Real Matters Inc

TSX:REAL

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Real Matters Fourth Quarter 2020 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lyne Beauregard, Vice President of Investor Relations and Marketing. Thank you. Please go ahead.

[Lyne Beauregard Fisher, Vice President of IR & Marketing]

Thank you, operator, and good morning, everyone. Welcome to Real Matters financial results conference call for the fourth quarter and fiscal year ended September 30, 2020. With me today are Real Matters' Executive Chairman, Jason Smith; Chief Executive Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning, before market opened, we issued a news release announcing our results for the 3 and 12 months ended September 30, 2020, as well as our new fiscal 2025 performance targets and executive leadership changes. A release, accompanying slide presentation as well as the financial statements and MD&A, are posted to the Investor Relations section of our website at realmatters.com. For today's question period, we ask that you limit your questions to the results. We are hosting a virtual Investor Day on Monday, where we will be discussing our 5-year strategy and new fiscal 2025 performance targets in greater detail, and you will have the opportunity to ask questions about our new targets at that time. 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 and the accompanying slide presentation for more detail. You could also find additional information about the risks in the Risk Factors section of the company's annual information form for the year ended September 30, 2019, and under the heading, COVID-19 Impact On Risk Factors in our MD&A for the year ended September 30, 2020, each of 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 margins. Non-GAAP measures are described in our MD&A for the year ended September 30, 2020, where you will also find reconciliations to the nearest IFRS measures. With that, I'll turn the call over to Brian.

[Brian Lang, President & COO]

Thank you, Lyne. Good morning, everyone, and thank you for joining us on the call today. I will kick things off by discussing highlights from the fourth quarter before handing it over to Bill for a deeper dive into our segment financials, and Jason will wrap up the call with some brief remarks. We will then open up the line for questions. We capped off the year with another strong quarter. We generated consolidated adjusted EBITDA of $22.2 million, an increase of 57.5% from the fourth quarter of fiscal 2019. As we outlined in the news release, our U.S. Title segment continued to outperform our other segments and for the second consecutive quarter, delivered higher net revenue and higher adjusted EBITDA than our U.S. Appraisal segment. Our fourth quarter results once again highlighted the operating leverage we have in the business. Consolidated revenues increased 15.9% to $124.4 million and we generated consolidated net revenue of $47 million, up 36.6% from $34.4 million in the fourth quarter of fiscal 2019. Our strong top line growth was principally driven by the performance of our U.S. Title segment as well as moderate growth in U.S. Appraisal and Canada. We continue to outpace the U.S. mortgage market in terms of growth in the fourth quarter, recording market-adjusted volume growth of 109% in U.S. Title and 4.2% in U.S. Appraisal due to year-over-year increases in market share and new client additions. We estimate that fourth quarter U.S. mortgage origination market volume was flat on a year-over-year basis as a 6% increase in purchase volumes was offset by a 9% decline in refinance volumes. The market decline in refinance volumes was due in part to a reduction of addressable market volumes as a result of the increased use of waivers for refinance transactions and veteran's affairs volume relative to the comparable 2019 period. We estimate the average loan sizes for purchase and refinance transactions increased 35% year-over-year. Our estimate of loan sizes is based on internal data, which reflects the composition of our customer base and will vary from external data points because of this as larger regulated lenders have the balance sheets to fund larger nonconforming mortgages. Home equity and default volumes comprised 25% of our total U.S. Appraisal volume in the fourth quarter. And so the impact of changes in these volumes on our total market adjusted growth calculation were not insignificant. We estimate that home equity and default market volumes were down 57% year-over-year. The impact of these volume declines are also reflected in the increase of our average U.S. Appraisal transaction revenue for the period. As we continue to grow with new clients in the larger origination channel, we expect to see a continued decline in the proportion of our volumes that are derived from home equity and default. When we combine these market changes to drive our view of the total market, we estimate that U.S. mortgage market volumes were down approximately 7% in the fourth quarter of 2020 relative to the same quarter last year, principally because of the significant year-over-year decline in home equity and default volumes. Our fourth quarter results were bolstered by year-over-year market share increases with our clients across both U.S. segments, including share gains with our Tier 1 lenders in U.S. Appraisal. Sustained strength in the U.S. refinance mortgage origination market also provided a healthy backdrop for the growth of our U.S. Title business in the fourth quarter. We set a new record for transaction volumes in U.S. Title in the fourth quarter, surpassing last quarter's records, and we went live with 2 new lenders. Fourth quarter U.S. Title segment revenues rose 45.9% year-over-year. As you know, we calculate market adjusted volume growth based on our estimate of the total market. However, our U.S. Title segment almost exclusively services refinance activity. U.S. Title market adjusted volume growth for refinance only volume was 114.1% in the fourth quarter. In U.S. Appraisal, revenues increased 2.7% and market adjusted volume growth for origination only volume was 7.4% in the fourth quarter. We continue to rank at the top of lender scorecards in the fourth quarter, and we launched 2 new clients. In our Canadian segment, fourth quarter revenues were up 16.8% on a year-over-year basis. Higher appraisal volumes due to market share gains and stronger mortgage market volumes were offset by lower insurance inspection revenues due to COVID 19. The team delivered excellent results in the fourth quarter with the vast majority of our employees still working from home. We on-boarded 88 new employees in the fourth quarter and a total of 185 in fiscal 2020, principally to support the growth of our U.S. Title business. As we look ahead and focus on the long game, we will continue to onboard new employees in our U.S. Title business, creating additional capacity to support existing volumes and new client launches, which we now expect will ramp at a more aggressive pace than originally anticipated. We progressively increased our title capacity over the course of the fourth quarter. We intend to maintain the level of capacity that was in place at the end of the quarter throughout the first half of 2021, with a further ramp up ahead of expected, requirements coming from pipeline conversions in the second half of fiscal 2021. We expect to cross the chasm into the largest lender segment with franchise type clients that are operations focused and aligned with our performance-based model. We are continuing to reallocate existing title resources to support the expansion of our centralize refinance title business. As we've said before, today's market conditions are providing a catalyst for growth in our U.S. Title segment, and momentum is building. The heightened level of refinance activity has triggered the RFI and RFP process with many lenders as they look to add new vendors. And as a result, our sales pipeline is accelerating. In fact, we are actively engaged in the sales process with the majority of Tier 1s on title today. As the strong refi market is affecting each Tier 1 lender differently, we are at the contract phase with one, and others are moving up the time line aggressively. We are confident that these engagements will result in new title client launches in fiscal 2021. We continue to believe that lender underwriting capacity remains the largest hurdle to industry growth. Although U.S. Department of Labor Statistics are demonstrating signs of progress, we believe that lenders remain challenged in hiring the level of loan origination staff required to support higher mortgage origination volumes on a sustained basis. Once industry underwriting capacity expands, we believe there is a large multiyear market opportunity for Real Matters that will provide a tailwind to our market share growth story. We continue to believe that we are in the early innings of a 2 to 3-year market surge, even if U.S. 10-year treasury rates increased to 1.2% and remain at those levels for the next few years. Taking a look at our full year results, fiscal 2020 consolidated revenues increased over 41% year-over-year to $455.9 million. Consolidated net revenue was up nearly 59%, and consolidated adjusted EBITDA more than doubled to $72.2 million, while consolidated adjusted EBITDA margins increased to 44.6% from 28.4% in fiscal 2019. Our strong financial performance in fiscal 2020 was underpinned by origination only market adjusted growth of 17.5% in U.S. Appraisal and refinanced only market adjusted growth of 59.2% in U.S. Title. Looking back at the objectives we set when we went public in 2017, we achieved 3 of those 4 targets in fiscal 2020, 1 full year ahead of our committed time line. We exited fiscal 2020 with 11.7% market share in U.S. Appraisal and 2.4% market share in U.S. Title, landing squarely in our fiscal 2021 target range for title. If you recall, we had committed to achieving consolidated net revenue margins of 35% to 40% and adjusted EBITDA margins of 25% to 30% by fiscal 2021. The reported consolidated net revenue margins of 35.6% for the full year in fiscal 2020, hitting the low end of the range and consolidated adjusted EBITDA margins of 44.6%, well above our guidance range for fiscal 2021. As outlined in our news release, we have new 5-year targets for our key performance indicators, targets which support our views of the longer-term potential of our business, a significant runway for growth ahead and the inevitable decline of the refinance boom years out. This company is built for the long run. While we won't go into detail on the new targets on today's call, we will be discussing them in greater detail during our Investor Day on Monday. With that, I'll turn it over to Bill. Bill?

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

Thank you, Brian. Turning to Slides 4 and 5 for a closer look at our financial results. Consolidated revenues were up 15.9% in the fourth quarter of fiscal 2020 compared to the same quarter last year due to significant revenue growth in our U.S. Title segment and to a lesser extent, our U.S. Appraisal and Canadian segments. Revenues in our U.S. Appraisal segment were up 2.7% year-over-year, while revenues in our U.S. Title segment increased 45.9% and Canadian segment revenues were up 16.8% comparatively. In our U.S. Appraisal segment, we serviced higher origination volumes due to market share gains and new client additions, offset by lower volumes serviced for home equity and default transactions compared to the fourth quarter of fiscal 2019. Our average revenue per unit increased in the fourth quarter as we continue to service a greater proportion of higher-priced origination volumes compared to lower-priced home equity and default volumes. Transaction costs in our U.S. Appraisal segment increased 2.2% year-over-year, a reflection of the increase in volumes serviced. Net revenue of $16.6 million was up 4.6% year-over-year in this segment, and net revenue margins were up 40 basis points to 23.5% from servicing a higher proportion of higher-priced origination volumes. Operating expenses in our U.S. Appraisal segment increased 3.3% to $6.8 million, up from $6.6 million in the fourth quarter of fiscal 2019, a result of higher payroll and related costs to service the anticipated increase in market volumes. The increase in payroll and related costs partially offset the increase in net revenue, resulting in a 5.6% improvement in adjusted EBITDA year-over-year. In addition, adjusted EBITDA margins in our U.S. Appraisal segment increased to 59.2% in the fourth quarter of fiscal 2020, up from the 58.6% posted in the same quarter last year. Compared to the fourth quarter of fiscal 2019, we converted each incremental dollar of net revenue to adjusted EBITDA at a rate of 70% in our U.S. Appraisal segment. Fourth quarter revenues in our U.S. Title segment increased 45.9% year-over-year, while transaction costs increased 15%, leading to an expansion in net revenue margins of 920 basis points. The increase in net revenue margins was due to product and client mix to refinance mortgage origination volumes as well as the flow of these volumes serviced in the quarter. U.S. Title revenues attributable to centralized title and revenues generated from our mortgage origination clients doubled to $38.4 million, up $19.2 million from the fourth quarter of fiscal 2019, and our average revenue increased $25 per transaction due to geographic mix. Diversified revenues declined to $3.9 million from $8.2 million in the fourth quarter of fiscal 2019 due to lower commercial, search and capital markets activity. Over the course of fiscal 2020, we made the strategic decision to streamline some of our diversified title operations. We exited the commercial business and unwound our title only and search operations and reallocated these resources to our centralized title operations. Commercial, title only and search revenues represented approximately 60% of the year-over-year decline in diversified revenues. As Brian indicated earlier, our focus remains on growing our centralized refinance title business. Operating expenses in this segment increased to $13.5 million, which is up from $9.3 million in the fourth quarter of fiscal 2019, and adjusted EBITDA increased to $15.4 million, up from the $7.7 million we closed in the same quarter last year. Consistent with our performance over the last several quarters, the scalability of our U.S. Title operations was once again on display and delivered a significant improvement to adjusted EBITDA year-over-year. Compared to the fourth quarter of fiscal 2019, we converted each incremental dollar of net revenue to adjusted EBITDA at a rate of 66% in this segment. In Canada, revenues increased 16.8% to $9.7 million, and net revenue margins contracted by 260 basis points due to lower insurance inspection services performed as a result of COVID-19. Canadian segment operating expenses were $0.4 million in the fourth quarter this year, down 29% from the fourth quarter of fiscal 2019, and adjusted EBITDA margins increased to 71.8% from 60.3% in the same quarter last year as we leveraged our appraisal operations in a higher overall volume environment and incurred lower travel and entertainment expenses due to COVID-19. Putting this all together, fourth quarter consolidated net revenue increased 36.6% to $47 million, up from the $34.4 million we reported in the fourth quarter of fiscal 2019, due in large part to higher revenues generated by our U.S. Title segment. Consolidated net revenue margins increased to 37.8% in the fourth quarter of fiscal 2020, up from 32% in the fourth quarter of fiscal 2019 due to a greater proportion of consolidated net revenue coming from our higher-margin U.S. Title operations. As a result of our strong operating performance, consolidated adjusted EBITDA rose to $22.2 million in the fourth quarter of fiscal 2020, up from $14.1 million in the same quarter last year. And consolidated adjusted EBITDA margins increased to 47.2% in the fourth quarter of fiscal 2020 versus the 41% mark we posted in the fourth quarter of fiscal 2019. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $129.2 million, an increase of $19.7 million from the third quarter of fiscal 2020 and an increase of $57.5 million from September 30, 2019. While we continue to purchase shares under our normal course issuer bid, our purchase activity was modest this quarter. We bought approximately 50,000 shares at a cost of $917,000 in the quarter. We continue to be measured and disciplined in our purchase of shares under our NCIB, focusing on the opportunity to create shareholder value over the long term. Subsequent to quarter end, we purchased 518,000 shares at a cost of approximately CAD 11.9 million. With that, I'll turn it over to Jason. Jason?

[Jason Smith, Founder, CEO & Director]

Thanks, Bill. Fiscal 2020 was an excellent year for Real Matters across all measures. We increased market share in both our U.S. Appraisal and U.S. Title segments, set a number of records across both businesses and delivered exceptional financial results, which allowed us to achieve 3 of our 4 long-term targets 1 year ahead of our committed time line, and we did all of this amid a pandemic. This past year has tested our resilience as a team, as an industry and no doubt as individuals. I'm very proud and thankful for the dedication and commitment of our employees and the field professionals on our network as well as for the continued trust of our clients. I'd also like to recognize our long-term shareholders for their ongoing support. As we enter fiscal 2021, Real Matters is better positioned than ever to drive growth over the long term. As the company is well on its way to winning in title, with the majority of Tier 1s now actively engaged in a process with us and with a strong backdrop of market volumes, even if the 10-year treasury yield goes to 1.2%, I'm confident in our core appraisal and title businesses' ability to achieve their objectives. As we will also discuss during our Investor Day, the targets we have laid out for appraisal and title reflect strong expected growth over the next 5 years. This is the time to be proactive and bold with our leadership for the third leg of our stool, data, and Brian is the best leader for that. Brian has been managing the executive team for the last 18 months, and we worked closely together on culture, operations, strategy, technology and the complexities of the U.S. mortgage market. I look forward to continue to draw on my 25 years of experience in mortgage technology to support Brian and the team in working with him to accomplish our fiscal 2025 vision. Brian is a proven leader whose experience and track record of working with leading financial institutions will provide a steady hand in continuing to expand our market share in the U.S. mortgage industry. His strong leadership skills and background in technology positions him well to lead the team into new markets as the company looks to diversify its revenue streams through our data monetization strategy. It's been my privilege to serve as the company's CEO for more than 16 years, and I continue to be committed to Real Matters' long-term success in my new role as Executive Chairman. With that, operator, I'd like to open it up for questions now.

[Operator]

[Operator Instructions] Our first question comes from the line of Robert Young with Canaccord Genuity.

[Robert Young, Director]

Congratulations, Brian, on the role change. And my first question would be around the lenders that you're talking about. They're expanding their RFP process in the title business. First of all, was that specific to title or was that a broader statement? And then the second piece, you've said that, that would be likely if the market slowed. And you've said in the press release and in the monologue that you expect that the high mortgage market volumes are likely to continue. And so what has changed there?

[Brian Lang, President & COO]

So let me address -- Rob, let me address the first piece. The first piece was around, is it across the business, our view on sales pipeline acceleration? And it definitely is across the entire business. So the lender community is now definitely spending significant time looking at their vendor base across both appraisal and title as this refinance volume continues to drive the need for a broader vendor base. I think we focused in a little bit on title there, Rob, really because we were talking about Tier 1s. And so that particular sales pipeline, which is a very important one for us in the title business, that one has also accelerated specifically. And so we mentioned that we've got 1 in contract phase, and the majority of the Tier 1s are now in discussions with us on title. So that, I think, covers off title. And for the second half of the question, do you want to just repeat what you think is the difference between what we said and what we put in the release?

[Robert Young, Director]

No, I was just saying that in the past, you'd said that most of the customers -- most of your clients are grappling with a very high level of volume and they weren't really interested in changing their vendor base. And so I'm trying to reconcile the fact that you expect high mortgage market volumes to continue for the next couple of years. And at the same time, this is now accelerating and so is that different or what's happened?

[Brian Lang, President & COO]

No. So I -- our view is when the market is busy and there is lots of volume, I think, Rob, maybe some of that conversation was more around productivity and capacity building. So we have this incoming refinance volume. The lenders are trying to get themselves organized to address it. We talked, I think, last time around some of the challenges around capacity and internal productivity. We've definitely seen a little bit of a move on the capacity side, but we believe there's still a bunch of work that lenders need to do. So they need to do that work in order to get themselves organized. But at the same time, they are definitely looking out to their vendor base and looking to augment that vendor base. So I think it was probably getting themselves organized, which we think they, of course, now are at least more organized around addressing the refi volume. That then opens up the ability to do RFPs and RFIs, which we are now seeing hit the street.

[Robert Young, Director]

Okay. And then as we look forward over the next few quarters, how should we think about your EBITDA margins? If you're going to -- if you're expecting to build scale in title and expecting to bring on new customers, should we expect it to decline? You're at a high level now and the 2025 targets, that you don't want to discuss on this call, they seem to imply a high level of EBITDA margin. And so should we expect it to remain at this level in the near term or will there be pressure?

[Brian Lang, President & COO]

Well, I will kick that over to Bill on the specifics, but the idea definitely on our title business right now is that we are investing. We have been investing. We mentioned on the call hiring up, Rob. So we have definitely been building capacity in order to make sure that we are prepared for the new lenders that we believe will be coming on in 2021. So that build that we did into Q4, the back end of last year, we, of course, will sustain that through Q1, Q2. And we think that, that new revenue should start getting realized through that and into the back half of the year. Bill, do you want to talk about specifics on EBITDA?

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

Right. I think that's fair, Brian. I think your point is well taken. And as a consequence, Rob, I think you might see a bit of a softening in the first half of the year as a result. But certainly, we're going to be back in saddle, if you will, by the end of the year at levels probably consistent with what you saw coming out of our current year. So, I think, there will be lots of room for us to take advantage of that EBITDA expansion not only for the back half of this year, but as we think forward through to 2025 in our 50% to 55% range. So got lots of room for growth.

[Robert Young, Director]

Okay. Last question for me, maybe a little higher level. Maybe you could imply from the lenders are expanding sales process as your pipeline growing, maybe the -- you can imply that Tier 1 customers are taking on more interest in growing their own mortgage origination share. Maybe if you have any comments on what you're seeing in your Tier 1 customer base? Are they getting more aggressive as it relates to origination? And then I'll pass the line.

[Brian Lang, President & COO]

Yes. So I think I'd start with, Rob. I think we're seeing that across the market. So we've seen some of the lenders that might be a tad bit more nimble, some of the smaller ones have built some capacity and definitely have been taking advantage of that and so growing their books quite aggressively. And so I think we are now seeing the Tier 1s. We're seeing a little bit more capacity come in there. So their sites, I think, are definitely turning. We're seeing it in the 30-year rates. So we're definitely seeing much more competitive rates, though that spread now has definitely started to come down. Even as the 10-year was clicking up a little bit, now settling down again, those rates definitely came down. So that usually for us is how they throttle their capacity. And when we see it start coming down, we assume that they're starting to take -- or being able to bring on more volume.

[Operator]

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

[Richard Tse, MD & Technology Analyst]

Thanks for providing those 2025 targets here. I'm just sort of looking at the sort of the numbers, and I was wondering if it's possible for you to provide sort of comparable actuals for fiscal 2020, just for us to kind of get a level set here when we look forward?

[Brian Lang, President & COO]

Actuals across the board, Richard?

[Richard Tse, MD & Technology Analyst]

Well, just for -- so you know how -- going forward, you're going to split the targets between purchase and refi market share. If you can maybe give us a sense of what you have as the actuals here for 2020?

[Brian Lang, President & COO]

Sure. Bill, why don't I push that over to you?

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

Okay. I apologize, Richard, you have to be a little clear on the question. So is your ask that our new market share for both purchase and refi and appraisal as of 2020, do you -- are you looking for those numbers or are you unclear as to what they are

[Richard Tse, MD & Technology Analyst]

Yes. Yes. Right. So 2020 you with U.S. Appraisal market share at 11.7%. And then 2025, now you're saying purchase market share of 7% and 9% and refinance market share of 17% and 19%. So I'm just curious, if you look at that sort of new segmentation, what would the respective actuals be?

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

Yes, absolutely. So thank you for that clarification. I appreciate it. So we were 4.6% and 9.3%, and it is -- we've actually laid that out in the MD&A. So I'll take that part -- get you after the call, Richard. But yes, so we're 4.6% and 9.3%. And basically, what we're looking at from an appraisal perspective is at the top end of the range, we're looking at about a CAGR market share growth rate of about 15% from 2020 levels through to 2025 and well north of that on our title business, probably in the high 20s to low 30 range from a market share CAGR growth perspective.

[Richard Tse, MD & Technology Analyst]

Okay. That's helpful. And then the time on growth side, when you end up bringing these -- it sounds like you've got some Tier 1s pretty active here. Would they scale the same way kind of as the appraisal side wise within these existing lenders?

[Brian Lang, President & COO]

Yes. Richard, I'd say we're not expecting something too different to that. If you remember on the appraisal side, once you get them launched, they do some testing with you, they might either do geographic or volume-type threshold testing with you to make sure that we're delivering on the KPIs and that the systems are running the way they're supposed to run. So usually, you see that start building up. So it takes a few months to start moving up the ramp. And sort of at the 6-month point, we usually see them -- the numbers start moving up a fair bit. So I think we're expecting the same type of setup on as we saw in appraisal. And as you know, that means -- back to the earlier sort of commentary, that means that we need to be fully ready, and we need to be -- we need to have the right capacity in order to manage all that. So that's why you're seeing us build the capacity as we have this last quarter, maintain it for the next couple and then to your point, start seeing some of that Tier 1 volume come on and then hopefully ramp a few months out.

[Richard Tse, MD & Technology Analyst]

Okay. And then on the data side, I don't want to sort of steal your thunder for Monday, but is any way you can maybe give us a bit of color in terms of the timing, the order of magnitude of that business or should we just wait till your Investor Day on Monday?

[Brian Lang, President & COO]

Well, listen, why don't you -- I think the one piece I can give you and -- because you're going to get all of what you just asked for and fortunately, probably more than you asked for. [indiscernible] ready for Monday. I think the big thing is there's a real expansion to our TAM when we take a look at data. So we've already increased what we believe the TAM will look like on appraisal. So we look at that long-term as a $4 billion TAM, which is more than what we would have talked about in our last Investor Day. We continue to see refi even as it goes through the maturation, it goes through the next couple of years and the growth, we see that settling $2 billion. But when we take a look at the data space, we think that's significant multiples of TAM opportunity for us in the data space. So that will be my glimpse on what we think will be a real driver in that space, and we're going to give you lots of detail on that on Monday.

[Richard Tse, MD & Technology Analyst]

Okay. And then the last one for me. And congrats, Brian, on the CEO title. Jason, as Executive Chairman, obviously, you're going to be heavily involved still in the company. Just kind of wondering what your focus will be in that role here as we look ahead? And that's it for me.

[Jason Smith, Founder, CEO & Director]

Yes, sure. No problems. Well, I mean, look, first and foremost, I think it's around the 5-year plan. We're set up here interestingly in that we anticipate this very strong backdrop of mortgage activity, appraisal continuing to grow, title launching new lenders and growing. So that's going to be our primary focus, and I think we're well set up for that. But then as we move into our new areas such as data, we'll be really supporting Brian to that end and making sure that we're -- I'm working very closely with the rest of the Board to accomplish that strategic objective. So Brian and I have 25 years of mortgage technology experience, and Brian will have full access to that as we work towards our 2025 objectives.

[Operator]

Our next question comes from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Can you expand on the waiver dynamic you're seeing in terms of the GSEs waiving appraisals on some refis? How has that evolved over the past quarter? How do you see that trending near term? And how do you think that ends up evolving over the course of the year?

[Brian Lang, President & COO]

Thanks, Thanos. So waivers -- so the GSEs have had these waiver programs in place for quite some time. And I think most of you know, they impact the rate refis, so not the cash out. And so we believe that right now, you've got more recent vintage mortgages that are now qualifying for the waiver program, the rate refis. We see that happening going into 2021, so continuing to the front end of 2021. But we think that over time that will start rolling down in the quarter. And remember, we see the TAM expanding over the next couple of years. I mentioned the $4 billion or we will be talking about a longer-term TAM that we believe is very strong in the appraisal side, upwards of $4 billion. So you've got the TAM increasing. You've got this, what we think is a shorter-term impact on the waiver program for rate refis.

[Thanos Moschopoulos, VP & Analyst]

I guess, as you think about sort of short term, like the current quarter, would you expect a similar proportion of waivers or has that ratio been trending up on a short-term basis?

[Brian Lang, President & COO]

I think I'll pass it over to Bill. But Bill, I think we've got it pretty well the same as we saw in Q4 and Q1, but you make sure you qualify that for me.

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

Well you're spot on, Brian. So you're absolutely right. And Thanos, that's basically the working premise. We're not seeing a further expansion of the waiver program, at least we're not expecting one in Q1. And as Brian alluded to, then we're anticipating really a walk down from current levels as the cohorts of those mortgages that are satisfying the waiver requirements start to get ingested in the system and then refinanced as mortgage. So as a consequence, we see that coming back down. And then as we think longer-term through to 2025, really normalizing back to levels that were consistent with pre-COVID and 2019 levels of activity is our view.

[Thanos Moschopoulos, VP & Analyst]

And then in terms of the home equity and default mix, which has been sort of other sort of pressure. Just very roughly, can you remind us what percentage of your business that represents?

[Brian Lang, President & COO]

Thanos, that's 25% -- represent 25% of the business right now. And as you saw, both of those were down in the mid-50s. So combined, it was down 57%.

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

Thanos, I would just add to that. So that's -- what Brian has pointed out was a volume metric. When you express it as a revenue, the mortgage origination revenues that we earn in our appraisal business being purchased and refi are over 90% of those revenues with default and home equity representing less than 10%. So while the volume is heavier, the actual impact to revenue is much, much smaller. So hence, the reason why we're focusing on the more profitable, bigger ticket items in mortgage origination, both purchase and refi.

[Operator]

[Operator Instructions] Our next question comes from Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

You guys are looking for your town closing market share to just over double at the low end in '25. So with the Tier 1 wins, just curious, like what is the size of that opportunity? And related to Richard's question, what is the -- what is -- how quickly do you expect to bring those guys on board from here?

[Brian Lang, President & COO]

Thanks, Dan. I think I'd, again, just reflect back on our appraisal experience. We think that the Tier 1s generally move as a pack. And so getting the first one on board, of course, has been the real prime focus. We are fortunate, as we mentioned, that we're now in conversations with the majority of the Tier 1s around title. So we'd expect something somewhat similar, right? Once we sort of land and have the first one up and running, we assume that the others will start to follow not too far behind, which is why we've got, as you mentioned, that doubling over the 5 years is because we feel pretty confident that's going to happen start in 2021, and we're going to start moving the rest of the Tier 1s through over the next couple of years.

[Daniel Chan, Research Analyst]

Do you have a sense of how much of the market the Tier 1s represent in title and closing?

[Brian Lang, President & COO]

Yes, it's slightly bigger. Good news. We'll definitely go through that on Monday. Lyne spends a good chunk of time, making sure that we're quite clear on that. They represent, I believe, somewhat similar to appraisal, but actually a little bit higher in the title space.

[Operator]

Our next question comes from Steven Li with Raymond James.

[Steven Li, Director & Equity Research Analyst]

Guys, can you hear me?

[Brian Lang, President & COO]

We can, Steven. Go ahead.

[Steven Li, Director & Equity Research Analyst]

So on the title and closing, if instead of 10, if I want to talk about Tier 2, so how many Tier 2s you have right now? And in terms of potential prospects out there, I mean, how many would that be?

[Brian Lang, President & COO]

Well, again, Steven, it's not too dissimilar to the way we've talked about the appraisal market where we talk about the top tiers and the top 100. So when we -- if we go back in time to '16 when we purchased Linear, Linear had a good stable of mostly Tier 3s and 4s. And so over the last few years, we've been plugging Tier 2s in there, along with, of course, additional Tier 3s and Tier 4s. So we've built up the Tier 2 stable. And now it's the time for us to make that last chasm crossing into Tier 1. So we have a decent portfolio within the top 100 and planning to expand that into the Tier 1s.

[Steven Li, Director & Equity Research Analyst]

All right. So the -- you don't foresee many more Tier 2s to be added to your portfolio at this point in the next 12 to 18 months?

[Brian Lang, President & COO]

I didn't want to make it sound like that. No. So listen, our focus clearly, Steven, is on Tier 1s. So that's why we talk about it a fair bit. That's been a big focus of crossing this chasm. We will continue to target Tier 2s. So we've even been fortunate enough, frankly, some of the Tier 2s have their own captives. Those conversations have started. But it's really important, Steven, again, this organization is incredibly focused on getting the right customers on those that appreciate our operational performance. And so we are looking at Tier 2s. We will bring on Tier 2s. We have brought on Tier 2s, but we do continue to focus on getting some of these Tier 1s on. So we'll expand across both Tier 1s and Tier 2s this year.

[Steven Li, Director & Equity Research Analyst]

Okay. And then second question is on the OpEx side for title and closing. Does that wrap ahead of launching a Tier 1? And is it a smaller investment, every incremental Tier 1 you launch?

[Brian Lang, President & COO]

Okay. Yes. So the short answer to the OpEx question is you do need to build capacity as you are preparing for the Tier 1. So it's -- as you can imagine, it's a fine balance of making sure that you're bringing up the organization in preparation for new KPIs, new commitments and the technology on-boarding that we need to do in order to bring these new players on. So that's sort of the -- broadly the way we look at it. Bill, do you want to comment any more on OpEx? And how we'll see that OpEx over next year?

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

No, I think that's a fair response, Brian. And I think it's consistent with Rob's question as well. So I think it's been well addressed. I would just add, just going back to a question that Dan asked with regards to Lender segmentation in title. We've actually laid that down in our MD&A as well, Dan. So what -- to answer your question, what is the size of Tier 1s in the title spend space? We look at it at about 30% to 32% of total title spend. So hopefully, that's helpful.

[Operator]

Our next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

I wanted to start out with a market structure fee -- or sorry, market structure question. The adverse market fee is kind of being put in place at the beginning of December here. I think at the time that, that was announced, mortgage spreads were a little bit wider and they since narrowed. So I guess, what are you hearing from your clients in terms of how that could shift the volume going through the market?

[Brian Lang, President & COO]

Well, so I'll address that, and then I'll pass it over to Jason since he's been actually quite involved and close on that. So I mean, broadly speaking, we're not seeing an impact from that new rate in the market, Gavin. So we haven't really seen any of that. The customers have, frankly, not talked much about it. I think it was sort of a big shock when it first came out as a conversation. But right now, I think it's mostly been factored into the business. And Jason, do you want to add anything to that?

[Jason Smith, Founder, CEO & Director]

Yes. I mean, look, our view is that there's 2 to 3 years' worth of refi candidates here that are incented to save money on their mortgage and refinance. So there's just no way for the industry to service all of that volume. We still believe that capacity is going to grow within lenders. We still -- and we think that 20% range a year, it makes sense. But the throttle here really becomes the spread over the 10-year yield. And so whether or not it's the bank's profitability or the GSE's profitability, I think the real focus here is that the rates can go down to the level where the banks can handle it. And we think that, that will just be the throttle. So from our perspective, the GSE fee is really noise. And I think the competitive market pressures will make that go away if it actually did reduce overall volume in the market. So hopefully, that helps.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Yes, that's very helpful. And then just secondly for me. Obviously, the press release referenced you're still being at the top of lender scorecards on the appraisal business. In the past, you've talked about not being kind of capped out with any of those Tier 1 lenders. I thought I'd just kind of check in and make sure that that's still the case.

[Brian Lang, President & COO]

Thanks, Gavin. That still is the case. And we know it's the case because we've won market share this year with some of the Tier 1s. So we do continue. I actually just got an update on our -- this week on one of our scorecards. So we're again #1. So we continue to stay at the top of the Tier 1 scorecards. And to your question, we continue to see our market share growing. So we haven't had any stall in our market share. Again, no caps in market share, and we continue to win.

[Operator]

There are no further questions in queue at this time. I'll turn the call back over to Lyne Beauregard for closing comments.

[Lyne Beauregard Fisher, Vice President of IR & Marketing]

Thank you very much, everyone, for joining our call today. We very much look forward to speaking with you again on Monday at our Investor Day. Thank you.

[Brian Lang, President & COO]

Thank you.

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

Thank you.

[Operator]

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