The Real Brokerage, Inc.

Good morning, ladies and gentlemen, and welcome to the Real Brokerage Third Quarter Earnings Call. At this time, all participants are on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara, with Hayden Investor Relations. Sir, the floor is yours.

Thank you. And once again, welcome to Real's Third Quarter 2021 Earnings Call. With me on the call are Tamir Kolag, Chief Executive Officer, and Michelle Ressler, Chief Financial Officer. This morning, REAL filed its financial results and management discussion and analysis for its third quarter ended September 30, 2021, on CDAR. These documents, along with the accompanying news release, can be found on CDAR. The content of this conference call should be considered in conjunction with and is qualified in its entirety by reference to such documents. I'll now read the forward-looking 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 the 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 which contains 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 call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward-looking statement to reflect subsequent knowledge, events, or circumstances unless otherwise mentioned. All references in this call reflect currency in U.S. dollars. This conference call will include references to adjusted EBITDA, which is non-international financial reporting standard IFRS financial measure. Non-IFRS measures are not recognized measures under IFRS. They do not have standardized meaning prescribed by IFRS. and therefore are unlikely to be comparable to similar measures presented by other companies. Adjusted EBITDA is used as an alternative to net income by removing major non-cash items such as amortization, interest stock-based compensation, current and deferred income tax expenses, and other items management considers non-operating in nature. Adjusted EBITDA has no direct comparable IFRS financial measure. The company uses non-IFRS measures solely to provide investors with added insight into REAL's financial performance. Listeners are cautioned that such non-IFRS measures may not be appropriate for any other purpose. Non-IFRS measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Now, I'd like to turn the call over to Tamir Pollack, 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 me over the past few months and to our community of agents who have contributed to the growth we are experiencing. I will now continue by highlighting some top-level financial results. Then I will provide some operational updates before turning it over to our Chief Financial Officer, Michelle Ressler, to dive deeper into our financials. After that, we will open up the call for a Q&A. Let's start with the financial results. Q3 revenue was $39 million, an increase of 885% year-over-year. Driving that growth was a 132% increase in real estate agents joining Real, as well as a 325% increase in the revenue per agent to $13,000. Now, turning to operating highlights. When we consider what is supporting our growth, it is based on a number of operational factors and strategies, namely geographical expansion, agent referral, retention, product focus, the amazing culture that attracts more and more agents, and the efficiency of our team. beginning with geographical expansion. During the third quarter, we announced real expansion into Canada with the launch of Real Broker AB in Alberta. We also expanded into Indiana, North Dakota, Minnesota, and Montana. After the quarter ended, we announced expansion to Iowa and Michigan, bringing our tally to 38 states, the District of Columbia, and the Province of Alberta in Canada. We look forward to growing our business in Canada and in each of our operating states. Our focus closing out the year and for 2022 will be North America. The intention is to go deeper in the U.S. rather than expanding horizontally. In terms of agent referrals, our agent attraction has always been correlated to our existing agents. We will be rolling out more tools for current agents to attract new agents. Every agent that joins the company has the potential to attracting more and more agents. As a reminder, agents are incentivized to recruit other agents because real agents earn revenue share through five tiers of referral, creating a network growth effect. We also believe that our story resonates with a lot of people. The culture that the agents we are attracting is also attracting other like-minded agents. As an example, this is what attracted Redline Brokerage and its 85 agents to Real in October. They saw our platform technology network and felt that by joining Real, they can both maintain the momentum that they are proud to have achieved and provide greater benefits to their agents. We are proud to say that they are now part of Real, the Real team, and we look forward to having them play an integral role in our operations. Moving to retention, at Real, we offer an equity incentive plan to both attract and retain agents. Agents can purchase stock at a discount with their commissions. They can earn stock by capping and attracting other agents. Agents can also earn elite agent stock awards if they reach specific production benchmarks. The majority of agents join and opt into the Equity Incentive Plan. It is a huge incentive to join and stay. Moreover, we believe that the Equity Incentive Plan has allowed us to attract and retain more agents and more high-producing agents. It has also allowed us to attract top-tier talent to our management team. In fact, in the last two weeks, we made two important appointments. Firstly, just last week, we announced that Catherine Mobley, will join our management team as chief marketing officer. Kat is an award-winning executive with more than 20 years of experience. Her focus has been on delivering strategic and data-driven strategic strategies for growth, venture-backed, and private equity companies. Previously, Kat led global marketing at First Advantage. Prior to her role at First Advantage, she served as the chief marketing officer at several technology firms and managed a range of global brands with accounts at several Fortune 500 companies. Secondly, earlier this week, we announced Raj Naik, will join our management team as chief operating officer. Raj has been an entrepreneur in technology for over 20 years. He joins Real from WorkRise, previously known as RigUp. WorkRise is a workforce management platform for the skilled trades, where he served as managing director for its construction business unit, and was a member of the executive leadership team. Raj also spent nearly four years at Uber, holding senior leadership positions in the rides, vehicle solutions, and Uber Eats business units. Prior to Uber, he held executive and founding roles at startups in election software, family safety technology, and business performance and compliance software. Raj founded his first company with friends while he was studying at the University of North Carolina at Chapel Hill, later sold to Oracle. Clearly, we further bolstered our management team with two driven, accomplished, and leading executives in Kat and Raj. They've been where Real is headed and will provide enormous value in supporting our growth ambitions. We welcome them to the family and at Real, and we believe they will fit right into our culture and team. To our product focus, I'll start with Instant Payments, which we launched a couple of weeks ago. Instant Payments is intended to change the way agents are paid in the real estate industry. With this first-of-its-kind model, agents will have the option to be paid at the time a transaction is executed rather than at closing. We are doing something that we believe no other brokerage has done before or has the ability to do in terms of the data they collect and process. I really hope that other brokerages will be following us because this is what is fair for our agents. I encourage other brokerages to do the same because I want more agents in this country to benefit from it. and because I think that this is what's fair for every agent in this country. Having said that, I think that very few brokerages can actually execute on a program like this because some do not simply have the data processing capabilities or the vast majority do not have the cash to actually support and finance that program. Agents work hard for months without payment. Our number one priority is our agents, and we want to be there to both help them and reward them for their efforts. This new program will disrupt the industry by assisting agents, new and experienced, to build and grow their business by getting paid faster. We are really excited to provide instant payments to our agents. Other items on the products focus include insurance. our new agent app that gives our agents better visibility into their business in real time and provides more services to enable them to service their clients in a better way. We have a new internal system that allows us to scale to 100,000 agents without needing additional substantial investment in technology infrastructure. One of the takeaways from Zillow's termination of their iBuyer program is that you cannot rely solely on software. Real will be basing its consumer-facing experience on a combination of software solutions for providing convenience, transparency, and speed on one hand, and a human agent who will be able to guide the client and understand their needs and emotional journey. We believe that by building a digital experience that leaves the agents in the center of the transaction, we can dramatically improve the way people buy and sell homes. I think that in a few years, when people talk about Real or think about Real, And who are we competing with? The first answer will not be traditional technology brokerage, but rather larger online real estate companies. Finally, moving on to the efficiency of our team, we continue to have growth in the number of full-time employees, which has led to a positive correlation to the volume of our real estate transactions. This has been done very efficiently. In fact, as of September 30, 2021, our current efficiency ratio, which is full-time employees divided by the number of agents that are currently on our team, remains high, right around 1 to 60. I think that this is excellent because we are at that phase of growth. where we are adding more and more resources at a fast pace. Even though we are hiring and putting a lot of resources to work in anticipation of building future products, we are still at a very good ratio. 1 to 60 is similar to Q2 and higher than Q1, which was 1 to 56. We are at a long-term target of 1 to 75. For context, most companies in our field have a ratio closer to 1 to 25. We view this as a competitive advantage in terms of how quickly and efficiently we can scale, and it provides the benefit in future profit margin. To sum up, we are focused on continued growth through geographical expansion, agent referral, retention, product development, and the efficiency of our team. Powering it all is our mission of having a positive impact on as many real estate agents and home buyers as possible. At this point, I will now turn it over to Michelle Ressler for a more in-depth view of our financials. Michelle.

Thank you, Tamir. So I'll start by discussing some of our key financial results for the quarter. Our Q3 revenues grew 885% year-over-year to $39 million compared to $3.9 million last year in the same quarter. This increase was mostly driven by agent growth, which was up 132%, and revenue per agent, which grew 325% year over year. This growth is further supported by our proprietary technology platform, which allows us to continue expanding our agent count and geographic footprint at an accelerated pace. If we look at gross profit, our gross profit grew 348% to $3 million in Q3 2021 versus $741,000 in Q3 2020. Our margins are affected by the increase in number of agents who cap and the increase in volume and rising unit prices, resulting in a downward pressure as we continue to attract high-producing agents. We expect the release of instant payments, which Tamir touched on previously, to help offset this pressure, as well as the future projects in our product focus. Our net loss for the quarter was $1 million compared to $422,000 last year. This change was primarily a result of investments in building our team of agents, key management, employee personnel, as well as our technology infrastructure. We place great importance on our management team and on hiring top talent all across the board and look forward to the enormous value Kat, Raj, and the rest of those who have joined us this quarter will add. We view each and every one of our hires and investments in infrastructure as key contributors to our growth and necessary to support this accelerated pace. Adjusted EBITDA for the loss for the quarter was recorded at $744,000 in comparison to $261,000 for the prior year. Management believes that adjusted EBITDA provides useful information about our financial performance and also helps identify underlying trends in our business that otherwise might be masked by the effective expenses we exclude in adjusted EBITDA. In particular, we believe the exclusion of stock-based compensation expenses provides a useful supplemental measure for evaluating the performance of our operations and also provides better transparency into our results of operations. Overall, our operating expenses were $4.3 million, and this is in comparison to $1.1 million last year. On an adjusted a bit of basis, operating expenses were approximately $4 million and not compared to $1 million last year. The change is primarily due to increases in headcounts, improvements in our technology infrastructure, stock-based compensation expenses, and other one-time expenses such as those related to our listing on NASDAQ capital market. General and administrative costs were $2.1 million in comparison to $980,000 in a prior year. That increase is mostly driven by the cost related to being a public company, increases in headcount, and further efforts to support our growth. T&A expenses are expected to increase going forward as we continue to scale rapidly. However, we continue to actively monitor our spending and impact on our bottom line. Marketing costs were $1.6 million compared to $88,000 last year, and the change is primarily due to the revenue share paid to agents that Tamira touched on previously as part of our incentive model. Just as a reminder, agents can earn revenue share for the new agents that they personally refer to REELs. and we do expect to see the cost associated with our revenue share program to continue to translate into significant year-over-year growth and also believe it to be a very fruitful contributor to the long-term goals and success of the company. As a percentage of revenue, our sales, general, and administrative costs were 10% in the current quarter, and as a reminder, they were 27% last year. This is highly representative of our level of efficiency and ability to scale. We have a technology infrastructure that enables us to continue scaling rapidly as we continue on the path forward to 100,000 agents with minimal impact on our operational cost. We ended Q3 strong with $45 million held in cash and investments, which is a significant increase from the total cash balance of $1.9 million in the prior year. Cash flows from operations increased by 581% in comparison to Q3 last year, and the company holds no debt. The company continues to strengthen its balance sheet and industry footprint, as well as demonstrate significant year-over-year growth. We expect this acceleration to continue to ramp up as we expand our focus from not only our agents, but to the consumer journey as well. This concludes my financial remarks. I will now ask the operator to open up the lines for Q&A. Operator, can you please pull for questions?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone now. Please hold a moment while we poll for questions. Your first question is coming from Darren F. Tahee with Roth Capital Partners. Your line is live.

Good morning, guys. Thanks for taking my questions, and nice job on the quarter. I have a few technical and maybe bigger picture after that. So in the quarter, could you give me what the average kind of home price was in the transactions you guys consummated on your platform? Sure.

Hi, Darren, and thanks. The average home price was around $330,000. Great.

And then I appreciate your bringing on fairly large levels of books of businesses. And so maybe looking at agent productivity over 2021 isn't the right metric, but I know a lot of investors focus on it. That metric was, was 0.9. It was 1.3 in the second quarter. So two questions, just one, is that a timing thing of ramping agents? And so the, denominator is getting bigger and maybe the productivity of that denominator is not fully exploited yet. And then as you think about your goal, you know, longer term, years from now, like, what would you like to see that transaction per agent really be on a run rate basis?

Sure. Good question. First of all, the 0.9 figure was a typo, and we're now correcting it. The correct number was 1.5, so it's actually an improvement from 1.3. We apologize for that typo. Longer term, I think that what we're seeing is that within our Currently, we're close to 3,500 agents on our team, and within them, we have about 1,000 historic agents that had a lower than average productivity, but the agents that we've been attracting in the past 12 months are higher than average in terms of production. So I think that long-term, we should be looking at around 2.5 to 3 transactions per agent per quarter. That's the long-term goal we're getting there, but, I mean, still there's some weight to those historic agents that we had with us that had lower than average productivity.

Great. That's helpful, and thanks for that correction. On the gross margin, I know, Michelle, you spoke to kind of the capping and there's been downward pressure, and you've spoken to that in the past. So a couple questions. One is, I know that resets in the beginning of the year, but how do we think about gross margins on kind of a run rate basis? And then you spoke of instant payments. How will that positively impact your gross margin? And then on the instant payments is a second question. Since you've announced that, have you seen a tick up in interest from agents on your platform, just given it's kind of a unique product out there right now? Sure.

So on the gross margin, we first have to understand what's impacting that. And we've had a higher number of high-performing teams joining us compared to what we previously thought would happen. So our financial and economics with the high-performing teams is such that their agents have lower caps. So our gross margin on their transactions are actually lower. and there was some downward pressure on growth margin. We have to remember that we are still in this early growth phase, and we're starting to grow and funnel as much GMV to the top of the funnel. And then the next step would be trying to monetize as much as possible. Currently, we're only monetizing through real estate brokerage services, but very soon we will add additional services such as ancillary services, instant payments was designed to do basically two things. One, benefit with our agents and actually provide them better visibility or better ability to plan and better cash flow. Two, every time an agent requests an instant payment, there's a processing fee involved. So that will enable us to have a positive impact on growth margins. We launched it just a couple of weeks ago, initially just to a group of about 120 agents. We are now starting to expand and expand. What we've been hearing from agents is, at the beginning, it took a little bit of education on what exactly does it mean and how does it work. But we think that there's definitely a positive impact when it comes to attracting agents to the company. I will also say that it's a great tool for team leaders to attract agents to their teams. So currently we did not enable it to team leaders, but I think that once we open it up to teams, that will probably attract more agents that are coming through teams as well, as well as enable us to make a better gross margin on team members. So hopefully that answers the question.

Yeah, it's helpful. Just if I could squeeze one more in. So, I mean, you have a fairly – large cash balance uh that hasn't you're not a cash burning business it's super capital intensive and i know you're increasing and you're hiring people but but just as you think kind of big picture i i mean where is that cash going to be deployed if you think about kind of 2020 initiative beyond just kind of hiring and growing your your agent base um i would state two main things one is product we have set an ambitious goal of changing the way people buy and sell homes in this country

And that will require massive investment in product. So that's one thing. And the second is acquisitions. We're constantly monitoring for acquisitions right now. We're focusing on early-stage startups in the market. in topics that deal with things such as agent productivity, mortgage, and title. We have some targets that we're talking to, and some of that $45 million will be attributed to acquisitions.

So just on that last point, I mean, things like mortgage and title, are you more of the thinking you want to JV these things, or you want to run them as owned and operated entities under a real platform?

Long term, we want to operate independently under our platform and actually own the entire food chain. Initially, we thought that the kind of fastest and easiest way would be to JV. I think that we might be able to make an acquisition that at least on one of those ancillary services will help us kind of own the entire food food chain from the very beginning without needing to go through a JV first. So long-term, it should be owning it. In the short-term, probably on the mortgage side, it will be a JV, and maybe on the title side, it will start with us just owning it from day one. Great. Thanks.

I'll pass it on. Appreciate it.

Thanks, Aaron.

As a reminder, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your next question is coming from Tom White with DA Davidson. Your line is live.

Great. Thanks so much. This is Tevasan for Tom. Just two questions, if I may. First, on agent growth, so clearly your combination of the low fees and proprietary tech is resonating with your agent, so we're curious to see whether you see your value proposition changing over time. Do you anticipate having the changes or lowering your splits or fees or at what level your agents cap, maybe introducing new financial benefits to stay in line or stay ahead of your competitors? And then I have a follow-up. Thank you.

Thank you. So our core offering to agents in terms of economics has not changed since 2014. We sometimes make some small adjustments, and most of the adjustments that we've made along the years were actually for the benefit of the agents. So we do not anticipate changing anything in the basic model. We do think that right now we're at that phase where we need to be attracting as many agents as possible and just generate that momentum, which is already happening. And at some point, maybe we'll need to optimize a few things that will not have a significant impact on the vast majority of agents. But the way we look at it is that at the end of the day, around a real estate transaction, there's so much money changing hands in so many ways that you can monetize a single transaction. And we're just right now at the beginning. The only service that we're now selling to our agents is real estate broker services, and that will change over time, and we will be offering more and more services. So at the end of the day, out of a single transaction, let's take a $300,000 home, for example, that our agents sell, and the commission on that is $9,000, and we keep roughly... $900 out of that or so, I think that in the future it will be quite easy to double, triple, and quadruple that amount if we build the right experience around those services that we want to offer directly to the consumer. So the way we think about it is let's funnel as many transactions to the top of the funnel right now and then over time just monetize it in a better way.

Marie, thank you. And then I understand that you're probably not in a position to provide formal guidance for 2022 right now, but I was wondering if you could maybe talk about the range of outcomes you're anticipating on aging additions in 2022. Sure.

We do not provide any formal guidance, but as you can see, we're growing agent count by around 120% to 140% year over year. We don't see that slowing down. We actually, back in May or June, we were trying to hit the brakes a little bit because we were growing so fast and we wanted to make sure that we continue and service and serve our agents the right way. So this... Tremendous growth of close to 900% happened organically without us even having a single salesperson in the company. So we think that we need to become a little bit more structured in our sales approach, a little bit more structured in our marketing, and CAT would be extremely valuable in that. But at the end of the day, I think that we could expect to see somewhat of a similar agent growth, if not even kind of a stronger growth in agent count in terms of percentage year over year. And, yeah, I mean, you can draw your own conclusions out of that. Thank you. Thanks.

We have no further questions from the lines at this time. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.