Real Matters Inc.

Good day and thank you for standing by. Welcome to the Real Matters first quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Lynne Beauregard. Thank you. Please go ahead.

Lynne Beauregard Thank you, operator, and good morning, everyone. Welcome to Real Matters' financial results conference call for the first quarter ended December 31st, 2021. With me today are Real Matters' Chief Executive Officer, Brian Lang, and Chief Financial Officer, Bill Herman. This morning, before market opened, we issued a news release announcing our Q1 results for the three months ended December 31st, 2021. The release, accompanying slides, as well as financial statements and MDMA are posted in the investor section of our website at realmatters.com. During the call, we may make certain forward-looking statements which reflect the current expectations of management with respect to our business and the industry in which we operate. However, there are a number of risks, uncertainties, and other factors that could cause results to differ materially from our expectations. Please see the slide entitled Caution Note regarding forward-looking information in the accompanying slide presentation for more details. You can also find additional information about these risks in the risk factors section of the company's annual information form for the year ended September 30th, 2021, which is available on CDAR and in the investor relations section of our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA, and adjusted EBITDA margins. Non-GAAP measures are described in our MD&A for the three months ended December 31st, 2021, where you will also find reconciliations to the nearest IFRS measures. With that, I'll now turn the call over to Brian.

Thank you, Lynn. Good morning, everyone, and thank you for joining us on the call. I will kick things off today by discussing some of the highlights of our first quarter and some of the key drivers behind our numbers. Bill will then take a deeper dive into our segment financials, and I'll wrap up the call with some brief remarks prior to taking questions. Turning to slide three, we reported consolidated revenues of $107.8 million as strong growth in our U.S. appraisal and Canadian segments was offset by a decline in U.S. title. We grew share with our clients and delivered record first quarter net revenue in U.S. appraisal. Our U.S. title operations continued to perform well, delivering against our Tier 1 lender scorecard in the quarter and landing us atop our Tier 2 client's scorecards. With plenty of movement in the 10-year Treasury yield, the U.S. mortgage rate environment was dynamic, with significantly higher rates presenting a market headwind for our business in the first quarter. First quarter mortgage market volumes were also more in line with the seasonality we typically see in the October to December timeframe with a slowdown in activity due to the holidays. That said, our first quarter U.S. appraisal mortgage origination revenues, which includes purchase and refinance, increased 13.9% year-over-year compared to an estimated 1.5% decline in total origination market volumes. The increase in U.S. appraisal revenues was principally driven by the mix of volume serviced, net market share gains, and new client additions. In the quarter, we launched four new lenders in U.S. appraisal and one new channel with an existing top 100 client. U.S. appraisal purchase revenues were down 0.8% compared to an estimated market decline of 9.3%. It's worth noting that the purchase market in the prior year quarter was exceptionally robust. It was the highest first quarter purchase market volume we have seen since going public making it a tough year-over-year comparable. U.S. appraisal refinance revenues were up 23.3% compared to an estimated market increase of 10.8% in the addressable refinance market. Our market estimate includes a year-over-year decline in the use of GSE waivers, which helped increase the size of the addressable refinance market for appraisal and offset the 31.2% total market decline for refinance market activity. In our U.S. title segment, first quarter centralized title revenues declined 60.6% year over year against an estimated market decline of 31.2%. Outside of market movements, we continue to focus on performance as the main driver of growth in our title business. We continue to perform at the top of our Tier 2 lender scorecards, and as a direct result, we continue to win market share. In addition, we expect that our performance on the Tier 1 lender scorecard will set the stage for further market share growth and the expansion of channels with this lender. The performance equity we are building today will also help support the sales cycle with prospective clients. We launched one new top 100 lender in title in the quarter, and subsequent to quarter end, we launched an additional top 100 client. We continue to move our pipeline forward and remain focused on bringing on new lenders throughout the year. In our Canadian segment, first quarter revenues were up 13.2% year over year from increasing market share with certain Canadian clients and increased revenues from insurance inspection services. With that, I'll hand it over to Bill. Bill?

Thank you, Brian, and good morning, everyone. Turning to slides four and five for a closer look at our financial results, U.S. appraisal segment revenues increased 14.1% year-over-year to $79.3 million due to the mix of volume service, net share gains with existing clients, and new client additions, which were offset in part by lower estimated addressable market volumes. Transaction costs in our U.S. appraisal segment increased 16.9% year-over-year and net revenue increased 4.2% to $16.4 million, while net revenue margins declined 200 basis points to 20.6% compared to the same period last year. The decline in net revenue margins was due in part to the mix of mortgage origination volume service, which included complex properties with higher appraisal fees. That said, and as Brian mentioned earlier, we delivered record first quarter U.S. appraisal net revenue this quarter. Operating expenses in this segment increased 14.7% to $7.9 million in the first quarter of fiscal 2022 due to higher capacity levels in the quarter and the mix of volume serviced. Adjusted EBITDA in U.S. appraisal decreased modestly to $8.6 million from $8.8 million in the first quarter of fiscal 2021, and adjusted EBITDA margins contracted to 51.9% on lower net revenue margins and higher payroll costs due to higher capacity levels in the quarter and the mix of volume service. Turning to our U.S. title segment, revenues declined 59.4% year-over-year on lower estimated refinance volumes of 31.2%. Diversified revenues totaled $0.5 million, representing a decline of $1.9 million from the first quarter of fiscal 2021 as a result of rationalizing this service offering last year. Transaction costs in our U.S. title segment decreased 58.9%, while net revenue margins were strong at 66.4%. The modest contraction in net revenue margins against the same quarter last year was due to the flow of volumes between comparative quarters, partially offset by higher net revenue margins from diversified title and other title revenues. Operating expenses in this segment decreased $4.8 million to $10.3 million in the first quarter of fiscal 2022 due to lower volume serviced. adjusted EBITDA was $0.4 million in the first quarter of fiscal 2022, down from the $11.6 million we posted in the same quarter last year. And adjusted EBITDA margins contracted to 4.1%, falling to the impact of lower volumes. As we've done in the past, we'll continue to manage operating expenses relative to volume service, while ensuring that we make the right decisions to support our long-term objectives. In Canada, revenues increased 13.2% on a year-over-year basis to $12.2 million, while net revenue margins contracted by 180 basis points due to the mix of appraisal services supplied and appraiser onboarding. Canadian segment operating expenses were $0.7 million in the first quarter, up from $0.4 million in the first quarter of fiscal 2021. and adjusted EBITDA margins decreased to 57.7% from 73.7% in the same quarter last year due to an increase in operating expenses attributable to higher payroll and related costs, other expense, and FX. Last year, we redeployed certain Canadian staff to service the title business with the resumption of more normal operations in Canada following the removal of certain COVID restrictions These employees have returned to the Canadian segment. In total, first quarter consolidated net revenue was $28.8 million compared to the $44 million reported in the first quarter of fiscal 2021 due to lower revenues in our U.S. title segment. Consolidated net revenue margins were 26.7% in the first quarter of fiscal 2022, down from the 36.6% we posted in the first quarter of fiscal 2021, reflecting lower margins in our U.S. appraisal and Canadian segments and lower net revenue generated by our U.S. title segment. Consolidated adjusted EBITDA was $5.9 million in the first quarter of fiscal 2022, down from $17.4 million in the same quarter last year. And consolidated adjusted EBITDA margins decreased to 20.6% due primarily to lower volume service in our U.S. title segment. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $73.3 million at December 31st, 2021. In the quarter, we directed 100% of the free cash flow we generated this quarter to share purchases under our NCIB, purchasing approximately 700,000 shares at a cost of $5.1 million. At the end of the quarter, we still have 3 million shares remaining under our current NCIB, and we intend to continue to be active in the NCIB, which we will balance with other strategic opportunities as they present themselves. With that, I'll turn the call back over to Brian. Brian?

Thanks, Bill. Overall, we're feeling good about the business as we continue to focus on operational performance managing scale, launching new customers, and driving market share growth. The long-term potential for our business has not changed, and we remain confident that we will achieve our fiscal 2025 objectives. As Bill mentioned earlier, our view is that the current trading price of our shares is not reflective of the value of our business, which presents an opportunity to return value to shareholders through share purchases under our current NCIB. With that, operator, we'd like to open it up for questions now.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, to ask a question, it's star then the number 1 on your telephone keypad. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Daniel Chan of TD Securities. Your line is open.

Hi, good morning, guys. Brian, last quarter you talked about how some Tier 1 customers were coming back into play. Just wondering how that pipeline has progressed over the last quarter and whether you had some visibility on the timing of those customers potentially coming on board to the platform.

Got it. So, Dan, I know that's specifically a title question. And so I think one of the benefits we continue to see is that our performance on appraisal with all of our Tier 1s continues to be incredibly robust, and we keep hitting the top of the scorecard with them. And as I've discussed in the past, we use that performance equity to drive our conversations on the title side. So I think with the Tier 1 that we currently have on the title platform, performance incredibly strong in the first quarter, so we will continue to work on driving that. And I've mentioned the majority of Tier 1s right now are in conversations around title. So we will continue to play that off with some market dynamics that are going on. Our team will continue to lean in, though, and drive for more Tier 1 coming onto the platform in the future.

Okay, thanks. And then, Bill, what are your thoughts on the size of your operations on the title and clothing side as we move through the rest of the year? Give me your view of how the market may shape up. Do you think you need to restructure that business at all?

Great question, Dan. When I think about the title business and OpEx in particular, I think – We've said before, and I'll say it again, that it really is balancing that market dynamic against costs in the business. But we also have to be mindful of what we expect to present itself in the back half of the year. So I think we're going to be prudent managers of our OPEC spend in the coming quarters. in particular, and then, again, we've always got to satisfy with that long-term view of, you know, what's coming next. So super, super hopeful that we've got some additional volumes coming our way from channel expansion with our current install base and title, and that will help support the current spend level.

Yeah, that's helpful. And then, Brian, one last one for me. At your investor day, you did present data analytics play, and you did mention that you may acquire into that. Just wondering how you're thinking about that strategy, balancing the volatility in the market against declining valuations in the space, whether acquiring into the space is still in the playbook. Thank you.

Great. Thanks, Dan. I mean, long term, Dan, as you mentioned, data is a very important third leg stool of the strategy. So we will continue to work on developing our strategic plan around data. That being said, as you mentioned, with the market dynamics as they are right now, I don't foresee in the very near future us doing anything from an acquisition standpoint from data, but we will continue to progress our strategy. Great. Thank you.

Our next question comes from the line of Richard Che of National Bank Financial. Your line is now open.

Yes. Thank you. You know, Brian, you guys had some pretty great numbers on the appraisal side given the backdrop and the market here. Just wondering if you can kind of give us a sense of the share gains and appraisals with respect to your tier one lender clients. Sure.

Morning, Richard. Yeah, so on appraisal, as you mentioned, the performance continues to be incredibly strong, Richard. We actually, as of the new year, we had reviews with two of our Tier 1s, and we are, again, number one on both of those scorecards. So as we talked about with performance and operational excellence, we continue to move market share. And so we're seeing that come through with the performance that we've got in the business. So, you know, across the Tier 1s, we continue to be at the top of the scorecard and continue to move market share. And, frankly, Richard, not just with those lenders, but we also are seeing it across our Tier 2s and 3s.

Okay. And then maybe sort of, I guess, related that question that you look at sort of your other tier one that may not be served out there, Max, in terms of allocations to real buyers, like, can you give us some context of how much room is left there?

Yeah. So, Richard, we talked to our biggest tier ones where we have significant market share, and they've made it incredibly clear to us that there is no ceiling with them. So, we continue to drive towards that long-term view of 50% for The lenders that we talk about that are on the front of the train, so those that are in the high 30s, low 40s percent, and, of course, the ones that are at the back, we continue to see progression there as we try and move them to the high 20s and into the 30s. So, frankly, we're seeing that entire train move, Richard, as we expect it to.

Okay. And just the last one for me, with respect to the waivers, as we're going through your filing here, you're still sort of pointing to 2025 when we kind of see a meaningful impact of sort of those waivers coming off. Has the environment changed at all? Obviously, you know, if you look at the volumes and the market and the backdrop, you would think that we would actually see that sooner. But maybe kind of give us a bit of color or update there.

Sure. I mean, if we look back at least quarter over quarter, Richard, we see last year we were up in the 30-plus percent range. This year our expectation is that we'll be down in the lower 20 percent range. So we're definitely seeing the progress that we had looked for with declines in the waiver rates. As we look out, Richard, I mean, unfortunately it's difficult to comment on what's going to happen with the 10-year. over the next couple of quarters and other dynamics in the market. But our view, again, continues to be that long-term, that waiver rate will continue to come down. You're going to get it no matter what in our view over the next few quarters if refi, if refi continues to come down, rate refi, and we see cash out coming back up. If I reflect back to 2018, 80% when we saw the rates moving up, 80% of the refinance volume was cash-out volume and with over $9.1 trillion of value in homeowners' homes. And from what we can see from research, a fair bit of appetite for home renovations and those sorts of things. We have a feeling there will still be a pretty decent refi market as we go forward. And therefore, that mix of what's in the waivers will definitely, I think, continue to drive that waiver rate down.

Okay, great. Thank you.

Thanks, Richard.

Our next question comes from the line of Thanos Moshopoulos of BMO Capital Markets. Your line is now open.

Hi, good morning. Brian, can you speak to just given all the volatility in the market, is that having any impact on customer behavior in terms of how the lenders are thinking about how they allocate share, or would you start to your title discussions in terms of how they're thinking about bringing on a new supplier?

So, Thanos, I was fortunate enough to spend some time last quarter with our tier one in the title space with the leader of that group. And what they shared with me is as they looked out over the year, within their customer base they felt they had 40 percent of their customers that were still refinanceable up to four percent so still a significant target within their own customer base so as they were looking at capacity planning for the year frankly they were looking at keeping it quite steady So I think the dynamic that we'll see play through the sort of back part of this quarter and usually launches with Super Bowl, where one of the bigger players in the market does a lot of advertising around Super Bowl. We then see a more aggressive advertising plan. Generally across the board. So we'll see how that plays through and therefore generally what type of volume that that along with of course the 10-year sort of plays through in the market. So that's, I mean, generally we're seeing our lenders be quite thoughtful about what they think the opportunity is this year. They still think there's a strong market for refi. They definitely will need to dig into their customer base in order to encourage some of that refi activity. And, you know, Black Knight continues to put out a report that says somewhere around 7 million North American homeowners are in the the block to actually mortgage their homes to make a refinance. So again, we'll just have to see how that all flows through, I think, Thanos. And for us, as you know, market share is really driven by performance. So with our operations team and title continuing to move the needle up on the scorecards, we expect that we will continue to win market share with our customers.

Great. And then the FHA last fall had talked about ramping up the use of desktop appraisals. I guess, firstly, have you started to see that? And then secondly, has that resulted in any sort of change in your business in terms of share or revenue transaction or anything?

Yeah, thanks, Thanos. I mean, interestingly, we still don't have the specifics around the desktop announcements. So unfortunately, months after that announcement, we still don't sort of have the requirements around what needs to be done around desktops. That being said, right now anyway, Thanos, the way we're looking at some of those non-usual appraisals is is frankly for us right now the the margin in that business is still very complementary to the margin in our business we of course can do desktops if required but we are not seeing uh a real increase in that business right now we're still seeing the um the 1004s and the and the work that we generally do as playing by far the the vast majority of appraisal orders clear thanks for that one all right thanks man

Our next question comes from Rob Yang of Canaccord Genuity. Your line is now open.

Good morning. I just wanted to get more context around something you said earlier in the call. You said that you wanted to be mindful of what you thought might present itself in the back half of the year around volumes. And so is that just the market returning to normal seasonality and your expectations that things will get busy in the April time period? Or is it the channel extension? Maybe you can put some more context around that, if that was just a title comment or just a general comment.

Sure. Well, I mean, it's interesting you bring that up, Rob. I mean, that would impact both of our businesses. I think the original comment was a little bit more around title. But as you know, seasonality really starts kicking in around March, April, so on the appraisal side of the business. We should see some robust growth there just because we assume that purchase will be a strong part of the program for Q3 and Q4. I think that comment when it was made earlier was more around title and our view that with market share, we assume to continually gain market share with the performance that we're seeing against the Tier 1 and Tier 2. But beyond that, we've talked about channel expansion, and so our view is that in Q3 and Q4, we should see some of that channel expansion with both the Tier 1 and the Tier 2 that we launched last year. So I think that's more specifically what that comment would be about, Rob.

Okay. And then I wanted to just maybe in a very simple way understand better the – the title revenue decline is quite a bit higher than the estimated market decline that you gave. And so I'm trying to put those two statements into context. How were you gaining share against the steeper decline relative to the market?

Yeah, so, I mean, our focus, as you know, Rob, has been on freeing up capacity in our system to make sure that we are very focused on performing and driving operational excellence with the Tier 1 and Tier 2s that we have on the platform today. And so that performance we know drives market share. We see the benefit in market share growth with those customers. And so that's why we are focused in the second half of the year on continuing to grow market share with those customers and expand uh expand our share with those customers so sometimes that comes um with some challenges with the tier threes and tier fours but as you know we are wholly focused on driving tier one and tier two uh performance and market share okay i guess the other thing that that could be a driver is the um the emphasis of that tier three and tier four earlier in the year is that still something that's in place or have you started to re-engage with some of those customers yet you emphasize to provide more capacity Yeah, we've been fortunate there, Rob. We have had some win-backs, but as I say, I mean, the real focus long-term for the 2025 targets is to make sure that we continue to move the Tier 1s and Tier 2s in the right direction.

Okay. Okay, thanks for taking the question.

Thanks, Rob.

Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Our next question comes from the line of Gavin Fairweather of Coremark. Your line is now open.

Okay, good morning. I thought we could start on US Title and focus on your Tier 1. I think it's been three quarters that it's been live now, and I think initially you'd said that you were targeting 5% to 10% share over the course of the first year. So maybe you can provide us with an update on how you're tracking against that target and any thoughts on where your share with that client could move over the second year of going live.

Thanks, Gavin. I think we shared at the end of last year that we had a very good year with the Tier 1, and to your point, we talk about getting to 5% to 10% in the first year, and after the first couple of quarters, we were very fortunate to have got ourselves into the double digits. We continue to focus on ramping that share, Gavin, and we will continue to focus on ramping that share. I think one of the unique opportunities there is beyond driving just the share with the business we have today is to expand the channels with that customer. And as I say, I think we're very optimistic. So barring market movements, et cetera, but we're very focused on bringing that channel up live in the second half of this year. So that's really, I think, where we're going with Tier 1s, continue to perform, continue to win market share in the core business, and then diversify into another channel.

That's great. And then just secondly for me in U.S. appraisal, the net revenue margins have been kind of hovering just over 20% in recent quarters given COVID. kind of the shift in mix towards more complex jobs. I guess I'm wondering if that's a good run rate for now. Do you see a pathway to maybe back towards the 23% or 24% level, perhaps by passing on some of the increased costs that you're seeing onto the lenders?

It's a good question, Gavin. I'm going to ask Bill to take that question. Bill?

Sure. Thanks, Brian, and great question, Gavin. I think in the short term, Gavin, I would say to you there's still elevated levels of refinance activity. And so as a consequence, I think we're still sitting firmly in the more complex camp, at least in the near term. You know, from a run rate perspective, I would think somewhere in the neighborhood of what you saw in this first quarter of the year would probably be fair for at least the next couple, but certainly longer term once the refinance market starts to settle. and and cool down a bit then i we fully expect uh margin expansion easily up into the 23 24 which which where we were uh pre-covered and then secondarily i think we've still got as you know you know lots of room to expand into the 26 to 28 range by 2025. great that's it for me thank you our next question comes from the line of martin toner of atd capital market your line is now open

Hi. Thanks, guys, for taking my question. So you lost share in title for three quarters now. Can you guys talk a little bit about the pace of increase at the Tier 1 and when those market share losses might turn around?

Yeah, so Martin, I think when we take a look at the title business, we've looked back, as you know, and communicated that we made some decisions around our Tier 3, Tier 4 portfolio in order to open up the capacity to take on the Tier 1s and 2s. Our view is I think you should see that market share ramp start moving in the right direction in the second half of this year, aligned with market share growth with our current customers, as well as that channel expansion piece. And then later on top of that, new customers, as we mentioned, we brought in sort of during the quarter and just subsequent to the quarter, we brought in two more top 100 customers. So I think you'll start seeing that momentum continue into the second half, and you should see that market share start tracking in the positive trajectory.

That's great, Jake. Thanks. With some of the estimates out there for the refinance market, even with share gains, it might be tough to not lose more volume. What might that mean for EBITDA in titles?

So I think that question is around, I believe anyways, is around how do we manage our costs, our cost base, Martin, depending on the volumes in the market. And so I think there's two ways we look at that. The first one is we are very focused on execution and operating the business appropriately. And so With volumes, if there is significant movement in volumes, then we manage OpEx to that, but we have to balance that with the fact that we have aspirations out to 2025, which includes bringing on new customers, expanding our share with the customers we have. And that performance that we've got with our Tier 1 and Tier 2, that, of course, is paramount for us, that we continue to drive the types of results that we're seeing on their scorecards. So I think that's the balance that we have, Martin, as we look forward. We look forward to some of the short-term headwinds that we're experiencing, and I think we've demonstrated in the past that we are quite agile in managing our OpEx around that, but we also need to ensure that we We keep some OPEX capacity for our expected expansions in market and our market expansions as well as our new customers that we're expecting in the second half of the year.

Great. Thank you very much. If I can ask one more. In the MD&A, it references timing of orders as a reason for lower margins in title. is that i mean that sounds like uh share games are kind of kicking in um i believe you meant you said the same thing last year at this time and it translated into uh adding your first tier one um can you give us any more color on new customers

Yeah, I can, Martin. So when we talk about flow, the reason we address that is because that is very relevant for our net revenue margin in title. So flow for us simply means that from the start of a title order, it takes us somewhere around 45 days until we see the revenue, and there's some expenses that we need to take up front. So when you see very strong margins, as you saw this past quarter, it often means that we are delivering more in that quarter. Therefore, we're realizing more revenue than we are necessarily spending on orders. And again, a chunk of that has to do with the 10-year Treasury, the trajectory that we've seen on that moving up. and potential impacts, headwind impacts from volume as we look forward. So that's really the dynamic that plays there. It's not relative to just a particular launch of one or another, but really the dynamics between how the market is moving and, therefore, how we are closing and opening orders within that particular quarter.

Got it. Okay, thank you. That's all for me. Great, thanks.

there are no further questions coming in at this time please continue okay well thank you operator that i think then wraps things up for today appreciate all of you joining the call and and please take care thank you this concludes today's conference call thank you for participating you may now disconnect