The Real Brokerage, Inc.

Greetings and welcome to the Real Brokerage First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. James Carbonara, Investor Relations. Thank you, sir. You may begin.

Thank you. And once again, welcome to REAL's first quarter 2021 earnings call. With me on the call are Tamir Poleg, Chief Executive Officer, and Michelle Ressler, Chief Financial Officer. This morning, REAL filed its unaudited interim financial statements and management discussion and analysis for its first quarter ended March 31, 2021 on CDAR. These documents, along with the accompanying news release, can be found on CDAR. The content of this conference should be considered in conjunction with and is qualified in its entirety by reference to such documents. I would like to begin the call by reading the Safe Harbor Statement. This statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21A of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report contained in subsequent filed quarterly reports, as well as in other reports that the company files from time to time with CDAR. Any forward-looking statements included in this earnings goal are made only as of the date of this goal. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events, or circumstances. unless otherwise mentioned, all references to currency in this call are in US dollars. Now, I would like to turn the call over to Tamir Pohle, Chief Executive Officer of Real. Tamir, please proceed.

Thanks, James, and thanks everyone for joining today. I would like to start by thanking the hundreds of agents who joined Real in the past few months and to our community of agents who have contributed massively to the accelerated growth we are experiencing. I will now continue by highlighting some top-level financial results. Then I'll provide some operational updates before turning it over to Michelle to dive deeper into our financials. After that, we will open up the call for Q&A. Okay, so let's start with the financial results. Q1 revenue was $9.3 million, an increase of 217% year-over-year. Driving that growth was an 82% increase in real estate agents joining Real, and we see no signs of slowing down. In fact, as we mentioned in today's press release, if we look at March alone, we added 255 agents with $20 million in training 12-month revenue recorded prior to joining Real. April performance was very similar to March. Notably, our core business does not include ancillary services, which we already have started exploring. With the addition of ancillary services, Real could expand into new areas of the market. This continued Continued growth serves a benefit to our agents who have equity incentives and to our shareholders, of course, and to consumers who enjoy the streamlined buying and selling process. Taken all together, we are well on track to achieving our ultimate vision of having a positive impact on as many human beings as possible within the real estate space. Now, turning to operating highlights. When we consider what is supporting our tremendous growth, it is a few operational factors and strategies And those are geographic extension, agent referrals, retention, product focus, and our team. Beginning with geographic extension, we entered 2021 operating in 22 states and the District of Columbia, and really rapidly adding new states based on demands from productive agents. To that end, during the first quarter, we announced real expansion into five additional states. We expanded into Utah, Oklahoma, Wisconsin, Kansas, and Hawaii. That brings our tally to 27 states plus DC. We look forward to the growth of each of those states can bring to Real. In terms of agent referrals, Real's agents earn revenue share through five tiers of referrals, creating a network growth effect. We recently announced that high producing real estate teams have joined Real in the fourth quarter of 2020, and first quarter of 2021 through February 9th. In the 12 months prior to joining Real, the new teams and agents have closed a volume of over $1 billion in home sales. You can attribute an approximately 2.5% commission on home sales to arrive at their trailing 12-month revenue figure, which is very attractive to Real on a go-forward basis and supportive of our growth ambitions. Moving to retention, At Real, we offer an equity incentive plan for agents vested over years. It was an important reason for us going public. Under the equity incentive plan, Real agents are eligible to receive stock options exercisable for common shares of Real under the stock option plan and restricted share units that vest as common shares of Real under the RSU plan. Agents can earn these stock-based incentives in recognition of their personal performance and ability to attract agents to real. The equity incentive plan builds on our listings on the TSX Venture Exchange June 12, 2020, and the OTCQX Best Market on August 11, 2020. And last month, we took another important step forward as it relates to our equity as an attraction and retention incentive with an application to list our common shares on the NASDAQ capital market. The equity incentives plan has allowed us to attract and retain not only more agents, but more high producing agents, which has had a big impact on our growth. Turning to our product focus, we are currently building a new agent app and we're building the infrastructure to accommodate scaling the company to 100,000 agents without needing any additional substantial investment in technology infrastructure. For that reason, in Q1, we also announced the acquisition of the business assets and intellectual property of RealtyCrunch. RealtyCrunch is a collaboration web and mobile app for home buyers and real estate agents. Launched in September 2020, it had already attracted over 2,000 real estate agents in the US who used it to streamline communication and document signing with their clients. Pritesh Damani, the founder and CEO of RealtyCrunch and additional RealtyCrunch employees joined real as part of the acquisition. Preetesh assumed the role of Chief Product Officer with Real's wholly owned subsidiary, Real Broker LLC, to continue his journey in real estate product innovation. Together, we will shape the future of the real estate brokerage industry with transformational software tools for real estate agents and their clients. As you can see, product has and will continue to be a big factor in our dramatic growth. Finally, moving on to our team. We were pleased to announce in Q1 that Vicky Bartolome had joined Real's advisory board to provide guidance and support to Real's board of directors and management with a focus on industry and real estate agent relations. Vicky is a recognized leader in the real estate industry who previously served as chief of agent success at Side and president of VXT Realty, where she helped the company grow from 500 agents to 15,000 agents in just three years. She also worked as team leader and agent throughout her career with Tarbell Realtors, Disney Vacation Development, and Keller Williams. She has extensive experience coaching real estate agents. In April, we were also excited to announce that Vicky had joined our board of directors. Her addition to Real has and will continue to support our growth ambitions. Additionally, we have had growth in the number of full-time employees, which has had a positive correlation to the volume of our real estate transactions. This has been done very efficiently. In fact, as of March 31st, 2021 real efficiency ratio, which means full-time employees to agents was one to 56 with a long-term target of one to 75. We view this as a competitive advantage in terms of how quickly and efficiently we can scale. and it provides benefits in future profit margins. For context, most companies in our field have a ratio closer to one to 25 or one to 30. And now to sum up, we had a fantastic first quarter, March and April were phenomenal with roughly 250 agents coming on each month with approximately $20 million in trailing 12 month revenue before joining real best of all, Our agents who are receiving equity incentives and shareholders are also rewarded. Later this year, we will be focusing substantial development resources on building an unparalleled consumer experience for home buyers and home sellers that are using real agents. We believe that there is a massive opportunity in improving many aspects of the real estate transaction for consumers while still heavily relying on the agent in the middle of the transaction. This will enable Real to accomplish its mission of having positive impact on as many human beings as possible within the real estate space. At this point, I will now turn it over to Michelle for a more in-depth view of our financials. Michelle.

Thank you, Tamir. I'll now review our Q1 financial results. As Tamir mentioned, Q1 revenue increased 217% year-over-year to $9.3 million. This increase was driven by agent growth, which was up 82%, ending the corner at 1,895 agents. If we look at gross margin, our gross margin was $1.2 million versus $384,000 in the prior year, remaining steady at 13%. Net loss for the quarter was $3.8 million compared to $243,000 last year. This increase was primarily a result of stock-based compensation expense. Adjusted EBITDA loss for the quarter was reported at $943,000 in comparison to $336,000 for the prior year. Management uses adjusted EBITDA as an alternative to net loss because it excludes major non-cash items such as amortization, interest, depreciation, stock-based compensation, current and deferred income tax expenses, and other items management considers non-operating in nature. Overall, operating expenses were $4.9 million in comparison to $959,000 last year. On an adjusted EBITDA basis, operating expenses were approximately $2.9 million compared to $720,000 last year. This increase is primarily due to an increase in headcount and expenses related to ongoing business matters of a public company. When a business is growing as quickly as we are, it is necessary to scale up operations in order to support that growth. General and administrative costs were $4 million in comparison to $784,000 in the prior year. Again, this increase is primarily due to an increase in stock-based compensation expenses, increases in headcount, and expenses related to ongoing business matters of a public company. Stock-based compensation expense was $2.7 million in comparison to $212,000 last year. The increase in stock-based compensation expense is primarily related to the acquisition of RealtyCrunch, which Tamir touched on earlier, and is directly attributable to Real's commitment to better serve its agents and to the growth and expansion of the company. Advertising costs were $443,000 compared to $152,000 last year. This increase is primarily due to revenue share paid to agents as part of our revenue share model. As Samir touched on previously, agents earn revenue share for new agents that they personally refer to real, and this is a major factor in the growth of both our agent count and revenue. As a percentage of revenue, sales, general, and administrative costs were 49% in the current quarter versus 32% last year. Total cash on hand was $20.5 million at the end of Q1 2021 versus $54,000 last year. That concludes my financial remarks. I will now ask the operator to open up the line for Q&A.

Operator, can you please pull for questions? At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation film will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Tom White with DA Davidson. You may proceed with your question.

Hi, this is Tevis Robinson. I'm for Time White. Thanks for taking our questions. First, I was wondering if you could talk a little bit about how you view the relative value proposition of your model for agents today relative to some of the other platforms out there. Do you expect your compensation model and benefits for agents to evolve over time? And then I have a follow-up question after this. Thank you.

Hi, Travis, thank you. So we actually asked all of the agents that are joining real why have you joined us and we the answer that we're getting are in this order, freedom and flexibility, technology and financial opportunities. So freedom and flexibility means that we let our agents run their business the way they want to. And we actually empower them to become small business owners and we look at ourselves just as a platform for them to grow their business on. Technology, at the end of the day, we're a mobile-focused company. We believe that agents should have all of their business in the palm of their hands and anything they need in order to interact with their clients, market themselves, deal with the opportunities that there are in the market, searching for homes, creating contracts, everything that an agent uses in their work we provided to them on a mobile platform, and this is an extremely powerful proposition. The financial opportunities are both in terms of the no monthly fees and very attractive commission split of 85-15, and the equity grants that agents can accumulate while they continue to sell homes. So once agents cap, and our cap is $12,000 per year, meaning that once an agent pays us $12,000 per year, they get to keep 100% of the commission, they just pay us a transaction fee of $225. So once agents cap, or they attract another agent to real, they are rewarded with equity, which vest over three years. So all in all, if you look at the cost versus value proposition, I think that we have the most attractive package in the market. And this is why so many agents are probably attracted to us these days.

Great, thank you. And then in the opening remarks, you talked a bit about your ancillaries. Could you talk a bit more about the importance of these products for your model, maybe a timetable for launching them and how they might impact the margin profile of your business?

Yes, of course. Naturally, at the end of the day, what our agents are doing is creating valuable relationships based on trust with their clients, the home buyers and home sellers. And currently, the only service that we're selling through our agents is brokerage services. But at the end of the day, when someone buys or sells a home, there are so many different services within the transaction that we can go and offer that can dramatically improve both profit margins and gross margins as well. Right now, we are focused on building an amazing agent experience, and later on, we will be focusing on the consumer experience, and through that consumer experience, which will be based on technology, we believe that we can sell additional services to those homebuyers and home sellers, and as you know, all the usual suspects as title and insurance and mortgage and moving and additional services, We believe that through the right technology we can have great capture rates within every single transaction. We already started exploring some directions and I believe that towards Q4 of this year we will start experimenting with at least one ancillary service in at least one market. I believe that overall there is an opportunity of doubling the gross margins if if adding entries into your services the right way.

Great, thank you. And then just to squeeze one last one in, you talked about you grew like 250 agents like in one month. Is that sustainable? And like, how can you give us a sense of where your agent count might be at the end of the year? Would it be like 250 per month? Or would it be? You know, is it going to stabilize toward the end of the year?

No, I think that it's not only sustainable. I think what we're experiencing is actually an acceleration and, uh, and because of the network effect of agents bringing their friends, as we grow, there will be more agents bringing more friends than those monthly numbers will only increase. Um, so I'm, I'm pretty sure we will see 3000 well before the end of the year. Uh, we're not providing any guidance, but you know, based on what we're seeing in terms of agents joining us on a monthly basis, So 3,000 will probably be coming before the end of this year, and that's the trajectory.

Great. Thank you so much for taking my question. Thanks, Travis.

Our next question comes from the line of Darren Aptahi with Roth Capital Partners. You may proceed with your question.

Hi, Tamir. Hi, Michelle. How are you? Nice results. Three, if I may. Tamir, could you maybe... handicap the agents you've added in the fourth quarter and the first quarter of 2021. I know you've called out the March agent ad, but what's kind of the trailing 12-month kind of revenue power or closed transaction power on commission basis that you've added over the last kind of six months?

Sure. Darren, thank you for being with us. I was certain that you were going to ask a question. Are you talking about Q4 and Q1 or the last six months?

Yeah, like you called out the March agent ad numbers being 20 million on an LTM basis. I guess if you're just looking at, you know, the six months going back between the fourth quarter of 20 and the first quarter of 21, what's kind of the trailing commission here? a revenue power that you've kind of added that network in those six months? Sure.

I'll, I'll answer that a little bit differently. Um, so in Q4, um, every month we added agents that, um, that would bring that broad between five to $7 million, um, on a trading 12 month basis per month. Um, then in Q1, it went up to around between 10 to 13. And, uh, and March and April were around 20. So the agents that came over in March and the agents that came over in April, each of those months, we attracted agents that did $20 million in trading 12 months. So we see an increase of, of those numbers.

Got it. That's fantastic. On your ancillary services comment and following up on the last question. So. as you think about, you know, verticalizing the platform and improving the consumer proposition, like, is this something that's a, a, a build by partner, any kind of insight would, would be, would be helpful.

Um, I think that the experience would definitely be a build, um, in-house. I think that there might be a lot of things that have to do with the infrastructure. For example, the infrastructure of providing, uh, a mortgage or title services, that billing from scratch wouldn't make sense. It would take a lot of money and probably a lot of time as well. So we will be looking to integrate existing infrastructure into an experience that we will be building ourselves. I would also mention potential acquisitions as something that we are constantly looking at. And the acquisitions that we're currently looking at are mainly focused on anti-virus services.

Got it. And then this last one, the stock comp number in the quarter, I think you said that was related to the acquisition of Realty Crunch, but as it pertains to the agents that you're adding in the quarter, how much of that 2.7 mix was from agents and not acquisition?

I think Michelle can provide the accurate number. Michelle, do you have it offhand?

Related to the agents that join, it would be roughly around 600,000.

Sorry, you said 61,000? 600 of the 2.1.

Oh, 600. Got it.

Okay. Great. Thank you. Appreciate it. Congrats. Thanks, Larry.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tamir Polak for closing remarks.

Thank you, operator. Thank you, everyone, for joining this call today. We are excited about our upcoming quarter and looking forward to speaking with you again on our next earnings call. Have a great day. Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.