Stewart Information Services Corporation

Hello, and thank you for joining the Stewards Information Services Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in listen-only mode. Later, you will have an opportunity to ask questions during the question-answer session. Instructions will be given at that time. Please note, this call is being recorded. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn today's program over to Nat Otis, Head of Investor Relations. Please go ahead.

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

Thank you for joining us today for Stuart's fourth quarter 2021 earnings conference call. David will take you through the quarter's financial results in a minute, but before then, I would like to touch on Stuart's 2021 results and what we see in front of us for 2022 and beyond. We are now two full years into what we call the journey to become the premier title services company. 20 and 21 were two of the best as well as the most challenging years in the title industry as a whole, given tremendous changes in the market, historically low rates, and an ongoing impact and uncertainty caused by COVID. For Stewart specifically, it has been a period filled with significant change and increased focus, a focus on significant structural improvement with enhanced operating discipline and a renewed commitment to the customer experience. More remains to be done in our journey, but we are encouraged by our progress. as we have materially improved from 2019 and 21. We have significantly improved in every aspect of our business and have demonstrated our ability to materially improve our margins while significantly growing our business. We are pleased with the results in all our lines this quarter, across residential and commercial, where we have built in a strategy to take advantage of what looks like a very positive commercial market that lies ahead. We have enhanced our core business by leveraging added scale and targeted geographies, while also placing a greater focus on managing more effectively and efficiently. We have built scale and targeted services, and we continue to benefit from an influx of industry talent that T. Stewart is a destination for forward-thinking leaders, offering a significant long-term opportunity. In the area of technology, we understand that the real estate transaction will continue to evolve, becoming less paper-intensive, more remote, and more digital. As we have done with many of our recent transactions, we will continue to invest when appropriate, in technologies and services that help facilitate this change, and therefore improving the customer's ease of use and experience. While we are proud of our accomplishments to date, we recognize there is more to be done in the face of higher interest rate environment and a further evolution of the market. The long-term outlook for the residential real estate market remains encouraging. as purchase segment trends are projected to continue to be strong and demographic realities such as first-time millennial home buying add to the opportunity of an increasing favorable mix shift. That said, our industry and our company will likely need to navigate a near-term horizon of greater interest rate uncertainty as the Fed acts more aggressively to curb inflation by taking actions that may lead to further pullback of the refinancing activity. At Stewart, we have been preparing for this market transition by reconstructing a title company that is better able to sustain the ups and downs of a full real estate cycle. A key part of building a resilient foundation is the work we continue to do to gain adequate local scale and priority markets. As part of this process, we continue to opportunistically add new title agencies and teams to our Stewart family, increasing talent and leadership in those market segments along the way. Historically, Stewart has been less weighted to refinancing volumes, And as we have grown, we have looked to acquire companies and talent that align with our view of future mix. We continue to reconstruct Stewart to be resilient under all conditions by focusing on our business mix, deeper agency relationships, additional commercial opportunities, and investing in technology and operating model improvements to deliver the enhanced customer experience. Let me finish by thanking our associates for all their hard work and customers for their continued support. We are on a journey together to make the company more successful and resilient. David will now update everyone on our results.

Thank you, Fred, and good morning. Let me also thank our associates for their amazing service and our customers for their steadfast support. Although we are in a seasonally slow residential period and the market is adjusting to Fed commentary, and rising rates, the residential purchase market remains active, driven by demand. Commercial real estate continues to recover, particularly in the industrial and multi-family segments. Office is increasingly active and energy is poised to benefit from continued economic recovery and environmental focus. There are several watch items that could impact future business performance, including Fed and government policy and action. improving yet historically high mortgage delinquency and forbearance, consumer pullback, a lingering virus, an uncertain jobs environment, rising inflation, and slow supply chains. Consistent with our strategy, we are focused on the areas that will have the most meaningful and durable impact on our long-term operating performance, gaining scale and attracting direct markets, improving scale and geographic focus in our agency and commercial operations, broadening our lender services offerings and throughout our business improving service and digital capabilities to provide seamless end-to-end user experience. During the quarter, we added Great American, Greater Illinois, Devon, Homeland, Las Cruces, and Rainier to key direct operations markets. Our lender services and data businesses added informative research and provider credit data and PropStream, a provider of real estate data. Credit and property data provide the business generation and improvement information so critical to our customers in a transitioning market. We are excited about these businesses, their possibilities, and their teams, and welcome them to Stewart. For the fourth quarter of 2021, Stewart yesterday reported net income of $85.5 million. and diluted earnings per share $3.12 on operating revenues of $951 million. On an adjusted basis, fourth quarter net income was $80.5 million, an improvement of $24 million, or 43%, compared to last year's quarter. The adjustments to our quarter net income were primarily due to net unrealized gains on equity securities investments. Compared to last year's quarter, total title revenues increased 178 million or 26% due to strong results from our residential agency and commercial operations. The title segment generated pre-tax income of 118 million, which is 23 million or 25% higher as a result of increased revenues and continued management focus. Pre-tax margin for the segment was comparable to last year. With respect to our direct title business, Domestic residential revenues increased $43 million or 18% due to higher purchase transactions and improving scale. Residential fee per file for the fourth quarter was approximately $2,700, which was 38% better than last year's quarter due to higher purchase mix. Domestic commercial revenues improved $35 million, driven by increased volume and average fee per file of $1,900. Total international revenues improved 4 million or 10% compared to last year's quarter due to increased transaction volumes in our Canadian operation. Total open and closed orders in the fourth quarter decreased 22% and 14% respectively, primarily due to lower refinancing transaction as expected with the market trend. However, commercial and purchase closed orders increased 7%. percent respectively compared to last year's quarter. Similar to our direct title operations, our agency operations generated a solid quarter with revenues of $445 million, or 27 percent higher than last year. The average agency remittance rate during the quarter was 18 percent, roughly in line with last year's quarter. Our title losses Total title loss expense decreased 13 million or 28% due to favorable claims experience. As a percentage of title revenues, title loss expense in the fourth quarter was 4% compared to 7% in last year's quarter, while for the year it was 4% in 2021 compared to 5% in 2020. In regard to operating expenses, which consists of employee and other operating costs, Total operating expenses increased primarily due to higher employee count, increased variable costs tied to higher revenues, state sales tax assessments, and office consolidation costs. Employee costs as a percentage of operating revenues improved to 23% from 25 last year, while other operating expenses increased to 22% from 18% last year, primarily due to the increased size of our ancillary and other real estate services operations. On other matters, we completed our $450 million senior notes offering and used the proceeds to repay outstanding credit facility borrowings and for acquisitions. To maintain liquidity flexibility, we obtained a $200 million unsecured revolving line of credit, which is fully available for future drawings. Our financial position remains on a solid foundation to support our customers, employees, and the real estate market. Our total cash and investments on the balance sheet are approximately $620 million over regulatory requirements, and we have the new available line of credit facility. Stockholders' equity attributable to Stewart increased to $1.3 billion. Our book value per share was approximately $48, an increase of 27% from last year. Last week, net cash provided by operations for 2021 was $390 million compared to net cash provided by operations of $276 million last year. We are grateful for and inspired by our customers and associates, advocates for everyone's improved safety and prosperity, confident in our support of real estate markets, and now I'll turn it back to the operator for questions.

At this time, if you'd like to ask a question, please press star one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question, and our first question is coming from Bose George with KMVW.

Morning, Bose.

Contribution to the earnings this quarter after the deal closed and just how we should think about inclusion next year.

We missed the beginning, both. Could you do that again?

I just missed the beginning. Yeah, sure. Yeah, just on the PropStream acquisition, you know, just wanted to how we should think about accretion from that. So do you want to repeat what we did?

Yeah. Hey, both. It's David here. So on PropStream, you know, we've been thinking about that as about a $40 million run rate revenue business at 40% pre-tax margins.

Okay, perfect. That's helpful. Thanks. And then actually switching over to commercial, you know, obviously there's a big jump in the commercial premium this quarter. You know, anything unusual to call out there or just reflecting a very strong commercial market?

Yeah, I gave a little bit of that in my remarks. I mean, I think we've seen both on the product side, you know, multifamily industrial office coming back a little, and then, you know, also a number of the geographies, particularly in the northeast, Boston, New York, you know, really started to pick up. So, yeah, just sort of across-the-board product and geographies were much better.

So we're pleased. We have a bullish outlook of commercial, like I think others do as well. It's always lumpy for us, you know, if you have a few big ones, but we're very confident this is a a strong commercial market right now. And you saw we also have been making some investments internationally, and we've got some opportunity, I think, there to look forward. So, good.

Okay, great. Thanks a lot.

Our next question comes from John Campbell with Stevens Incorporated.

Hey, John. Good morning. Hey, guys. Good morning. Congrats on a great quarter and a great year.

Yeah, great year.

Yeah, I wanted to see if we could maybe dive in the M&A side of things for just a second. So, David, I guess first, if you could maybe talk to the M&A capital deployed last year and roughly how much of that was tied to kind of ancillary services versus the platform build-out, or excuse me, against the title business. And then, Fred, maybe if you could talk to just the broader strategy around the platform and as you kind of step back from what was obviously a busy year, how much of the heavy lifting do you feel like there's left on that kind of platform build-out? Great. Go ahead.

Yeah, sure, John. So, you know, a lot of stuff in the fourth quarter and then, you know, throughout the year some other activity. But, you know, it's probably a few hundred million in services, right, between PropStream and IOR as we disclosed. And then, you know, I think we did about 600 or 600-plus total. So the rest would have gone to the, you know, sort of the core platform, you know, the title agency type activity.

Yeah, I think as you look at our business, you know, it's been a pretty interesting couple of years. You know, we went from about a billion-eight company to three-three, right? So we grew over a billion and a half dollars. Obviously, the market was good, but we've kind of repositioned ourselves. And as we've talked, you know, we looked at all the MSAs, and I would say there's still 15 or 20 MSAs I'd like to see a material change in our share positions. but it's a lot less vulnerable than it was. And you saw we took some additional actions this quarter on some consolidations, leasing, elimination, closing some offices. There's not a lot of that stuff left to do, but I think there's opportunity in a material way in some of our MSAs. And then the other thing, the point I would make is that if you look at our 90 markets, essentially, our leadership is so much better and well-positioned that there's the ability to do tuck-ins in microgeographies and stuff if it makes sense. So I think there's opportunities that continue to be in front of us. I think there's a, if I use the word platform a little broader, we still also, you know, when we started the journey, I said there's three years of work here to really get some catch up. And we still have some work on our data management. We still have some work on some of the technology investments we want to make. There's still some work on our operating model as far as workflows goes. that we're making good progress on. But, you know, we have still improvement in front of us that we've got to focus on. So I like the combination for us, that there's opportunities to grow as well as continue to improve. And, you know, it's going to be our view of the market is, you know, while it's now seasonal again and, you know, it's not as good as last year, it's going to be a very good market. I mean, our outlook for the next couple of years is that we think these are going to be two of the better years in history and the industry if the purchase holds up. There's some uncertainty coming into the first quarter, but we feel pretty good about where we are in total. So I think we have more work to be done, but I feel we're in a good place as we continue to move forward.

That makes sense. That's helpful. You know, I saw the office consolidation cost that you guys called out in the press release. It doesn't look like you backed that out of your adjusted numbers. Is there a way to frame up? Was that a meaningful cost or any kind of color there?

Yeah, it was in the $5 million range. You know, we always look, John, to try to improve the business when we can. And so, you know, that's an example. Just get it ready for the longer term of the cycles.

Yeah, and you know when we started, I described it as an inch deep and a mile wide, and we had a lot of stuff in a lot of places. And our whole view is if we can't see clarity to winning at a local market level, we shouldn't really keep investing there. And so, again, most of that is behind us, but we still have some work to do in a number of markets to gain a level of share that we feel comfortable we can deliver consistent service and great margins to recycle. So, you know, a little bit of work to do.

Makes sense. Last one, just if I can squeeze in one more. On the reserves, it looks like they came down to maybe 3.9% or so this quarter. Obviously, it was down last quarter as well. So I don't know if you're seeing better trends in the back half, you're feeling better about that, but just give us an idea or a sense of how we should be thinking about that for 2022. Sure.

Yeah, we've got admitted fours. I would leave that guidance the same. Maybe it'll be a couple ticks higher than that or a couple ticks below that, but that mid-four number I think is a solid number. If you remember what happened During some of the turmoil, we were very thoughtful about reserves. So if you look at where we are on our range, we're kind of the most conservative point in our range. So if things happen well, it kind of gets thrown into the earnings, you know, because we have been reserving quite strongly, which I think is appropriate given the uncertainty. But the mid-fours is the right. I mean, I don't, again, whether it's two-tenths above that or two-tenths below that, but it's That's the right number still. There's nothing material that we see that would make us take that down.

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

Our next question comes from Jeffrey Dunn, Dowling & Partners.

Hi, good morning.

Doing well, thanks. I've got a few questions here. As you noted, I mean, the outlook is strong for 22-23, but you are facing – seasonality for the first time in a year or two with this Q1. And you also got some great headwinds. Um, can you give us an idea of how January trended for open and closed and, and, um, just remind how you think about a Q1 in a typical year, since it seems like we're maybe back to the normal pattern.

Yeah.

Hey Jeff, it's David here. Um, yeah, I mean, I think we saw, um, you know, continued decline a little bit in January, you know, from where we were in December and then a little bit below January of last year. I think what, you know, what's really going on, I mean, we've seen what since the December Fed meeting, you know, through the January Fed meeting, you know, just a tremendous increase in the 10-year and the mortgage rate itself. And so, you know, a month of sort of negative activity there, and we've seen that a little bit on the order. But purchase continues. Most of that's in refinance. Purchase continues to be strong. Probably we had similar levels to last year, if not a little up. But that's generally what's going on. But refinances are getting hit pretty hard.

And the data that's in the release, you see our December open orders. You can see the drop, right? And And what's interesting is last year there was no seasonality. It's one of the unique things of last year was we didn't see any. And to your point, I think it is back to normal. And so it'll be a little choppy probably in the first quarter back where we're returning to what the normal cycle is. I would also say that early January had a bunch of bad weather. We've also had what was interesting last year is the weather was great across the country. So he didn't have any hiccups. So I think it's going to be fine, but it's going to be just, we're going back to a more seasonal outlook. And that's why I look at the whole year and I feel really good. As I said, you know, I think it's going to be a fine year, but it's going to be less than last year. Right.

And on that outlook, I mean, if you're raised the last two years, the forecast from the NBA for 22, 23 seem almost ideal for title given a strong purchase market. So, is success in 22-23 based on the existing forecast a double-digit margin?

Again, I've said this a couple of times. I think what happens in our business, it was so good last year that your same store, basically you're at 100% capacity and then you have refi on top of it. You use overtime, but your marginal margin, if you will, in this industry is quite high when you have what you've had in the last year. And a lot of people didn't hire for that excess volume. They just ran overtime. That's getting out of the system. So there's a couple of points of margin for everybody in the industry as that comes down. And so, you know, again, but we believe we are better, right? We think we've positioned ourselves so we believe we can, you know, maintain those double-digit margins as we're shooting for it.

All right. And just two more here. In terms of the MS and corporate segment, can you give us an idea of a bit of the run rates there? It looks like corporate might be in like an 8 to 9 million run rate when you factor in a full quarter of debt expense. And then you got your informative research around 15% margin, prop stream at 40. If I assume that the kind of core MS business is a negligible margin there, is this a double-digit margin on the mortgage services operations once PropStream's integrated?

Yeah, so our goal in that area is low double digits, right? And I think we're right on track to do what we need to do to do that. And it's a combination of a couple things. One is, to your point, there's a mix thing going on there where we didn't have kind of what I would say data-type assets and services. And so that mix is enhancing it a little bit. But we're also, I mentioned last call and a couple of other times. The assembly of all the assets, particularly around appraisal, there was some real important platform work we need to do to get that to where our target kind of returns. I didn't want to minimize some customer disruption, so we kicked that work into this year. It's going to carry forward into this year, but it's all coming together nicely, and so I feel very confident that that business is going to be able to be by, you know, whatever, bid to year, low double digits, and sustain that. So I think we've got a nice business there, and it's established, and we're right on track for where we want to be.

Okay, and then just two number questions. What was holding company cash at your end, and also – I think it was $5.6 million of purchase price amortization in Q4. What's the full Q1 run rate for PropStream, including PropStream?

Yeah, on the amortization, Jeff, we're still going through all the purchase accounting and stuff, so I think that's probably in the area, but it could go up a little bit once we finish everything. And in terms of whole code cash,

I think we were probably in the 50 to 70 million range. All right. Thank you. Thanks.

Our next question comes from Ryan Gilbert in BTIG. Good morning.

Hi. Good morning, guys. Thanks for taking my questions. First one is on competition in the title business. I'm just I'm wondering if you had any thoughts around competitive dynamics in the fourth quarter and then what your expectations are for 2022?

Yeah, I don't think there's much of a change. What's interesting, I think, going to happen, there is a number of competitors that are very skewed towards refi, regionals, et cetera. And so there's some action starting to take that's going to create opportunities for us. whether it's staffing or resource allocation, stuff like that. So we're getting back to what I would consider a more normal market, and I think the strong players will have some advantage during this time. And so, again, I'm looking forward to actually, you know, these challenges with this transition, but in my view, it's a more – normal market where a local market share and kind of your position on the purchase side is going to drive your success. And so I feel pretty good about what's transpiring there. But again, the commercial, you've already mentioned, I think the commercial is back from where it was. And so that's a really good market. Again, leading the larger players with capital and underwriting skill have a huge advantage with that in that world. So Again, there's some interesting things. What I would say is we're getting back to a more normal mixed market, but still very attractive. And so it creates some opportunity, I think, for everybody that's got some size and scale.

So, good.

Okay, got it. That's helpful. Second question on refinance volume, you know, down 30 in the quarter, and it looked like open orders were maybe closer to down 40. That's, I think, better on a year-over-year decline rate than certainly what I was expecting, and I think the market is maybe closer to down 60. Do you feel like you picked up share in refi in the quarter, or are there any specific dynamics around refinance that you wanted to call out that benefited Stewart relative to the market overall?

Yeah, that's a great question. What's interesting, we have less refi than anybody in the top six or seven competitors. We didn't focus on a centralized offering historically. We don't have a lot of the national agents that drive refi. We have some great relationships with great people, but if you look at the national agents, we're a weak player historically because of some ease of use questions that occurred a couple years ago. But so our mix of refi is more distributed than our competitors. What I mean by that, it is more the direct offices and sort of a piece of our business versus these huge national agents that are dedicated to it or a centralized title. We don't have a big centralized title operation. And so I think there might be a lag here for some reason because of that. I'm not sure we're immune, if you will, to the trends on Repi. But it is interesting, and it is a different profile. And because it's less to us, it's a less meaningful change to our revenue stream. But it is an interesting observation because I think you're right. I haven't seen all the data reported, but we would anticipate that the market's down in the 50s, And that's what we're planning for, if you will, 50s or so.

Craig, we're not as big out on the West Coast. I'm asking California. I mean, the other guys are a lot bigger in California, and that's a big refund market. That's very true. That's very true.

Okay, got it. That's really helpful. Last one for me, just a point of clarification. I think you mentioned in response to one of the other questions there was some uncertainty in 1Q22. Is that just a function of the increase in mortgage rates that we've seen year-to-date or any other areas of uncertainty?

I think that's the question, right? I mean, everybody has anticipated, all you guys, as you thought through your models. I mean, everybody's been talking about it. We all look at the same forecast. We're very comfortable that it's going to be a pretty good year, but if something happens beyond that because of the inflation is obviously that would change a little bit. So that's why there's some uncertainty in it. But the rest of it, to me, is kind of what we see is kind of on track to what our views are. So, again, we feel like this could be a very good year for us and for the industry, those particularly that are purchase-focused.

Okay, great. Thanks very much. Thanks.

That does conclude the question and answer session.

I'll turn the program back over to Fred for closing remarks.

Again, I want to thank everybody for joining us on our Stewart Fourth Quarter call. Thank you so much for your interest.

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