Stewart Information Services Corporation

Stand by, your program is about to begin. Hello and thank you for joining the Steward Information Services second quarter 2021 earnings call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Instructions will be given at that time. Please note this call may be recorded. Lastly, if you should need any If you should require any operator assistance, please press star zero. It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.

Thank you, Ashley. Good morning. Thank you for joining us today for Stewart's second quarter 2021 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO Fred Eppinger and CFO David Hisey. To listen online, please go to the Stewart.com website to access the link for this conference call. I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected. The risk and uncertainties with forward-looking statements are subject to include but are not limited to the risks and other factors detailed in our press release published yesterday evening and the statement regarding forward-looking information, risk factors, and other sections of the company's foreign 10-K and other filings with the SEC. Let me now turn the call over to Fred.

Thank you, and thank you for joining us today for Stuart's second quarter 2021 earnings call, and I want to thank everybody for your interest in Stuart. Dave will take you through the details of this quarter's financial results in just a minute, but before then, I want to touch on a couple of broader points. When I began at Stewart almost two years ago, I discussed both the value of our people and brand, as well as the financial strength of our core business. Stewart clearly was not a typical turnaround story, yet significant changes were necessary. To compete effectively, we needed to focus on a strategy founded on targeted scale, operational improvement, talent upgrades, and acquisitions in core and ancillary business lines. We realized that our journey to become the premier title services company would not happen overnight, but we began to put in place the pieces necessary to build a resilient long-term success. As you know, the rebuild has been happening in the face of the pandemic and historic origination void. I want to once again applaud our associates who have worked through these challenges, but our team understands our mission and is aligned to moving fast to achieve our long-term goals while taking care of our loyal customers. I bring this up today as we deliver on record earnings because the improvements in process and investments in talent, scale, services and technologies we have made, though not complete, have begun to take hold. While we clearly benefited from extraordinary residential order activity and a nice uptick in our commercial businesses quarter, the contribution of our structural changes and operational discipline to our results is exciting to see While we are bullish on the real estate over the long term, we are realistic in our assessment that the current market will not last forever. That said, on a daily basis, we are making decisions and taking actions that will define us through the current market and the next full real estate cycle. That is what drives us, and that is what you're beginning to see in our results. I'm often asked the question, how do you appropriately quantify the changes that Stewart has made so far in our journeys? With all that we've been working on, it can at times be challenging to measure all the ways we've improved our operations by being more efficient, adding new talent, unlocking existing expertise, eliminating redundancies, rescaling operations, and embracing new and improved technology. But I feel comfortable that the picture that can lie ahead if we execute on our plan is embedded in our performance in the first half of 21. In conclusion, as always, I want to thank our associates for all their hard work and congratulate them on their results. Our journey continues and we are a quarter closer to our goals. Thank you and David now will update everybody on our results this quarter.

Thank you Fred and good morning. Let me also thank our associates for their inspirational service and our customers for their steadfast support. We continue to see a strong residential real estate market driven by demand, favorable interest rates, and an economy getting back to normal. The commercial real estate market is also benefiting from this improving economy. Although the economy is improving, there are several watch items including Fed and government policy in action, virus variance and anti-vax sentiment, and an improving yet historically high mortgage delinquency and forbearance which need to play out. Since these watch items can create operating volatility, we continue to focus on the areas that will have the most meaningful and many more. For the second quarter 2021, Stewart reported net income of $95 million and diluting earnings per share of $3.50 on total operating revenues of $802 million. On an adjusted basis, second quarter net income was $86 million, an improvement of $54 million compared to $32 million from last year's quarter, as disclosed in Appendix A of the press release. The main difference between reported and adjusted net income being the gain on sale of certain buildings. Compared to last year, total title revenues for the quarter increased $248 million, or 50%, due to strong performances from our residential agency and commercial operations. The title segment generated $126 million of pre-tax income, an increase of $71 million from last year's quarter, as a result of revenue growth and continued management focus. Pre-tax margin for the segment also improved to 17% compared to 11% from Q2 2020. With respect to our direct title business, residential revenues increased 76 million or 47% from increased purchase and refinancing transactions. Residential fee per file for the second quarter was approximately $2,100, a 15% improvement over last year's fee-for-file due to a higher purchase mix this year. Domestic commercial revenues improved $30 million, or 97%, due to increased transaction volume and higher average fee-for-file, which was $12,600 versus $9,800 for last year's quarter. Total international revenues increased $29 million or 118% primarily due to improved volumes in our Canadian operations. Total open orders increased 8% while closed orders improved 27% compared to the last year primarily due to the strong housing market. Similar to our direct title business, our agency operations generated a solid quarter with revenues of $390 million. which was 113 million or 41% higher than last year. The average agency remittance rate was similar at 17.5%. On title losses, total title loss expense increased 12 million or 56% primarily as a result of increased title revenues. As a percent of title revenues, title loss expense was 4.5% compared to 4.3% last year. In regard to operating expenses, which consists of employee and other operating costs, total operating expenses increased primarily due to increased revenue and order activity. Employee costs as a percent of operating revenues improved to 24% from 27 last year, while other operating expenses increased to 17% from 15 last year, primarily due to the pass-through appraisal and service costs in our increased appraisal services businesses. Excluding these businesses, overall other operating expense ratio would have been 12% for the second quarter of 2021. On other matters, our financial position remains very solid to support our customers' employees in the real estate market. Our total cash and investments on the balance sheet are approximately $600 million over regulatory requirements. and we have approximately $225 million available on our line of credit facility. Shareholder's equity attributable to Stewart increased to $1.13 billion with book value per share of approximately $42. And lastly, net cash provided by operations for the second quarter increased to $103 million compared to $61 million from last year's quarter. We are grateful for and inspired by our customers and associates, advocates for everyone's improved safety and prosperity, and confident in our support of real estate markets. I'll now turn back to the operator for questions.

And at this time, if you would like to ask a question, please press star 1 on your touch-tone phone. We'll take our first question coming from Boast George with KBW. Please go ahead.

Morning, Boast.

Hey, guys. Hey, guys. Good morning. Great quarter. Actually, let me just start just asking about the margins. When you look out into 3Q, you know, any reason to think that margins will change, you know, meaningfully from what you reported? And then just any updated thoughts on where you think, you know, normalized margins could be, you know, just again, given the strength of what we're seeing so far?

Right. So, as you know, when we started, our margins for the overall company were about 50% of the lead two guys in the business. Our goal, as I said from the beginning, was to double those and double the margins over the next three years, which would get us to the kind of 10%, 9%, 10% level for the overall company. What you've seen is overall we're ahead of that because of the strength of the market, and obviously the market is historic. But I think we've made really good progress on our underlying goal, and so we're right on track of where I said we would be. and I think those are sustainable. The market obviously has helped beyond that, right? And we all know that at some level. So I feel good about the margins. I feel like we're a much better company than where we started. And then the other part, you know, we said we were going to position ourselves to be able to grow as well and you've seen that as well. So again, has the market helped us with growth? Yeah, but we've grown you know whatever it is seven eight hundred million dollars on a run rate basis and I believe we're positioned to continue to outgrow the market as well so I feel good on both sides but I'm fully aware that this extraordinary housing market has helped us look even better right as it as it will to everybody else because what you have is you know between overtime we are basically using all our capacity right everybody is within the offices and so you're leveraging your enforced and your fixed costs to the max. You couldn't sustain this for two or three more years because of the overtime and the stress in the system. But the marginal contribution during this year is terrific. And I think we're doing a good job taking advantage of it, but that part of this is not as sustainable.

Okay. So that makes sense. And just specifically on the third quarter, I guess you've got decent visibility into where volumes are. Do you think the margin's there? Any reason to think that comes down meaningfully from what you just reported?

Yeah, we've disclosed, and I'll have David talk a little bit about orders. If you saw what we showed in both received orders and closed orders, what we saw is a nice shift to purchase, right, which – which offset some of the decrease. So obviously those open orders carry into the next quarter. We feel like there's some nice momentum going into the third quarter, but everybody can see the refi market as it's changed, although obviously recently we saw interest rates go down again, so it's a little bit of a crystal ball. But we have some nice momentum in our business right now.

Yeah, I think, Bo, in terms of both the closed and open orders, they're running closed around where they were in June. Open may be dropping a little bit. We'll see if the decline in rates gets out to pick up a little. And so I think the trend for the early part of the quarter is certainly there. Could it drop a little as we get closer? Thank you for joining us.

Okay, that's perfect. Thanks. Actually, just a quick one just on the international. Is that, you know, is there something lumpy there or, you know, should we sort of see some of that growth there as kind of sustainable?

Yeah, as I said, so Canada, we've done a lot of interesting things. I feel good about it. We're investing, you know, we're one of the leaders obviously there and we're balancing commercial, a little bit of investment commercial there and I feel good about our future and how we're building it. The market was very strong, right? Even though the orders were closed, the market was incredibly strong this quarter. And as I said, the price, if you look at the stats, the price increases were incredible, like 20 plus percent in a lot of locations. That is not a sustainable number, right? So the reality, it's good. We're happy with our business. We have some nice momentum. But again, the results, in my view, at some point... That's got to normalize, right? So, again, I think this quarter's results at international were extraordinary, and I'm not sure that's sustainable.

Okay, great. Thanks a lot.

All right, our next question comes from John Campbell with Stevens. Please go ahead. Your line is open.

Good morning, John. Hey, guys, good morning. Hey, so yeah, I remember back in the activist days, obviously this predates you guys a good bit, but you guys I think had a goal or objective of about $5 of EPS. It looks like you put that up in the first half of this year, so that was fantastic. It's nice work. So I wanted to ask two questions here. So first on the reserves, you guys had mentioned earlier this year expecting kind of the loss revision rate to drop. somewhat, I guess, hang around the levels you guys saw last year. I think it was 5.3% or something like that, 5.2. You guys have run ahead of that pretty far in the first part of this year. So just curious about what you're expecting for the back half.

So you want to go first, David?

Yeah, John, I mean, you know, I think it has been running a little lower. I think the activity levels with the, you know, sort of the moratorium and the like on foreclosures have sort of definitely impacted the first part of the year. I think you've got the FHFA moratorium expiring in July, and I think we'll just have to see how it goes. I mean, obviously, if the current pace continues, it's going to look more like it has looked this year, but if we start to see some increased activity on the on the foreclosure front could spike up a little as the year goes.

Yeah, so again, I think our philosophy that we described in the fourth quarter and again in the fourth quarter, I just think it's appropriate right now for us to be maybe conservative to overtly conservative. But as David says with the moratorium, obviously the run rate is a lot better than we're reserving for. But, you know, it's fine to be conservative at this level. We feel very, very confident at this level, and we'll see how it unfolds.

Okay. Makes sense. And then on the entity services business, it seems like you guys have something really kind of positive spinning up there. If I back out the corporate costs for that segment, I'm getting to about a 4% margin. I think last year you guys were negative. You know, the year's part of that, it was a pretty steep loss-type business. So, David, just curious about, you know, The moving parts there, where do you think that margin can go over the kind of nearer term and then longer term? If you guys get that to a certain level of scale, where do you think you can take those pre-tax margins?

Yeah, I think, John, we're trying to get that consistent with the corporate margins that Fred described, overall corporate pre-tax margin. I think, you know, we have seen some improvement with some of the scale. I think, as we've talked about before, there's sort of puts and takes going on there, so you don't have any you know foreclosure kind of activity right there's a lot of title work and other valuation work that goes with that there's limited capital markets activity and most of its origination now and then even on the origination front because there's so much demand for appraisers right that the cost of that you know is creeping up a little you can't always recover it so there's a lot of puts and takes going on I think we're making progress and I think Over time, we'll get closer to corporate margins, particularly in a more normalized cycle where you have activity throughout each of the services. But that's sort of what's happening right now. Yeah, and I would say just in general, I agree with all that.

And I would add, if you remember, we've talked about this a couple of times. So we had a legacy. We had some multiple platforms. and we said what you're going to see is a lot of those true margins are going to come through beginning of next year, kind of at the tail end of the first quarter because we still have consolidation work on the platform and obviously you've got to be careful with that because you transition clients and stuff like that. We're right on track of what we're doing. What we've got, we like what we have, we like the portfolio and as we kind of align the operations, get the platform set up, I'm not worried about us hitting those targets as we described. I would say we're right on track. I didn't expect it to go faster than that given the sensitivity we have about some of the consolidation of platforms given the impact on clients. You've got to do that with your clients to get to the single platform. So we're in good shape.

Okay. Sounds great. And then the last one for me, the Thomas title acquisition, I mean obviously that's kind of geared to the commercial side of things. It looks like you guys Close that, I would imagine in June, it looks like you had a pretty big pop sequentially from May to June in commercial orders. Just curious about how much of an impact that was.

Not really any. So it was late. It really wasn't any real impact. We had a real bounce back in commercial. We're feeling pretty good about it. We look forward to the end of the year. We feel like things have come back a lot. Has it come all the way back? Probably not, but It's my big change, what we've seen, and we have a lot of momentum in our commercial business. And again, that acquisition was smaller, more targeted. It had some really interesting capabilities that we were interested in, both geographically, but also in some sectors. And so it's a nice add, but we really didn't mean anything this quarter.

Okay, that's helpful. Thank you, guys.

And just as a reminder, that is star and one. We'll go next to Jeffrey Dunn with Doling and Partners. Please go ahead.

Hi, good morning.

Morning, morning.

I wanted to keep that commercial conversation going. First quarter, it seemed maybe like Stuart didn't bounce back as much as some of your peers on commercial. This quarter, it exploded, and it doesn't seem just back to pre-COVID that you're running stronger than pre-COVID. So can you talk more about the broader commercial market, where you're seeing health? Is it still the secondary markets or the primary markets coming back? What's going on with New York? And then what's going on specifically with Stewart in the commercial market where it seems maybe the gains this quarter were ahead of at least one of your peers and last quarter you were kind of lagging? I guess just a general update there, please.

Yeah, that's great. So let me just talk about some trend things and then I'm going to have David talk generally about the market. But You know, obviously the market's coming back, which is a good thing. We're seeing it. And so the activity feels pretty good, pretty broadly. I think there's some sectors that we can talk about that are obviously less than others, but it's a pretty broad-based comeback. As far as our numbers, what's weird, it's a smallish business still for us, and it's lumpy, right? So if you remember the fourth quarter last year, we blew it away, right? So For whatever reason, I think some of our volume in the first quarter got pushed up into the fourth quarter. And as I had mentioned, when we did our analysis of share in commercial last year, it looked like we grew a little bit of share. During COVID, we did a really good job, in my view, focusing our efforts on our seven key markets and a couple of sectors, particularly energy. And it put a lot of resource against that. And we feel pretty good about the momentum pretty broadly. The Sun Belt's a little better. You can imagine where some of the better areas are. But we feel pretty good about the broad base of the comeback and the momentum we have in the business. As I've said before, it is a place, given our history and our distraction, and we're always good financially, but our capital strength right now is unprecedented historically. Thank you for joining us. and what we see, we think there's a long-term opportunity. Thomas is a first step that's a little bit more visible, but we plan on making other additional investments. I feel good about it. I feel good about our momentum, but it's hard. Again, it's really lumpy for us. A scale of this is such that a few deals moving from one quarter to another could create You know, a trend that's not real, right? But again, as we look at orders, I feel pretty good about the rest of the year.

So, David, is there... Yeah, I mean, just maybe a couple other quick things, Jeff. So I think just in general, there seems to be capital returning to commercial real estate, you know, not only on the equity side, but that continues to be cheap and plentiful. I think on a sector basis, you have sort of... multifamily and industrial strong offices sort of by market you know New York and San Francisco at least what we see still a little slower and as Fred had pointed out you know some of the Sunbelt markets Texas and the like stronger and so I think that's what we're seeing in our our results and you know we just have to see how things go but it does seem like there's higher interest and higher capital being committed to the sector.

Okay, thanks. And then just a second question. It's more technical, which we've had a refi-dominated resi market for several years. And this quarter you saw really the start of a shift back to purchase. Can you talk about closing ratios on a purchase versus refi? I mean, we can look at the numbers, but with all the volatility, it's hard to really nail down any differential. But not only as you go to purchase, do you maybe get a fee-for-file benefit, but do you get a closing ratio benefit as well?

I mean, generally it's a little better, right, because you don't have people falling out shopping as much as you do on refi, so, yeah.

Yeah, and obviously there's a little benefit to that, and the big part, obviously, is the revenue profile is a very different profile for us, and And so it does help in a number of ways. And one of the things I think we've mentioned in a couple, our work on forecasting, we're pretty bullish on the next couple of years, right? I mean, from a title perspective and the demographics with millennials and stuff and the purchase market, purchase is such a better thing for the title business than refi in a bunch of ways. that we see, while this is a record year and it can come down, the next couple of years look pretty darn good historically over a long period of time because of the strength of the purchase market. Now, we could all talk about the inventory issues, short-term and this and that, but so many of the trends are relatively positive for the next couple of years, and we're seeing some of that play out in a little bit of extremes right now. We feel relatively good about the purchase market looking out. Okay, thank you.

There appears to be no further questions. We'll turn the call back to Mr. Premier for any comments or remarks.

I want to thank everybody for joining us on our call this quarter and appreciate your interest in Stuart. Thanks so much.

Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time.