Real Matters Inc

TSX:REAL

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Real Matters First Quarter 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to your host, Ms. Lyne Beauregard, Vice President of Investor Relations. Ma'am, the floor is yours.

[Lyne Beauregard Fisher, Vice President of Investor Relations & Marketing]

Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results Conference Call for the First Quarter Ended December 31, 2020. With me today are Real Matters' Chief Executive Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning, before market open, we issued a news release announcing our Q1 results for the 3 months ended December 31, 2020. The release, accompanying slide presentation as well as the financial statements and MD&A are posted in the Investors section of our website at realmatters.com.During the call, we may make certain forward-looking statements, which reflect the current expectations of management with respect to our business and the industry in which we operate. However, there are a number of risks, uncertainties and other factors that could cause our results to differ materially from our expectations. Please see the slide entitled Cautionary Note Regarding Forward-Looking Information in the accompanying slide presentation for more detail. You can also find additional information about these risks in the Risk Factors section of the company's annual information form for the year ended September 30, 2020, which is available on SEDAR and in the Investors section of our website.As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA and adjusted EBITDA margins. Non-GAAP measures are described in our MD&A for the 3 months ended December 31, 2020, where you will also find reconciliations to the nearest IFRS measures.With that, I'll turn the call over to Brian.

[Brian Lang, CEO & Director]

Thank you, Lyne. Good morning, everyone, and thank you for joining us on the call. I will take things off today by discussing some of the highlights of our first quarter. Bill will then take a deeper dive into our segment financials. And I'll wrap up the call with some brief remarks prior to taking questions.Turning to Slide 3. We delivered solid financial results in the first quarter. Consolidated net revenue increased 24.8% year-over-year to $44 million, and adjusted EBITDA was up 19.7% to $17.4 million. And for the third quarter running, the contribution to net revenue and adjusted EBITDA of our U.S. Title segment surpassed that of our U.S. Appraisal segment.The U.S. mortgage origination market remained robust in the first quarter as low interest rates continue to provide a tailwind to market growth. These market dynamics provide a healthy backdrop for our growth, and we realized solid year-over-year market share gains in U.S. Appraisal and even stronger gains in our U.S. Title segment.U.S. Appraisal segment revenues increased 3.2% year-over-year to $69.6 million, principally driven by market share gains and new client additions, which together drove higher origination revenues. The increase in origination revenues was offset in part by a 37.1% decline in other revenues, which represent home equity and default transactions. Origination-only revenues were up 9.2% year-over-year relative to what we estimate was a flat addressable market for appraisals, which take into account the impact of VA and waivers.In the quarter, we launched one new Tier 2 lender in 2 channels in U.S. Appraisal. We also continue to rank at the top of lender scorecards, which drove market share gains in the main origination channel year-over-year. In fact, in the first quarter, we marked our third straight year as the top performer with one of our Tier 1 clients. Operational excellence continues to be our principal focus as we drive toward achieving our fiscal 2025 objectives of doubling our U.S. Appraisal purchase and refinance market share at the midpoint of the range.In our U.S. Title segment, first quarter revenues rose 39% year-over-year. Growth in our centralized Title operations continued to significantly outpace the market with revenues increasing nearly 93% compared to an estimated 60% increase in refinance market volumes. The significant increase in centralized Title revenues was partially offset by a $4.1 million decline in diversified Title revenues and a $2.1 million decline in other Title revenues representing home equity and real estate-owned transactions.With new client launches in our centralized Title business on the horizon, we have shifted resources away from our diversified Title operations with a view of supporting our long-term growth strategy in the origination channel. In the quarter, we went live with 2 new clients, including a Tier 2 lender, and our sales pipeline continues to be strong. As we indicated during our last quarterly call, we are actively engaged in a sales process with majority of the Tier 1s on Title today, and we remain confident that these engagements will result in our first Tier 1 lender launch.In our Canadian segment, first quarter revenues were up 40.7% year-over-year, and adjusted EBITDA increased to $1.2 million from $0.7 million in the first quarter of fiscal 2020. Higher Appraisal volumes from increasing market share with certain Canadian clients and a stronger mortgage origination market in Canada were partially offset by modestly lower revenues from insurance inspection services due to COVID-19. Canadian mortgage market continues to be remarkably resilient.With that, I'll hand it over to Bill. Bill?

[William P. M. Herman, Executive VP & CFO]

Thank you, Brian, and good morning, everybody. Turning to Slides 4 and 5 for a closer look at our financial results. Consolidated revenues were up 15.9% in the first quarter of fiscal 2021 compared to the same quarter last year due to significant revenue growth in our U.S. Title segment and continued growth in Canadian and U.S. Appraisal segment revenues.Revenues in our U.S. Title segment were up 39%, while revenues in our U.S. Appraisal segment increased 3.2%, and Canadian segment revenues rose 40.7%, each expressed on a comparative basis. In our U.S. Appraisal segment, we serviced higher origination volumes from market share gains and new client additions. Conversely, revenues related to home equity and default volumes declined year-over-year.Transaction costs in our U.S. Appraisal segment increased 3.8% year-over-year compared to the 3.2% increase in revenues for the same period. As a result, net revenue was up 1.4% to $15.7 million. However, net revenue margins declined 40 basis points to 22.6% in the first quarter of fiscal 2021 from the 23% we posted in the first quarter of fiscal 2020 due in part to the mix of mortgage origination volume serviced, and we continue to build capacity and strengthen the network in anticipation of volume growth in the second half of fiscal 2021.Operating expenses in our U.S. Appraisal segment increased 3.5% to $6.9 million, up from $6.7 million in the first quarter of fiscal 2020 due to higher payroll and related costs from higher origination volumes serviced. As a result, adjusted EBITDA was flat with the first quarter of 2020. Adjusted EBITDA margins in our U.S. Appraisal segment decreased to 56.3% in the first quarter of fiscal 2021 from the 57.2% we posted in the same quarter last year.Turning to our U.S. Title segment. First quarter revenues were up 39% year-over-year while transaction costs increased 29.3%, leading to net revenue margin expansion of 250 basis points. The expansion in net revenue margins was due to the flow of volumes in the first quarter, which saw us close more transactions than we received in new orders.Transaction costs attributable to mortgage origination orders are typically incurred 45 days in advance of recognizing revenues. Accordingly, there is a lag between when we record transaction costs and when we recognize revenue. As expected, new refinance orders in the month of December, for example, were lower than October and November due to the holidays. As such, net revenue margins improved as the number of orders we completed and recognized revenues for were proportionately higher than the new orders received in the quarter.Looking ahead, we anticipate the launch of a number of new Title clients in the second quarter of fiscal 2021. Accordingly, we expect to incur transaction costs attributable to orders from these new clients in the latter half of the second quarter that will convert to revenue in the third quarter of fiscal 2021.As Brian mentioned earlier, centralized U.S. Title segment revenues nearly doubled to $36.2 million from $18.8 million in the first quarter of fiscal 2020. Diversified revenues decreased 63.2% to $2.4 million as a result of planned initiatives to focus on large, centralized U.S. Title clients. And other Title revenues were down 59.9% to $1.4 million, representing lower home equity activity.As we outlined during our last quarterly call, over the course of fiscal 2020, we made the strategic decision to streamline some of our diversified Title operations due to the growth in our centralized Title business. To that end, we exited the commercial business and unwound our Title only and search operations and reallocated these diversified Title resources to our centralized Title operations to support a larger, long-term, strategic growth opportunity for the company.Operating expenses in our U.S. Title segment increased $5.1 million to $15.1 million in the first quarter of fiscal 2021. In the quarter, we continue to build capacity in this segment and rationalize the customer base to make room for a Tier 1 launch. This capacity build will result in a further increase in Title operating expense in the second quarter this year. While it is often difficult for us to dictate when new launches will occur, we are confident in the timing and scale of our investment.Adjusted EBITDA increased to $11.6 million in the first quarter of fiscal 2021, up from the $8.4 million we posted in the same quarter last year. However, adjusted EBITDA margins declined 220 basis points to 43.5% as a result of our ongoing investment to build capacity for growth in our U.S. Title business. We remain confident in our ability to achieve adjusted EBITDA margins of 50% to 55% by fiscal 2025.In Canada, revenues increased 40.7% on a year-over-year basis to $10.8 million, while net revenue margins contracted by 190 basis points due to a reduction in insurance inspection services as a result of COVID-19 and the mix of mortgage origination volumes serviced. Canadian segment operating expenses were $0.4 million in the fourth -- in the first quarter, down 26.9% from the first quarter of fiscal 2020. And adjusted EBITDA margins increased to 73.7% from 55% in the same quarter last year as we leveraged our Appraisal operations in a higher overall volume environment and incurred modestly lower travel and entertainment expense due to COVID-19.In total, first quarter consolidated net revenue increased 24.8% to $44 million, up from the $35.3 million reported in the first quarter of fiscal 2020. And consolidated net revenue margins increased to 36.6% in the first quarter of fiscal 2021, up from 34% in the first quarter of fiscal 2020, due in large part to the contributions made by our U.S. Title business.As a result of our solid operating performance, consolidated adjusted EBITDA rose to $17.4 million in the first quarter of fiscal 2021 from $14.5 million in the same quarter last year. And consolidated adjusted EBITDA margins decreased to 39.6% in the first quarter of fiscal 2021 versus the 41.2% we posted in the first quarter of fiscal 2020 due to the capacity investments we made in both our U.S. Title and U.S. Appraisal segment this quarter to service higher volumes in Q1 and in anticipation of higher volumes in the second half of the year. These investments were partially offset by lower travel and entertainment expense as a result of COVID-19. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $118.6 million, down from $129.2 million at September 30, 2020. Cash from operations of $7.3 million was offset by CapEx of $2.3 million related to the opening of 2 new Title offices in Dallas and Phoenix. As we continue to scale our Title business, we are making the necessary investments to support our growing footprint and expanding the breadth of our operations to meet clients and regulatory requirements. We also continue to purchase shares under our normal course issuer bid, purchasing approximately 1.2 million shares at a cost of about $18.9 million in the first quarter of fiscal 2021. Post quarter end, we purchased over 90,000 additional shares.With that, I'll turn it back over to Brian. Brian?

[Brian Lang, CEO & Director]

Thanks, Bill. Overall, we were very pleased with how the business performed in the first quarter, making a solid start to the year in a traditionally seasonally lower quarter. While our U.S. Title segment benefited from U.S. mortgage market tailwinds in the first quarter, more importantly, we continue to make progress with market share in Appraisal and Title, and we are investing in our business, laying the foundation for future growth. As Bill mentioned, we are continuing to build Title capacity in Q2 while rationalizing our customer base to make room for at least one Tier 1 launch. We are making the right decisions today for the long term, and we remain confident in our ability to convert at least one large Tier 1 lead client in Title this year.We believe that the market surge for refinance activity will continue. We remain focused, however, on driving market share through operational performance and scale to build value over the long term. I'd like to thank our team and the field professionals on our network for helping us deliver solid results this quarter, especially during the holidays.With that, operator, we'd like to open it up now for questions.

[Operator]

[Operator Instructions] Your first question will come from the line of Mr. Richard Tse from National Bank Financial.

[Richard Tse, MD & Technology Analyst]

Yes. Guys, I was just wondering if you could maybe talk about the trajectory of the Appraisal business for the remainder of the year. I'm expecting that you're still going to see some growth, but maybe you can kind of give us an update on that.

[Brian Lang, CEO & Director]

Yes. So you know seasonality, Richard, is playing into things. And so our view is we're going to go into that spring and summer market. And much as we sort of forecasted out in the year, we believe that we will see some good up-ramp in Q3 and Q4. Q2 will continue to sort of plug away. And -- but I think we'll actually see that up-ramp Q3, Q4.

[Richard Tse, MD & Technology Analyst]

Okay. And then, I guess one of the challenges is that there are a number of different items within sort of this Appraisal segment, for sure. You called out home equity and default. Can you give us maybe a bit more color or some finer detail on sort of the market share gains you are having in appraisals?

[Brian Lang, CEO & Director]

Sure. So the majority of our Tier 1s in this past quarter, we increased market share with. So we are continuing to see through operational excellence. I mentioned that we celebrated our third year being top of the scorecard with one of our Tier 1s. So we continue to see the fruits of that labor. And so that was a very good quarter that we just had as far as continuing to build market share with those Tier 1s. I also mentioned, Richard, that we launched a new Tier 2 into 2 different channels. So that is at the very front edge, of course, of volume, but we expect to continue to see some growth and market share gaining with that new Tier 2.

[Richard Tse, MD & Technology Analyst]

Okay. If I could just...

[William P. M. Herman, Executive VP & CFO]

Sorry, Richard, I apologize. It's Bill. If I could just add, one of the things that we've expressed, I think, on the call and in our MD&A as well is just to give some perspective you on how we've done relative to the market. So when we look at the addressable market in our Appraisal business, our view is that it's really flat year-over-year. But when you look at those origination revenues in isolation, they increased over 9%. So I think that's a pretty decent proxy for our volume growth and our market share gains on the quarter. There really was no meaningful price change quarter-to-quarter as it relates to the average price in Appraisal, be it refinance or purchase. So it's really -- that's a good proxy for our volume gains quarter-over-quarter or year-over-year that is.

[Richard Tse, MD & Technology Analyst]

Okay. And just sort of on that point, would you guys ever consider segmenting that sort of information on those other lines of businesses within appraisals going forward just because it obviously kind of distorts the results of the sort of the pure business that you have right now. Is that something you would consider going forward?

[Brian Lang, CEO & Director]

Bill, I'm going to hand that over to you.

[William P. M. Herman, Executive VP & CFO]

Yes, absolutely. So we certainly laid down the difference in revenues. And we have done so since the end of last year, Richard. So you're going to continue to see at least the bifurcation. So you can see how the home equity portion of our business relative to the main larger origination channel is behaving. And when we're giving our market estimates, we're obviously focused on the origination channel principally.We obviously gravitated away from a total market view where we included home equity and default transactions, really just focused on isolating on the main origination channel, and those are aligned with our 2025 strategic long-term targets as well. So I think that sets up well for at least understanding the business and where we're focused on and where we intended to go. I don't think I would ever see us taking home equity and actually subdividing it in our Appraisal segment down to net revenue and EBITDA, but we certainly give some color at the revenue line. So hopefully that's helpful.

[Richard Tse, MD & Technology Analyst]

Okay. And just one last quick one for me. Obviously, the business is shifting increasingly more towards Title, and it sounds like you guys have a little bit of activity on a Tier 1. So the question is once you bring on one of these Tier 1s, does it sort of typically take a quarter to scale these up much like you've referred to in your text today? But those aren't tier 1s. What sort of the time line scale up the Tier 1s?

[Brian Lang, CEO & Director]

Good question, Richard. So listen, our expectations on the Tier 1 that we're in discussions with are probably a little more aggressive than we've talked to you in the past. And I think that's mainly because we've got -- had built up this sort of performance equity on the Appraisal side. So as opposed to taking some time, a quarter or 2, for us to actually start seeing a decent amount of volume, our feeling is that -- and our planning is around us taking on a much better chunk of volume, so a decent amount of market share from the get-go. So we have expectations that we'll take on some good volume from the Tier 1 in the second half of this quarter.

[Operator]

Our next question will come from the line of Mr. Daniel Chan from TD Securities.

[Daniel Chan, Research Analyst]

So you mentioned that you have discussions going with the majority of the Tier 1s. Can you just give us some color on the timing of those and how far along you are in those discussions?

[Brian Lang, CEO & Director]

Sure. Daniel, I think we look at this very similarly to our Appraisal experience. So if we fall back on that, it was 18 months plus, give or take a month, so call it, 18 to 24 months from the signing of the first contract with the Tier 1 until we had all 6 of the Tier 1s in contract. So our view is similar with the Title business, we feel that the progress on the sales pipeline sets us up for that sort of -- that same type of dynamic.

[Daniel Chan, Research Analyst]

But we should expect steady Tier 1 wins throughout that 18-month period, right?

[Brian Lang, CEO & Director]

Correct. Correct.

[Daniel Chan, Research Analyst]

And then on the waivers that you guys started talking about last quarter, any change on the percentage of appraisals that need to be waived?

[Brian Lang, CEO & Director]

No, a very similar quarter this quarter as we had sort of suggested and forecasted last quarter. So what's going to happen now as we go forward is the waiver rates, the average waiver will come down simply because of mix. So remember that the waiver rates on rate refinance, as the market shifts, purchase starts coming up, cash out refi comes onboard, we believe that the waivers will slowly start making their way down.

[Daniel Chan, Research Analyst]

Okay. And then last one for me. You introduced your data strategy at the Analyst Day. Just wondering what the pipeline of acquisitions is looking like for you to acquire into that data strategy.

[Brian Lang, CEO & Director]

Yes, not much of an update there, Daniel. We continue to look at opportunities in the market, but nothing has progressed worth conversation here.

[Operator]

Our next question will come from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

As we think about your market share gains in Appraisal through the rest of the year, are there any mitigating factors we should think about, be it in terms of what you're seeing as far as the type of share gains that your own customers likely to capture as far as the overall market or be it with respect to the purchase refi mix in the industry? And if you could call out as we think about share gains.

[Brian Lang, CEO & Director]

So I think it's still early to make a call on that, Thanos. As I think we've talked about in the past with regards to refinance, often some of the nonbanks will get going and take some share early when there's a refinance event. And so I think there may have been a little bit of that early.But I think the -- some of the big Tier 1s now you're seeing some good growth there, definitely very competitive on the rates. So we think that, that will continue to evolve. But definitely, we're feeling very confident in some of the big Tier 1s, making sure that they are continuing to take their fair share of market share. So I think that's how we would look at it going forward.And the purchase refi mix, I think we told you, we have been heavier on the refi mix. A bunch of that's driven by just the customer mix. So players -- some of our big players are very refi focused, and that's generally not surprisingly a nonbank like Quicken. And so some of our Tier 1s are quite focused on purchase. So as we move into the purchase cycle, we think that they will fare very well.

[Thanos Moschopoulos, VP & Analyst]

Okay. And with respect to your expectations of waiver activity coming down later this year, is that primarily a mix dynamic? Or might there be other factors that you're anticipating in terms of be it the GSE participation in the overall market or be it in terms of GSE waiver behavior within refi versus purchase?

[Brian Lang, CEO & Director]

Yes. So refi, for me anyway, is part of the mix piece. So I just -- the waiver rate on purchase is quite a bit less than it is on refi rate and same with cash out. So there's a mixed piece. So that will just evolve, especially as we head into the spring and summer markets.As far as GSEs, we talked a little bit around the fact that there's a sort of cohort of identified mortgage holders that we believe will find their way through the pipeline, and so hence, why we've talked about in the second half of the year starting to see that overall sort of waiver rate start finding its way down.

[Thanos Moschopoulos, VP & Analyst]

And sorry, just to clarify, would you expect that the GSE level of waivers, say, within refi, I think they're waiving something like record ratio now. But would you expect that their waiver activity within, let's say, refi would come down? Or do you think that remains constant, but that's the...

[Brian Lang, CEO & Director]

Yes. We think over time -- Thanos, we think over time that cohort that we talk about, the 720 credit score, the recent Appraisal, good LTV, that whole group, we believe that will find its way through the funnel. So we've talked about in the second half, seeing that actual rate refinance waiver rate slowly start making its way down. We plan for a very slow decrease. But I think we might see a little bit more of a decrease just with the mix coming in with purchase starting to ramp up in the spring.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then finally, what are you seeing as far as lender capacity? Are they growing their processing capability to the extent that you have been anticipating?

[Brian Lang, CEO & Director]

Yes. They're getting there, I think, from our standpoint. So -- and you're seeing it, I think, in the margins. You're seeing the margins from the 10-year and 30-year come down. You've seen the rates come down dramatically, of course. So they're now starting to compete more for the business, which that's, I think, a decent proxy for them definitely having more capacity.If you look at the labor rates, it's a slightly sort of static story. It's not a significant growth in capacity. But from what we're seeing in the market, the market dynamics would tell us that they're getting good. They're getting close to where we would expect capacity to get to.

[Operator]

Your next question will come from the line of Paul Steep from Scotia Capital.

[Paul Steep, Analyst]

Great. Could you comment maybe just a little bit about the trend in diversified Title revenue and put it in context of your comments from the MD&A regarding maybe reallocating resources expecting that you're ramping for your Tier 1 clients later in the year, should we read that to mean basically that, that -- those revenues are basically going to approach 0, you exited the market? Or is it going to sustain? That would be the first part.

[Brian Lang, CEO & Director]

Sure. So Paul, diversified Title, it's a less scalable business than our centralized Title business. So as we saw the refinance wave start picking up, we took a look at a portion of our diversified Title business that was very relevant to the centralized Title business as far as capabilities go. And so we then decided it made sense for us to start streamlining that part of our business and move it into support centralized Title. So that was the commercial side of the business. And so as of this past quarter, we have shut down that portion of diversified Title.We are still running our capital markets piece of the business, and that continues to perform. But that's sort of our view. So that business will continue going forward. So expect that there will be capital markets revenue coming in. Capital markets have been a little bit soft. So we're -- we'd like to see that be a little healthier, that portion of the business. But that's currently the way we're looking at it. So commercial has been closed down. Those resources have been put into the centralized Title business. And we'll continue to run the capital markets portion of the business.

[Paul Steep, Analyst]

That's helpful. So just to be -- so I'm clear on it, the $2.4 million this quarter, that's just pure capital markets, and so there's no real trailing amount, not that it's material.

[Brian Lang, CEO & Director]

It'd be material -- it would be immaterial, the commercial revenue there.

[Paul Steep, Analyst]

So then the second part of that, and it's to the comments you made in the MD&A and in the prepared text, just regarding the cost, right, it sounds like you shifted resources. It wasn't clear whether you added new resources and whether those resources were all in for a full quarter. I guess where I'm going with this is I'm trying to recon this quarter in advance how much should we think it grew in terms of -- is this a decent baseline? Or is it going to materially move higher?

[Brian Lang, CEO & Director]

No problem. So we've been growing our costs. We started talking about building up the capacity, capacity in 2 areas. One, of course, is building out our network. So onboarding more notaries and abstractors in preparation of resources to support things like search and in curative. So we've been hiring, Paul. I think we've been pretty clear and actually given numbers on folks that we've been hiring.So we're definitely bringing folks in as well as that transition that we mentioned around some of the DT resources onto the centralized Title business. So we're building people as well as investing in the network and making sure that we're able to attracting and bringing up the network. So that is, I think, the way we would look at it. Did that answer your question? Apologies. Was there a second part to your question?

[Paul Steep, Analyst]

Just -- all we're trying to do is just sort of level set whether or not you've got a full quarter of the cost and how significantly -- and I was just referring to OpEx. So sure.

[Brian Lang, CEO & Director]

Yes. So we'll continue -- I mean I can turn that over to Bill for maybe a little more color around OpEx. But we're going to continue to scale that business up in this quarter with that expectation of volume in the second half increasing volume. But Bill, I'll let you comment on OpEx.

[William P. M. Herman, Executive VP & CFO]

Sure. Thanks, Paul. Great question. I think what you're going to continue to see, and it was really just echoing Brian's comments, we are going to continue to build that capacity up with the expectation of that volume coming, especially in Q3 and Q4, converting into revenues. Your question really is, we posted a $15.1 million OpEx in our Title business. That was up roughly $1.6 million sequentially over the Q4 period. The ultimate, I think what you're asking is we did see another $1.5 million or $1.6 million. The short answer is it's probably not going to be that significant, but I would certainly expect it to have a slight further increase off of the 15.1% level that you saw in Q1.

[Operator]

[Operator Instructions] Rob Young from Canaccord Genuity.

[Robert Young, Director]

If you'll look back to the Investor Day, is the waiver volume that you're seeing, is that playing out relatively consistent with your view then? Is there any change in scope of where the waivers are being applied? Or is there any change in the volume as you expected it?

[Brian Lang, CEO & Director]

Yes. I mean, I think we've stated, Rob, the waiver rate was a little higher than we had expected, but we had built waivers and a pretty healthy waiver rate into the overall plan. So I mean, the plan has that in place. It has it slowly starting to track down in the back half of this year. And as we've mentioned before, it makes its way back down to 2019 rates by 2025. The reality is, of course, with the mix of the business changing over time as rate refi becomes, over time, a smaller part of the overall mix, that, of course, will become less relevant in the back couple of years of the plan.

[Robert Young, Director]

Okay. And that's been driven by 2 factors. As you head into the spring market, there's more purchase volume and the underwriting capacity, where it's -- you're expecting it will shift more towards the Tier 1s, which would seem less wavering. Is that -- or at least in your -- in the composition of your revenue, is that a good way to summarize that?

[Brian Lang, CEO & Director]

Yes. So the overall mix of the market will definitely start moving more towards purchase simply because of the dynamics of seasonality kicking in. So you're going to get that and purchase has a very low waiver rate. It's somewhere in 5% to 6% right now, historically, more like 2% to 3%. So that will, of course, just generally change the overall average of the waiver rate. So that's, I think, in the short term. And then longer term, Rob, we've talked about the cohort that we think goes through this. And the requirement for data, all the other elements around the GSEs, we think will start that track down in the second half.

[Robert Young, Director]

Okay. And then going into the spring market where the volumes are expected to increase, if lender underwriting is that very high capacity levels right now, should we expect a normal seasonal uptick? Or will it be limited by lender capacity?

[Brian Lang, CEO & Director]

I think, I think we'll have to see. I mean, our expectation is that we will have a strong spring market. The analysts out on The Street have been talking about the U.S. market having a strong spring and summer. So our view is the overall purchase market should be pretty solid. Comment earlier around -- I think the capacity is pretty good at the lenders. It may not be exactly where we would have liked it to be, but it's definitely much better than it was last year at this time. So the comment, Rob, is I think the purchase market will be strong. It's not much different, though, than the way we had forecasted it for Q3 and Q4.

[Robert Young, Director]

Okay. And then when you were talking about the shift at headcount, that's likely a bit of a top -- a short-term revenue headwind. And also in Q2, the capacity increases that you're expecting, I think you suggested that you're expecting Title volume to increase in the back end of Q2, where you would recognize the cost. And so Q2, you're going to see some top line headwind, but also a strong tick up in your expenses?

[Brian Lang, CEO & Director]

Yes. So the top -- yes, the top line is making room in the portfolio for the incoming Tier 1 volume. So there's a piece of that. There's another piece, Rob, which is I think the second point you were talking about, which is we had a very good margin in Q1 on Title down to EBITDA, and we had a really good margin because we closed more orders than we opened, which is not unusual with December. And so in this upcoming quarter, we see that in the back half, we are preparing for that volume.To your point, we think we are going to open lots of orders in the back half and close those in Q3. And we take the COGS on those orders upfront. So we've got that. And then you've layered on the piece, which is around capacity build. So we will continue to build up capacity. So that's where you will get some expenses in Q2.

[Robert Young, Director]

Okay. And maybe just to put a little bit of a finer point there. I don't know if you said this earlier on the call, but would that capacity increase exiting Q2, is that related to like expectations on new customer wins? Or is that just related to regular volume increase from seasonality?

[Brian Lang, CEO & Director]

No. That's very much focused on customer wins. That's almost 100% focused on customer wins. Expected customer wins.

[Robert Young, Director]

Okay. Great. And then maybe last question. And then last question from me would be I mean there's some complaints in the market around appraiser professional shortages? And are you seeing any impact on the capacity, especially -- I guess, the capacity increases are more on the Title side, but are you seeing any impact on capacity on the appraiser side? Then I'll pass the line.

[Brian Lang, CEO & Director]

Yes. No, we haven't. And we're quite fortunate that some of the large lenders are actually warming up to the idea of including trainees as long as, of course, it's signed off by that certified appraiser. So our view right now, Rob, is we're not seeing any shortages around that. And we haven't had a problem finding and fulfilling orders.

[Operator]

And that will be for our last question for today's conference. Again, thank you so much, presenters. Thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe, and have a lovely day.