Real Matters Inc

TSX:REAL

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Real Matters First Quarter 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Lyne Beauregard. Thank you. Please go ahead.

[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, 2021. With me today are Real Matters' Chief Executive Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning, before market opened, we issued a news release announcing our Q1 results for the 3 months ended December 31, 2021. The release accompanying the slides 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 results to differ materially from our expectations. Please see the slide entitled Caution Note regarding forward-looking information and in the company's 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, 2021, which is available on SEDAR and in the Investor Relations 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 margin. Non-GAAP measures are described in our MD&A for the 3 months ended December 31, 2021, where you will also find reconciliations to the nearest IFRS measures.With that, I'll now 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 kick things off today by discussing some of the highlights of our first quarter and some of the key drivers behind our numbers. 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 reported consolidated revenues of $107.8 million as strong growth in our U.S. Appraisal and Canadian segments was offset by a decline in U.S. Title. We grew share with our clients and delivered record first quarter net revenue in U.S. Appraisal. Our U.S. Title operations continued to perform well, delivering against our Tier 1 lender scorecard in the quarter and landing us atop our Tier 2 clients' scorecards.With plenty of movement in the 10-year treasury yield, the U.S. mortgage rate environment was dynamic with significantly higher rates, presenting a market headwind for our business in the first quarter. First quarter mortgage market volumes were also more in line with the seasonality we typically see in the October to December time frame, with a slowdown in activity due to the holidays.That said, our first quarter U.S. Appraisal mortgage origination revenues, which includes purchase and refinance, increased 13.9% year-over-year compared to an estimated 1.5% decline in total origination market volumes. The increase in U.S. Appraisal revenues was principally driven by the mix of volumes serviced, net market share gains and new client additions. In the quarter, we launched 4 new lenders in U.S. Appraisal and 1 new channel with an existing Top 100 client. U.S. Appraisal purchase revenues were down 0.8% compared to an estimated market decline of 9.3%. It's worth noting that the purchase market in the prior year quarter was exceptionally robust. It was the highest first quarter purchase market volume we have seen since going public, making it a tough year-over-year comparable.U.S. Appraisal refinance revenues were up 23.3% compared to an estimated market increase of 10.8% in the addressable refinance market. Our market estimate includes a year-over-year decline in the use of GSE waivers, which helped increase the size of the addressable refinance market for Appraisal and offset the 31.2% total market decline for refinance market activity.In our U.S. Title segment, first quarter centralized Title revenues declined 60.6% year-over-year against an estimated market decline of 31.2%. Outside of market movements, we continue to focus on performance as the main driver of growth in our Title business. We continue to perform at the top of our Tier 2 lender scorecards, and as a direct result, we continue to win market share. In addition, we expect that our performance on the Tier 1 lender scorecard will set the stage for further market share growth and the expansion of channels with this lender.The performance equity we are building today will also help support the sales cycle with prospective clients. We launched 1 new Top 100 lender in Title in the quarter. And subsequent to quarter end, we launched an additional Top 100 client. We continue to move our pipeline forward and remain focused on bringing on new lenders throughout the year.In our Canadian segment, first quarter revenues were up 13.2% year-over-year from increasing market share with certain Canadian clients and increased revenues from insurance inspection services.With that, I'll hand it over to Bill. Bill?

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

Thank you, Brian, and good morning, everyone. Turning to Slides 4 and 5 for a closer look at our financial results. U.S. Appraisal segment revenues increased 14.1% year-over-year to $79.3 million due to the mix of volumes serviced, net share gains with existing clients and new client additions, which were offset in part by lower estimated addressable market volumes.Transaction costs in our U.S. Appraisal segment increased 16.9% year-over-year and net revenue increased 4.2% to $16.4 million, while net revenue margins declined 200 basis points to 20.6% compared to the same period last year. The decline in net revenue margins was due in part to the mix of mortgage origination volumes serviced, which included complex properties with higher appraisal fees. That said, and as Brian mentioned earlier, we delivered record first quarter U.S. Appraisal net revenue this quarter.Operating expenses in this segment increased 14.7% to $7.9 million in the first quarter of fiscal 2022 due to higher capacity levels in the quarter and the mix of volumes serviced. Adjusted EBITDA in U.S. Appraisal decreased modestly to $8.6 million from $8.8 million in the first quarter of fiscal 2021. And adjusted EBITDA margins contracted to 51.9% on lower net revenue margins and higher payroll costs due to higher capacity levels in the quarter and the mix of volumes serviced.Turning to our U.S. Title segment. Revenues declined 59.4% year-over-year on lower estimated refinance volumes of 31.2%. Diversified revenues totaled $0.5 million, representing a decline of $1.9 million from the first quarter of fiscal 2021 as a result of rationalizing this service offering last year. Transaction costs in our U.S. Title segment decreased 58.9%, while net revenue margins were strong at 66.4%. The modest contraction in net revenue margins against the same quarter last year was due to the flow of volumes between comparative quarters, partially offset by higher net revenue margins from a diversified Title and other Title revenues.Operating expenses in this segment decreased $4.8 million to $10.3 million in the first quarter of fiscal 2022 due to lower volumes serviced. Adjusted EBITDA was $0.4 million in the first quarter of fiscal 2022, down from the $11.6 million we posted in the same quarter last year. And adjusted EBITDA margins contracted to 4.1%, owing to the impact of lower volumes. As we've done in the past, we'll continue to manage operating expenses relative to volumes serviced, while ensuring that we make the right decisions to support our long-term objectives.In Canada, revenues increased 13.2% on a year-over-year basis to $12.2 million, while net revenue margins contracted by 180 basis points due to the mix of appraisal services supplied and appraiser onboarding. Canadian segment operating expenses were $0.7 million in the first quarter, up from $0.4 million in the first quarter of fiscal 2021. And adjusted EBITDA margins decreased to 57.7% from 73.7% in the same quarter last year due to an increase in operating expenses attributable to the higher payroll and related costs, other expense and FX.Last year, we redeployed certain Canadian staff to service the Title business. With the resumption of more normal operations in Canada following the removal of certain COVID restrictions, these employees have returned to the Canadian segment.In total, first quarter consolidated net revenue was $28.8 million compared to the $44 million reported in the first quarter of fiscal 2021 due to lower revenues in our U.S. Title segment. Consolidated net revenue margins were 26.7% in the first quarter of fiscal 2022, down from the 36.6% we posted in the first quarter of fiscal 2021, reflecting lower margins in our U.S. Appraisal and Canadian segments and lower net revenue generated by our U.S. Title segment.Consolidated adjusted EBITDA was $5.9 million in the first quarter of fiscal 2022, down from $17.4 million in the same quarter last year. And the consolidated adjusted EBITDA margins decreased to 20.6% due primarily to lower volumes serviced in our U.S. Title segment.Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $73.3 million at December 31, 2021. In the quarter, we directed 100% of the free cash flow we generated this quarter to share purchases under our NCIB, purchasing approximately 700,000 shares at a cost of $5.1 million. At the end of the quarter, we still have 3 million shares remaining under our current NCIB. And we intend to continue to be active in the NCIB, which we will balance with other strategic opportunities as they present themselves.With that, I'll turn the call back over to Brian. Brian?

[Brian Lang, CEO & Director]

Thanks, Bill. Overall, we're feeling good about the business as we continue to focus on operational performance, managing scale, launching new customers and driving market share growth. The long-term potential for our business has not changed, and we remain confident that we will achieve our fiscal 2025 objectives.As Bill mentioned earlier, our view is that the current trading price of our shares is not reflective of the value of our business, which presents an opportunity to return value to shareholders through share repurchases under our current NCIB.With that, operator, we'd like to open it up for questions now.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Chan of TD Securities.

[Daniel Chan, Research Analyst]

Brian, last quarter, you talked about how some Tier 1 customers were coming back into play. Just wondering how that pipeline has progressed over the last quarter? And whether you have some visibility on the timing of those customers potentially coming onboard to the platform?

[Brian Lang, CEO & Director]

Got it. So Dan, I know that's specifically a Title question. And so I think one of the benefits we continue to see is that our performance on Appraisal with all of our Tier 1s continues to be incredibly robust, and we keep hitting the top of the scorecard with them. And as I've discussed in the past, we use that performance equity to drive our conversations on the Title side.So I think with the Tier 1 that we currently have on the Title platform, performance incredibly strong in the first quarter, so we will continue to work on driving that. And I've mentioned the majority of Tier 1s right now are in conversations around Title. So we will continue to play that off with some market dynamics that are going on. Our team will continue to lean in, though, and drive for more Tier 1 coming onto the platform in the future.

[Daniel Chan, Research Analyst]

Okay. And then, Bill, what are your thoughts on the size of your operations on the title and closing side as we move through the rest of the year? Given your view of how the market may shape up, do you think you need to restructure that business at all?

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

Great question, Dan. When I think about the Title business and OpEx, in particular, I think we've said before and I'll say it again, that it really is balancing that market dynamic against costs in the business. But we also have to be mindful of what we expect to present itself in the back half of the year. So I think we're going to be prudent managers of our OpEx spend in the coming quarters in particular. And then, again, we've always got to satisfy it with that long-term view of what's coming next. So super -- it's super helpful that we've got some additional volumes coming our way from channel expansion with our current installed base in Title, and that will help support the current spend level.

[Daniel Chan, Research Analyst]

Yes, that's helpful. And then, Brian, one last one for me. At your Investor Day, you did present data analytics playing, and you did mention that you may acquire into that. Just wondering how that -- how you're thinking about that strategy, balancing the volatility in the market against declining valuations in the space? Whether acquiring into this space is still in the playbook?

[Brian Lang, CEO & Director]

Great. Thanks, Dan. I mean long term, Dan, as you mentioned, data is a very important third leg of the stool -- of the strategy. So we will continue to work on developing our strategic plan around data. That being said, as you mentioned, with the market dynamics as they are right now, I don't foresee in the very near future us doing anything from an acquisition standpoint from data, but we will continue to progress our strategy.

[Operator]

Our next question comes from the line of Richard Tse of National Bank Financial.

[Richard Tse, MD & Technology Analyst]

Yes. Brian, you guys had some pretty great numbers on the Appraisal side, given the backdrop in the market here. Just wondering if you can kind of give us a sense of the share gains and appraisals with respect to your Tier 1 lender clients?

[Brian Lang, CEO & Director]

Sure, Richard. Yes. So on Appraisal, as you mentioned, the performance continues to be incredibly strong, Richard. We actually -- as of the new year, we had reviews with 2 of our Tier 1s, and we are, again, #1 on both of those scorecards. So as we've talked about with performance and operational excellence, we continue to move market share. And so we're seeing that come through with the performance that we've got in the business. So across the Tier 1s, we continue to be at the top of the scorecard and continue to move market share. And frankly, Richard, not just with those lenders, but we also are seeing it across our Tier 2s and 3s.

[Richard Tse, MD & Technology Analyst]

Okay. And then if you sort of -- I guess, related to that question, if you look at sort of your other Tier 1s that may not be served at their max in terms of allocations to Real Matters, like can you give us some context with how much room is left there?

[Brian Lang, CEO & Director]

Yes. So Richard, we talked to our biggest Tier 1s where we have significant market share, and they've made it incredibly clear to us that there is no ceiling with them. So we continue to drive towards that long-term view of 50% for the lenders that we talk about that are on the front of the train, so those that are in the high 30s, low 40s percent. And of course, the ones that are at the back, we continue to see progression there as we try and move them to the high 20s and into the 30s. So frankly, we're seeing that entire train move, Richard, as we expect it to.

[Richard Tse, MD & Technology Analyst]

Okay. and just the last one for me. With respect to the waivers, I was sort of going through your filing here, and you're still sort of pointing to 2025 when we kind of see a meaningful impact of sort of those waivers coming off. Like has the environment changed at all? Obviously, if you look at the volumes in the market and the backdrop, you would think that we would actually see that sooner. But maybe kind of give us a bit of color or update there?

[Brian Lang, CEO & Director]

Sure. I mean if we look back at least quarter-over-quarter, Richard, we see last year, we were up in the 30-plus percent range. This year, our expectation is that we'll be down in the lower 20% range. So we're definitely seeing the progress that we had looked for, with declines in the waiver rates. As we look out, Richard, I mean, unfortunately, it's difficult to comment on what's going to happen with the 10-year over the next couple of quarters and other dynamics in the market. But our view, again, continues to be that, long term, that waiver rate will continue to come down. You're going to get it no matter what, in our view, over the next few quarters if refi continues to come down -- rate of refi, and we see cash out coming back up.If I reflect back to 2018, 80% -- when we saw the rates moving up, 80% of the refinance volume was cash out volume and with over $9.1 trillion of value in homeowners' homes. And from what we can see from research, a fair bit of appetite for home renovations and those sorts of things. We have a feeling there will still be a pretty decent refi market as we go forward. But -- and then, therefore, that mix of the -- what's in the waivers will definitely, I think, continue to drive that waiver rate down.

[Operator]

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

[Thanos Moschopoulos, VP & Analyst]

Brian, can you speak to -- just given all the volatility in the market, is that having any impact on customer behavior in terms of how the lenders are thinking about how they allocate share? Or with respect to your title discussions in terms of how they're thinking about bringing on a new supplier?

[Brian Lang, CEO & Director]

Yes. So Thanos, I was fortunate enough to spend some time last quarter with our Tier 1 in the title space with the leader of that group. And what they shared with me is as they looked out over the year, within their customer base, they felt they had 40% of their customers that were still refinanceable up to 4%. So still a significant target within their own customer base. So as they were looking at capacity planning for the year, frankly, they were looking at keeping it quite steady.So I think the dynamic that we'll see play through the sort of back part of this quarter and usually launches with Super Bowl, where we're one of the bigger players in the market, does a lot of advertising around Super Bowl. We then see a more aggressive advertising plan generally across the board. So we'll see how that plays through. And therefore, generally, what type of volume that, that, along with, of course, the 10-year sort of plays through in the market.So that's -- I mean, I think, generally, we're seeing our lenders be quite thoughtful about what they think the opportunity is this year. They still think there's a strong market for refi. They're definitely willing to dig into their customer base in order to encourage some of those -- that refi activity. And Black Knight continues to put out a report that says somewhere around 7 million North American homeowners are in the Black to make a -- to actually mortgage their homes, to make a refinance. So again, we'll just have to see how that all flows through, I think, Thanos. And for us, as you know, market share is really driven by performance. So with our operations team in Title continuing to move the needle up on the scorecards, we expect that we will continue to win market share with our customers.

[Thanos Moschopoulos, VP & Analyst]

Great. And then the FHA last call had talked about ramping up the use of desktop appraisals. I guess, first, when do you start to see that? And then secondly, has that resulted in any sort of change in your business in terms of share or revenue per transaction or anything?

[Brian Lang, CEO & Director]

Yes. Thanks, Thanos. I mean, interestingly, we still don't have the specifics around the desktop announcement. So unfortunately, months after that announcement, we still don't sort of have the requirements around what needs to be done around desktops. That being said, right now, anyway, Thanos, the way we're looking at some of those nonusual appraisals is, frankly, for us right now, the margin in that business is still very complementary to the margin in our business. We, of course, can do desktops, if required, but we are not seeing a real increase in that business right now. We're still seeing the 1004s and the work that we generally do as playing, by far, the vast majority of appraisal orders.

[Operator]

Our next question comes from Rob Young of Canaccord Genuity.

[Robert Young, Director]

Just wanted to get more context around something you said earlier in the call. And you said that you wanted to be mindful of what you thought might present itself in the back half of the year around volumes. And so is that just the market returning to normal seasonality and your expectations that things will get busy in the April time period? Or is there -- is it the channel expansion? Maybe put some more context around that, if that was just a title comment or just a general comment?

[Brian Lang, CEO & Director]

Sure. Well, interesting you bring that up, Rob. I mean that would impact both of our businesses. I think the original comment was a little bit more around title. But as you know, seasonality really starts kicking in around March, April. So on the Appraisal side of the business. we should see some robust growth there, just because we assume that purchase will be a strong part of the program for Q3 and Q4.I think that comment, when it was made earlier, was more around title and our view that with market share, we assume to continually gain market share with the performance that we're seeing against the Tier 1 and Tier 2. But beyond that, we've talked about channel expansion. And so our view is that in Q3 and Q4, we should see some of that channel expansion with both the Tier 1 and the Tier 2 that we launched last year. So I think that's more specifically what that comment would be about, Rob.

[Robert Young, Director]

Okay. And then I wanted to -- just maybe a very simple way to understand better the -- you said that there was a share gain in Title, but the Title revenue decline is quite a bit higher than the estimated market decline that you gave. And so I'm trying to put those two statements into context. How are you gaining share against the steeper decline relative to the market?

[Brian Lang, CEO & Director]

Yes. So I mean, our focus, as you know, Rob, has been on freeing up capacity in our system to make sure that we are very focused on performing and driving operational excellence with the Tier 1 and Tier 2s that we have on the platform today. And so that performance, we know, drives market share. We see the benefit in market share growth with those customers.And so that's why we are focused in the second half of the year on continuing to grow market share with those customers and expand our share with those customers. So sometimes that comes with some challenges with the Tier 3s and Tier 4s. But as you know, we are wholly focused on driving Tier 1 and Tier 2 performance and market share.

[Robert Young, Director]

Okay. And I guess the other thing that, that could be a driver is the emphasis of the Tier 3 and Tier 4 earlier in the year. Is that still something that's in place? Or have you started to reengage with some of those customers yet? You emphasized that there is more capacity.

[Brian Lang, CEO & Director]

Yes. We've been fortunate there, Rob. We have had some win backs. But as I say, I mean, the real focus long term for the 2025 targets is to make sure that we continue to move the Tier 1s and Tier 2s in the right direction.

[Operator]

[Operator Instructions] Our next question comes from the line of Gavin Fairweather of Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

I thought we could start on U.S. Title and focus on your Tier 1. I think it's been 3 quarters that it's been live now. And I think, initially, you had said that you were targeting 5% to 10% share over the course of the first year. So maybe you can provide us with an update on how you're tracking against that target? And any thoughts on where your share with that client could move over the second year of going on?

[Brian Lang, CEO & Director]

Thanks, Gavin. Yes, so we -- I think we shared at the end of last year that we had a very good year with the Tier 1. And to your point, we talked about getting to 5% to 10% in the first year. And after the first couple of quarters, we are very fortunate to have got ourselves into the double digits. So we continue to focus on ramping that share, Gavin, and we will continue to focus on ramping that share.I think one of the unique opportunities there is -- beyond driving just the share with the business we have today, is to expand the channels with that customer. And as I say, I think we're very optimistic, barring market movements, et cetera, but we're very focused on bringing that channel up live in the second half of this year. So that's really, I think, where we're going with Tier 1s, continue to perform, continue to win market share in the core business and then diversify into another channel.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's great. And then just secondly for me, in U.S. Appraisal. The net revenue margins have been kind of hovering just over 20% in recent quarters, given kind of the shift in mix towards more complex jobs. I guess I'm wondering if that's a good run rate for now? Do you see a pathway to maybe back towards the 23% or 24% level, perhaps by passing on some of the increased costs that you're seeing on to the lenders?

[Brian Lang, CEO & Director]

Good question, Gavin. I'm going to ask Bill to take that question. Bill?

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

Sure. Thanks, Brian. And great question, Gavin. I think the -- in the short term, Gavin, I would say to you, there's still elevated levels of refinance activity. And so as a consequence, I think we're still sitting firmly in a more complex camp, at least in the near term. So from a run rate perspective, I would think somewhere in the neighborhood of what you saw in this first quarter of the year would probably be fair for at least the next couple.But certainly, longer term, once the refinance market starts to settle and cool down a bit, then we fully expect margin expansion easily up into the 23%, 24%, which, where we were pre-COVID. And then secondarily, I think we've still got lots of room to expand into the 26% to 28% range by 2025.

[Operator]

Our next question comes from the line of Martin Toner of ATB Capital Markets.

[Martin Toner, Analyst]

So you've lost share in Title for 3 quarters now. Can you guys talk a little bit about the pace of increase at the Tier 1? And when that -- those market share losses might turn around?

[Brian Lang, CEO & Director]

Yes. So Martin, I think when we take a look at the Title business, we've looked back, as you know, and communicated that we made some decisions around our Tier 3, Tier 4 portfolio in order to open up the capacity to take on the Tier 1s and 2s. And so our view is, I think you should see that market share ramp start moving in the right direction in the second half of this year, aligned with market share growth with our current customers as well as that channel expansion piece.And then layer on top of that, new customers, as we mentioned, we brought in sort of during the quarter. And just subsequent to the quarter, we brought in 2 more Top 100 customers. So I think you'll start seeing that momentum continue into the second half, and you should see that market share start tracking in the positive trajectory.

[Martin Toner, Analyst]

That's great. Now with some of the estimates out there for the refinance market, even with share gains, it might be tough to not lose more volume. What might that mean for EBITDA in Title?

[Brian Lang, CEO & Director]

So I think that question is around -- I believe, anyway, is around how do we manage cost, our cost base, Martin, depending on the volumes in the market. And so I think there's two ways we look at that. The first one is we are very focused on execution and operating the business appropriately. And so with volumes, if there is significant movement in volumes, then we manage OpEx to that. But we have to balance that with the fact that we have aspirations out to 2025, which includes bringing on new customers, expanding our share with the customers we have. And that performance that we've got with our Tier 1 and Tier 2, that, of course, is paramount for us that we continue to drive the types of results that we're seeing on their scorecard. So I think that's the balance that we have, Martin, as we look forward. We look forward to some of the short-term headwinds that we're experiencing. And I think we've demonstrated in the past that we are quite agile in managing our OpEx around that, but we also need to ensure that we keep some OpEx capacity for our expected expansions in market and -- our market expansions as well as our new customers that we're expecting in the second half of the year.

[Martin Toner, Analyst]

Great. If I can ask one more. In the MD&A, it references timing of orders as a reason for lower margins in Title. Is that -- I mean, that sounds like share gains are kind of kicking in. I believe you said the same thing last year at this time, and it translated into adding your first Tier 1. Can you give us any more color on new customers?

[Brian Lang, CEO & Director]

Yes, I can, Martin. So when we talk about flow, the reason we address that is because that is very relevant for our net revenue margin in Title. So flow for us simply means that from the start of a title order, it takes us somewhere around 45 days until we see the revenue, and there's some expenses that we need to take upfront.So when you see very strong margins, as you saw this past quarter, it often means that we are delivering more in that quarter. Therefore, we're realizing more revenue than we are necessarily spending on orders. And again, a chunk of that has to do with the 10-year treasury, the trajectory that we've seen on that moving up and potential impacts, headwind impacts from volume as we look forward.So that's really the dynamic that plays there. It's not relative to just a particular launch of one or another. But really, the dynamics between how the market is moving, and therefore, how we are closing and opening orders within that particular quarter.

[Operator]

There are no further questions coming in at this time. Please continue.

[Brian Lang, CEO & Director]

Okay. Well, thank you, operator. That, I think, then wraps things up for today. Appreciate all of you joining the call, and please take care. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.