rates going higher, et cetera?

It's Adam. It's something that we're watching closely as well. Obviously, we could use a more, if you call it, a normal market, which -- a little ease on the inventory constraints would be a nice thing. I don't necessarily know that overall it's going to have as drastic an impact or a headwind on the homebuilders. Because frankly, we still have a pretty significant shortage of housing, particularly entry-level housing. And I think you can kind of judge that by the fact that there is just a great deal of offers on different properties. Now while the new homebuilders might not see a great deal of offers, that's almost kind of a little bit of a different marketplace, although it is an option for those resale buyers.

So I like what we're seeing with a little bit of increase in inventory. Listings are good for the marketplace; they're good for our industry and good for our agents. Our agents control a great deal of the listings out there. So it's a positive move for us. And we'll continue to help the new homebuilders sell their product as well as much as we possibly can. They've got some great new product out there, new innovation in sustainable housing, things of that nature.

So I -- we don't know what the impact is going to be yet. But those slight ticks that you are mentioning, yes, we do notice those. But we are still in a very, very constrained market, inventory-wise, and we do have a lot of movement that we can see before it starts causing any sort of buyer pressure, if you will.

Great; and I appreciate that. And second question just on affordability. With the big run-up in prices as well as rates earlier in the year, are there any markets you are hearing from your franchisees where you feel like affordability is starting to hit a little bit of a wall? California is one, in particular, there's been a lot of focus around tax reform; and in general, it feels like the sales environment there has been a little bit softer this year. So was curious if you think affordability constraints are driving that at all?

Alan, it's Karri. So I think from a California perspective, those trends are pretty consistent with what we're seeing in our network as well. We have looked more holistically at the SALT states and really, still too early to tell, as Adam mentioned, in terms of the market, but we really continue to perform well there and across the network. And so we're still encouraged by what it means to be with RE/MAX. We're -- I say -- I would say we're kind of more insulated from overall market dynamics, but we're not really immune to anything. So we continue to really watch the market and understand where the pressures are coming from.

But from an affordability perspective, with rates going up, they're still, in terms of historic levels, affordable. And just we continue to see really strong demand coming from the breadth of the network, which is, obviously, just very dispersed across the country, and we just don't have as much variability to the high price points or specific jurisdictions like some of our competitors may.

Your next question comes from John Campbell from Stephens.

I have a two-part question here on booj. Can you provide a little more color on the revenue contributions you guys are expecting from booj for the rest of this year or maybe for '19? And then you guys mentioned on -- before, that booj is generating revenue on the 40-or-so customers outside of RE/MAX. Is there a focus on increasing that number? Or is the focus more on giving the RE/MAX agents access to that kind of technology?

John, so I will answer the second part of your question first. So the focus is really on the RE/MAX technology initiative. So we're really excited about it. Huge focus on automation and differentiation and efficiencies through the booj platform as well as a couple of other significant initiatives that we have. So we're not really looking to grow the revenue base for booj despite the fact that there would definitely be demand from local and regional brokerages to do so.

In terms of the revenue contribution for this year, kind of mid- to slight high-single digits in terms of revenue on a next-year kind of in that really more solid, a little less than double-digit revenue contribution from their existing customers.

Your next question comes from Brad Berning from Craig-Hallum.

Two follow-ups on a number of issues that have been addressed. And one is instead of the newer participants in the market, maybe you can talk a little bit more about the more traditional competitors you have and are they getting more aggressive with retention of productive agents? And how do you feel about recruiting agents away from them?

And the second part of that question is, out of your 20% churn that you guys see, how many of those are leaving the industry versus leaving for competitors and do you see any dynamics in that?

And then the second real question is, why is inventory tight in your guys' view? Is it really that baby boomers are staying in their homes longer and they're just going to have to age out of their house in a different way? Or are you seeing other dynamics of people, post- financial crisis, less willing to flip into homes than they have been traditionally? Just kind of curious as to what you think it will take to get inventory to loosen up?

Brad, I'll start with the recruiting question and the traditional competitors in the marketplace. Recruiting is -- it's the lifeblood of our industry, really. That is how these businesses power their businesses and how they generate their revenue is recruiting producing agents or recruiting agents that pay a monthly fee and a split. So the -- overall, recruiting the big players from the competitors has always been a key to the marketplace.

However, really what the key to our marketplace is, is taking those high-po agents and turning them into high-per agents. So the high-potential agents, the ones that are doing a good business, $75,000 to $125,000 in GCI; and turning them into something that is $200,000 or $300,000 in GCI, and that's really been a great deal of the RE/MAX marketplace. That is -- there are a lot of that type of agent emerging in this marketplace as marketing and sales trends and techniques adjust with digital type means and different community dynamics, things of that nature.

So it -- it's not necessarily where the agent is at that we look to go after, be it the traditional or the more modern; or maybe they're with one of the employee-based organizations or something like that. It's what's the potential of that agent and how can we fit them into the culture of our organization best. So recruiting is a science and with a significant amount of art attached to it. Same as sales. You're basically selling your business model and dream to those agents, and they look very hard at what can this do for me and my business and my lifestyle.

So to pick -- to take a look at our traditional competitors, I think everybody is at -- in the target zone for recruiting if they have good agents or good high-potential agents in their organization. You don't necessarily go and try and pick off the #1 producing agent from an office because they may require more resources than other agents do in that office; and you can build your foundational business better by grabbing more of those high-potential agents than the high-performance agents.

So it -- our business revolves around that art and science of the recruiting. So we're always looking at those different aspects of it, and we can go on with that answer for a long time. So we can catch more of that offline if you ever want to talk recruiting.

Looking at the 20%, I'll toss it over to Karri for that.

Yes, Brad. With that, we're always looking at what that looks like from a turnover perspective and analyzing that. And it's really all over the board. And so we continue to kind of evaluate that and it's just hard to evaluate trend. What we really focus on is the retention side of the house and making sure that we're differentiating our value proposition and really making an effort to differentiate why high producing and highly motivated agents want to come to RE/MAX and the value that we can offer to keep them here.

Understood. And then, the inventory thoughts?

Yes, when you take a look at the inventory, inventory is always kind of an interesting science project in our business. The inventory constraints that we're seeing, everybody speculates on different aspects of that. And truly what it boils down to is the consumer confidence in coming out to the marketplace and saying, "Okay, if I sell my house, are 2 things going to happen? One, am I going to see a good benefit from doing so; and two, is the move going to benefit me in the future?" So it's -- we we've been through some shaky economic times over the past decade, and I think people still, to an extent, are wondering, "Okay, do I have a fear of something else happening?" And we start to see emergence from that.

We've got a generation that had to put off retirement for quite some time, and we also have an emerging generation, some of which have a great deal of cash built up in the bank in investments. And they're considering, "Okay, is this a good movement for it?"

So I think, overall, inventory is both a function of the economy and also the education of the marketplace. And that's what we're working hard on developing is a better education platform to help the marketplace see those options and measure those with data to determine what's best for them.

What we're seeing is people are deciding to move their -- there is family formation going on, which is fantastic. Yes, the boomers are staying put in some cases. But to a great deal of extent, an empty-nest family or empty-nest couple that has decided, "Okay, we're going to sit here tight because we're comfortable with everything." They do want to move now and it's incumbent upon the downsizing aspect of that to fit them being new home build -- I can tell you my dad has actually moved a couple times in the past 5 years to find the right home for him and it happened to be new homes each time. So when you look at the boomer market, they are competing for the first-time homebuyer market. That's a competitive marketplace because you do see 10 or 12 offers on different places and you also see a rush for inventory in some communities that have emerged from a homebuilder.

That being said, a lot of those new communities that are emerging from homebuilders are still in their infant stages. And that's tough to envision yourself moving in there because it's a bunch of dirt and holes in the ground. So the second move in those communities, a lot of times the resale move, is good for us, good for the new homebuyers, good for the empty nesters, things like that. But I think we're still seeing the younger stages of a new housing market emerge, and we'll start to see increased inventory as that happens.

Yes, and Brad, just putting some quantitative things behind that. We're seeing about 1.1 million of an increase in household formation over the last couple of years, but existing home sales have really maintained flat. And as a result of that and the trend prior to that, we're just seeing a huge deficit that's accumulated from a housing perspective driven by multiple factors: less building coming from the homebuilders, coupled with just an increase in household formation and the fact that the number of existing home sales has stayed flat.

Then you add on top of that the fact that a lot of investors came in during the recession and picked up housing and has converted homeownership to rental properties. And all of those are just a confluence of factors that are causing a constraint from an inventory perspective on the market.

(Operator Instructions) Your next question comes from Nikita Bely from JPMorgan.

Are you on mute, Nikita?

(Operator Instructions) There are no further questions in the queue. I now turn the call back to the presenters.

All right, thank you, Kim, and thanks to all for joining us on the call today. Have a great week.

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