Real Matters Inc.

Good morning, ladies and gentlemen, and welcome to the Real Matters third quarter 2023 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, July 28, 2023. I would now like to turn the conference over to Lynn Beauregard. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results Conference call for the third quarter ended June 30th, 2023. With me today are Real Matters Chief Executive Officer Brian Lang and Chief Financial Officer Rodrigo Pinto. This morning, before market opened, we issued a news release announcing our results for the three and nine months ended June 30th, 2023. The release, accompanying presentation, as well as financial statements and MD&A are posted to 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 our results to differ materially from our expectations. Please see the slide entitled Cautionary 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 30, 2022, 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 revenues, net revenue margins, adjusted EBITDA, and adjusted EBITDA margins. Non-GAAP measures are described in your MD&A History and 9 months into June 30, 2023, where you will also find reconciliations to the nearest IFRS measures. With that, I'll turn the call over to Brian. Brian?

Thank you, Lynn. Good morning, everyone, and thank you for joining us on the call today. I'll kick things off by providing an overview of our third quarter performance and some of the key drivers behind our numbers. Rodrigo 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. We delivered positive results in the third quarter as we saw solid improvements in our financial performance across all three of our reporting segments, which brought the business back to positive adjusted EBITDA. Consolidated revenues and net revenue were up 22% sequentially. In fact, notwithstanding the impact of interest rates and market volumes going forward, this was the first time we posted sequential revenue growth in seven quarters. Consolidated adjusted EBITDA increased both sequentially and year-over-year to $1.7 million in the third quarter. Our results were driven by sequential net market share gains across all three segments in the third quarter, as well as an uptick in market volumes, part of which was attributable to spring market seasonality. As we noted during our last quarterly earnings call, the U.S. mortgage market seems to be bottom-bouncing below 30-year lows. Ten-year Treasury yields inched higher during the third quarter and spreads remained wide relative to historical averages, which pushed 30-year mortgage rates closer to 7% for a good portion of the quarter. Even with the backdrop of a challenging rate environment and continued housing supply constraints, most U.S. metros saw home price growth stabilize, which helped drive seasonal demand for housing and a corresponding increase in purchase origination volumes. According to the National Association of Realtors, Existing home sales increased 7% year-to-date through May. Market refinance transactions were nominal in the third quarter, bottom bouncing off all-time lows. Cash-out refinance transactions remain the principal driver behind the baseline levels of refinance origination we are seeing today, making up more than 80% of volumes. We continue to believe that the refinance market will return to more normalized levels in the future and we have capacity in place and the ability to scale the business to meet the demand of higher market or organically driven volume growth. Our position on lender scorecards helped us deliver sequential market share wins across the board in third quarter. In U.S. appraisal, we recorded net market share gains year over year and we launched one new channel with an existing client. In U.S. Title, we onboarded the additional market share we won with our Tier 1 lender, and we launched one new channel with an existing client. In Canada, we launched five new clients and increased market share in the third quarter. In U.S. Appraisal, purchase origination revenues were up 25% sequentially, and refinance origination revenues were down 2% quarter over quarter. Other revenues were up 37% quarter over quarter due to higher home equity volumes from market share gains. I think it's safe to say that the mix of volume we're seeing between purchase and refinance is unlike any market we've seen over the last 30 years. Purchase transactions today make up close to 80% of the volume on a market size that is extremely low by historical standards. The silver lining for our U.S. appraisal business is that the breadth of our client base allows us to capture the economics regardless of market mix. We posted strong net revenue margins of 27.5 in U.S. appraisal in the third quarter as a result of our operating model. Our team was actively engaged with existing and potential clients during the third quarter Leveraging our number one ranking on scorecards and our position as industry leaders to garner additional market share and to open the door to new opportunities to grow the business. We continued to advance the sales pipeline in the third quarter. U.S. title segment revenues were up 17% quarter over quarter and up 41% for centralized title. We were very pleased with our performance in title in the third quarter as we held the number one spot on our Tier 1 lender scorecard and onboarded volume from the market share increase we received at the end of the second quarter. U.S. title net revenue margins in the quarter were up 840 basis points sequentially, principally as a result of a higher proportion of centralized title volumes. We narrowed our adjusted EBITDA loss in US title to 1.6 million in the third quarter from the $2.3 million loss we posted in Q2, 2023. We have worked diligently to reduce our cost base in title over the last 12 months, which included the deployment of technology that has made us more efficient while permanently transforming the cost to run the business at scale. This positions us well for a variety of scenarios including a lower volume environment in the short term, as well as higher expected volumes over the medium and long term. Canadian segment revenue was up 34% sequentially, and adjusted EBITDA increased to $1.3 million in the third quarter on higher volumes from market share gains. With that, I'll hand it over to Rodrigo. Rodrigo?

Thank you, Brian, and good morning, everyone. Turning to our third quarter financial performance, I'll start with our U.S. appraisal segment, where we recorded revenues of $33.5 million, down 42% from the same period last year, mainly due to lower addressable mortgage origination volumes, partially offset by net market share gains with existing clients and new clients' additions. Other revenues from home equity and default were up 4% year over year. U.S. appraisal net revenue was $9.2 million for the third quarter, down 29% year-over-year. We continued to see strong net revenue margins in the third quarter with an increase of 490 basis points compared to the third quarter of 2022. Our ability to leverage our platform resulted in a significant year-over-year margin increase. U.S. appraisal operating expenses declined 36% year-over-year to $4.4 million in the third quarter. U.S. appraisal adjusted EBITDA was $4.8 million for the quarter, a decrease of 21% from the third quarter of fiscal 22. Adjusted EBITDA margins increased to 52% from 47% we posted in the third quarter last year as a result of an improved net revenue margin profile and the reduction of operating expenses. Turning to our U.S. title segment, revenues declined 53% year-over-year to $2.6 million due to lower refinance origination volumes. Revenues related to centralized title services declined 63% year-over-year. Other title revenues of $0.8 million representing revenue from home equity services were down $0.3 million compared to the third quarter of fiscal 22. U.S. title net revenue was $1.2 million, down $2.1 million from the third quarter last year, and net revenue margins contracted to 45.2% from 59.2%, mostly due to a change in product mix. We reduced our U.S. title operating expenses by $4 million year over year to $2.8 million due to lower refinance market volumes. We recorded an adjusted EBITDA loss of $1.6 million for the U.S. title segment compared with a loss of $3.4 million in the third quarter of fiscal 22, an improvement of 54% mainly due to year-over-year reduction in operating expenses that I just mentioned. In Canada, we posted revenues of $9.9 million for the quarter, a decrease of 37% on a year-over-year basis. Net revenue margins expanded by 550 basis points year-over-year as we continue to leverage our appraiser network in a lower market environment. Our Canadian segment operating expenses declined 20% year-over-year to half a million dollars. This reduction of expenses combined with increasing net revenue margins helped increase Canadian adjusted EBITDA margins to 73.7% from 69.6% in the third quarter of 2022. In total, Q3 consolidated net revenue declined 33% to $12.1 million compared to the $18.1 million we reported in the third quarter of fiscal 2022, largely due to lower market volumes across all three segments. Consolidated net revenue margins increased to 26.4% from the 23% we posted in the third quarter of fiscal 22, reflecting the higher net revenue margins in U.S. appraisal and Canada. Consolidated operating expenses, excluding stock-based compensation, were down 42% year-over-year to $10.5 million in the third quarter. As Brian mentioned earlier, we posted positive consolidated adjusted EBITDA of $1.7 million this quarter, up from $66,000 in the third quarter of fiscal 2022. Finally, I'll briefly turn to our balance sheet, which remains quite strong with no debt and increasing our cash position to $42.5 million at June 30, 2023, reflecting the positive cash generated from our operating activities during the quarter. With that, I'll turn it back over to Brian. Brian?

Thank you, Rodrigo. In summary, we were very pleased with our performance in the third quarter. We were leaders on lender scorecards, we made good progress on market share across the board, and we saw our margin profile improve. Our results also reflected moderately better market conditions from a combination of seasonality and bottom-bouncing refinance volumes. We posted positive consolidated adjusted EBITDA of $1.7 million in the third quarter, demonstrating growth on both a sequential and year-over-year basis. We believe we are very well positioned from an operations perspective to take on additional volumes when the market recovers. As a result of the work we've done over the last 12 months to scale down expenses, our operations today are more efficient and we have permanently transformed the cost to run the business at scale. Because of the cyclical nature of the mortgage market, we've always looked at this business with a long-term lens and that hasn't changed. While we are cautiously optimistic that the market will bottom bounce in the near term, we believe we are on the right trajectory and so our focus is on long-term growth. Growth through market share gains with our top tier blue chip client base and growth through new client additions. We believe in the long-term earnings potential of our business and we remain focused on our fiscal 2025 objectives. With that, operator, we'd like to open it up for questions now.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Daniel Chan with TD Cowan. Please go ahead.

Hi, good morning, guys. Just wondering if there's any progress on the second tile and closing channel with your Tier 1, and how quickly are you expecting that to ramp?

Good morning, Dan. Thanks for the question. Yeah, so good news on title from the last quarter was that we were able to onboard the doubling of market share that we talked about at the end of Q2. So the team, I think, did a fantastic job. And with that, we also performed at the top of the scorecard for the quarter. So I'm feeling good about where we're at with tier ones currently on the title platform. We talked a little bit last quarter about RFPs starting to find their way into conversations, and we continue to see that. So we've got a couple of lenders that are definitely starting to move down that RFP process, Dan. So it's hard to time it since they manage the timelines around it, but I would say that we're making progressive forward actions with the Tier 1s that we have the RFP conversations going on with right now.

That's good to hear, and thanks for that, Brian. If you do win these RFPs over the next couple quarters, what's the timing we should expect for you to get that revenue generation, to get to revenue generation on these?

Yeah, so it's, Dan, it's quite similar when we talked about how we onboarded our appraisal customers. So when we look at that, onboarding and the ramp on those businesses. We looked at trying to get to 5% to 10% market share year one and then grow from there 15% to 20% and up into the 30% in year three. So we'd expect something quite similar to that. As you know, they test and learn a little bit in the first sort of six to nine months, and then we start seeing a little more volume. I think in the near term, Dan, the opportunity for us, we've talked about the second channel opening up with our current tier one. So the team's quite focused on getting that second channel open by either the end of this fiscal or the first quarter of the next.

Okay, thanks. And it's been a while since you've launched your first tier one and it sounds like you're performing well saying that you're at the top of the scorecard there. Surely you've had a lot of key learnings and feedback from that tier one Any chance we could see a faster ramp up just given that you're pretty much got a mature product heading into these other two RFPs?

Well, Dan, I'd say the biggest driver of that will be volume. So we'll have to see where the volume's at as they're bringing on us as a new vendor. And I think if we're continuing in a bottom-bouncing environment, it might be a little tougher to ramp with a lot more speed. If there is some more volume coming in, then you're right. We could see a quicker ramp than maybe what we've expected in the past. And as you've mentioned, I mean, we have had that Tier 1 on the platform for a couple of years, and it's sort of right in line with that getting to 20% that we expect in the second year. We're pretty well on course for that. with this year one.

Okay, thanks. I'll pass it along.

Thanks, Dan. Your next question comes from Richard C. with National Bank Financial. Please go ahead.

Hi. Thanks for taking my question. It's James again for Richard. I was just wondering with CoreLogic leaving the market, do you see any more competitors exiting at some point and how might that impact your market share moving forward? Thanks.

Thanks, James. You mentioned one of our competitors exiting, and so that is definitely part of the increase in share that we saw on the appraisal side of the docket this past quarter. We actually had really solid growth with one of the Tier 1s that used to be a customer of our competitor. Very solid progress with that tier one, pushing them up sort of near the front of our market share expectations of getting to 50%. So really good quarter there. As far as other competitors, I mean, we'll have to see, James, how things shake out over the next couple of quarters. There are only a few, a handful of big national players, as you know, that we compete with. So there's been a little bit of movement, but frankly, I wouldn't say there's been a significant amount of movement there. In the title side of the ledger, we compete with the big title insurance companies, so we don't see a lot of movement necessarily there, and a couple of other title companies that we compete with. There's definitely, further down the mix, there are lots of vendors that are probably struggling in this environment, and we've seen some of those. But I think at the top of the house, I'm not sure there's going to be a significant move in the competitive field, but of course, we'll have to see.

Great. Thanks. I'll pass the line.

All right. Thanks, James.

Your next question comes from Thanos Moshopoulos with BMO Capital Market. Please go ahead.

Hi. Good morning. Can you remind us how we should think about net revenue margins? as volumes recover. So let's say in a scenario where we have a strong recovery, you know, volume starts trending up, you know, 30, 40, 50 percent. Do we start to see the volumes, maybe the net revenue margin pull back a little bit in the near term as you build scale capacity, or would the dynamic be there?

Yeah, good question, Thanos. As you know, our focus has been on our 25 targets on both the net revenue and adjusted EBITDA margin line. And so right now you're seeing in the appraisal business that we are hitting those targets between 26 and 28% at the 27 and a half. And so I think, Thanos, you should expect us to stay within that range. So even as volume comes on, I think we've now put the business in such a place from an operating cost standpoint that we should be in good shape. I've mentioned before that we've got capacity at the current volume. So on the appraisal side, we still got 30% capacity. Where you'll see more torque, of course, is on the adjusted EBITDA line because of that capacity that we've got. So we'll continue to make our way towards that 65% to 70%. And this past quarter, you saw some improvement there, Thanos, as you mentioned. And on the title side, we will definitely see that continue to tick up once we get more volume. that the refinance space, you know, is very low right now. So we'll definitely see some uptick, as you saw again in this quarter, on our net revenue line. So with volume, as you've mentioned, I mean, if the volume is where it is now, then we'll probably see something similar for the next couple of quarters. But if we were to get a big bump, you would definitely see that line go up towards our 60% to 65% target that we laid out. And on the adjusted even side, that's where there's a bit of a drag right now, simply because We need to have the operating cost structure that we've got now. We've brought that down to sort of a minimum operating model. And so the new volume that comes on, we've got lots of capacity on the title side, three to four times the volume we could be doing right now. But that's what we need to have for being a national provider. So I think there will be a lot of torque right now in the business, Thanos, if we were to see that. And I mentioned a little in my presentation opening that the fact that we've reduced the operating costs, some of them permanently, which is really digitizing some of the workflow, that would only incrementally add to the torque that we'd see in the margins.

Great. And can you update us in terms of what you're seeing in the industry as far as, I guess, appraiser capacity? What I mean by that is, Obviously, you have your network that's going to allow you to scale very well as volumes rebound. Do we have a situation, though, where some appraisers are exiting the profession? And so maybe you'll do fine as long as they're proper. Maybe there'll be some industry constraints. Maybe that helps you incrementally gain share. What's the dynamic you're seeing in that regard?

Sure. I mean, so I think it's pretty status quo on the network side of things, Thanos. I think where we've been focused is, and where the industry is frankly focused, is bringing more appraisers in. So we're very involved in some what I think are quite unique trainee programs with the Appraisal Institute, with Chase. So we're working in partnership to bring more in with a real focus on diversity. So I think there's a real focus of the industry to start bringing in more talent. And right now, as you can imagine, with the volumes where they are, there is a lot of network capacity to manage. So I think we're in really good shape.

Great. I'll pass the line. Thanks.

Thanks, Dennis.

Your next question comes from Gavin Fairweather with Cormac. Please go ahead.

Oh, hey, good morning. Thanks for taking my questions. Maybe just to start out, you referenced the business efficiency gains a few times. Can you maybe just give us some examples of some of the areas where you've found some efficiency in the business and I don't know if you'd want to put a number on kind of the productivity gains that you've uncovered throughout the cycle.

Yeah, so, Gav, the focus has definitely been around taking a look at the processes that we currently manage, the workflow on both sides of the business. I think we've really dug in the last 12 months on the title side of the business with the volume where it's at. So where we're seeing real improvements, as you know, there's a couple of different big components to the workflow. One is around the title search area. So I think we've really found some ways to digitize some of the work that folks were doing in the past. I think we can do a lot more of that now in an automated fashion. As well as at the end of the process, there's a lot of balancing that goes on. with documents at the end. And so, again, I think the team's done a really great job of finding ways to automate some of the processes around there. So that's when I talk about, you know, reducing some of the operating costs permanently. That's really what we're looking at. The other piece to that, Gavin, is with the move to the cloud, which we've talked about, there's real advantages that are built into that. And so, frankly... Pivoting from title to appraisal, we're spending a good chunk of time on appraisal right now, looking at how we automate some of the quality areas, some of the appraiser management areas. So I think in this type of environment is exactly what the team should be focused on, and we're already seeing some good results from that.

Awesome. And then maybe just a couple from an industry perspective. Just on the abnormally wide spreads, I guess when you speak to your lenders, is there some catalyst or a set of macro conditions that they point to that should lead to some spread compression? Are you hearing anything on that front?

Well, I think the broad answer to that, Gavin, is just that there's still some uncertainty in the industry. I mean, I think that's really what's driving it. So I think we'll see after this quarter. As you know, last quarter, one of the concerns was just around the The tier two, tier three banks, what was that going to look like? How was their capital management looking? So we'll have to see how that plays out with results coming out this quarter. And the Fed's been moving around their sort of position on pausing on rates and moving rates back up again. So when you have that, Gavin, when you have some of that uncertainty as to what the next little while looks like, we still have inflationary conversation, we have recession, all that sort of stuff, unfortunately. ads for the uncertainty. And so that's why I think, as you say, I mean, we've had historically high spreads for a while. So when we look into 2024, we think there's some opportunity there. I'd be very surprised if over time, with the market hopefully settling, that they wouldn't start bringing those spreads to a much more reasonable, normalized long-term average, which I think is 170. So that tells you how off we are at 300.

That's great. That's it for me. Thank you. Thanks again.

Your next question comes from Martin Toner with ATB Capital. Please go ahead.

Thanks so much. Do you have visibility on the spread between what people are refinancing at versus what they had before they refinanced? And the reason I ask is there is this perception that people only refinance if they are a certain amount in the money. And so just wondering, do you have visibility on that? Maybe you could talk to that last point regardless.

Yeah, so I mean, I'd start sort of at the top of the house, Martin. So when we take a look at refinance, as you know, the majority of refinance right now is 80%. is 80% cash out, right? So that is individuals that are making, I assume, life decisions of one form or another. They're getting prepared for weddings. They're sending kids to college, those sorts of things. So to your question, I'm not sure whether in the money is necessarily driving the desire for them to cash out. It's a life event, right? They need cash out of their home. And so again, that's 80% of the volume that's going through there. And then on the rate side, I think it just sort of depends, right? So as we mentioned, there is still a significant opportunity that's now growing. We've mentioned in the past that as people are getting mortgages now at 6%, 7%, there's a pool that's growing, which we look at as very, very opportunistic, right? High-rate mortgages. And so right now, we actually got some more data this morning that which is pointing to the fact that about 15% of mortgages are now 5% plus. So for us, again, as we look forward, that pool is expanding. The rates right now look like they're 6.75 to over 7, so that pool is only going to continue to expand. And so all we need is the rates to start moving more towards that 5%, which will open up a significant amount of opportunities.

That's great, Collar. Thanks very much, and that's all for me. Thanks, Martin. Much appreciated.

Your next question comes from Robert Young with Canaccord Genuity. Please go ahead.

Where would you put that cash if that turns into a trend? I know you haven't been active on buyback or anything like that, so how do you think about that cash if it's stabilized and growing?

Thanks. Thanks, Rob. And I appreciate the optimism. So as you said, good news, the cash is growing again. And so in the short term right now, as you know, it's all about making sure we've got a healthy balance sheet. We're talking to more tier ones about getting into the title business. So I think at least in the near term, Rob, the focus will definitely be on continuing to hold on to the cash that we have. Looking longer term, we'll have to see how it grows, and then we'll talk, of course, around the strategic opportunities that might present themselves. But right now, definitely the focus is on investing in the core business, which we continue to do. I just mentioned talking about continuing to drive down the cost base through automation using technology. So that's, I think, where we will continue to focus our efforts and continue to maintain a really healthy Okay.

And then on that effort to work down the cost base, I think you already touched on this a bit, so I apologize if it's covering past ground, but is that net revenue margin benefit or is it OpEx benefit or is it both? And then hard to maybe quantify, but how much more do you think you can do there?

Yeah, so a lot of that's around adjusted EBITDA. Rob, that's real effective because, as I say, I mean, for us, the real focus in the business right now, we have initiatives going on around how do we scale as efficiently as possible. So that's really, I think, where the focus of the capabilities will hit the balance sheet. I think we'll get a little bit, or sort of the P&L, and I think we'll get a little bit out of... maintaining that net revenue margin by doing some of the things that we're looking at doing on the appraisal sort of management side of things.

Maybe I'll ask it in a slightly different way. If you look at your 2025 targets, do you think these cost benefits and the ability to scale maybe at a slightly lower cost, could it drive to maybe potentially setting the higher EBITDA expectation in 2025 or... is everything still relatively similar to the way you would have looked at it a couple years ago?

Yeah, I think it's pretty close, Rob, because there's lots of other things going on in the business around mix and such. So I think the focus absolutely is on the targets that we've got today. I think this stuff will help enable us to get there. And the plan will be to get there hopefully with a little more volume. That's really, as you know, that's really what we need is just some more volume in the system to see the scale dynamics really play their way through.

Okay, maybe last question. I think I would benefit from this, hopefully others would as well, but just the home equity volumes. Can you just sort of remind us how that differs from the core? And, you know, if you look out to a better market, is that something that you will, you know, keep a footprint in, or is that something that you would wind down over time? Maybe just give us a sense of how that changes the business, and then I'll pass the line.

Sure. Thanks, Rob. So on the home equity front, as the business evolves, plays out, we definitely need to make sure that we service our Tier 1 customers with the products that they demand. And so although the core origination business is, of course, is by far the large proportion of our business and the profitable part of our business and the one that we can really drive margins through, we do continue to offer home equity and other like-type products So I guess answer number one, Rob, will be yes, we will continue to provide home equity. This particular quarter, past quarter, is actually quite a representation of a tier one lender that continues to provide us with great market share from an origination standpoint, but also continues to require that we continue to supply good home equity services to them. And so we've actually grown our home equity market share with them commensurate with the origination increase in market share. So really sort of strong growth around that. To your point, the margin profile is a little bit more challenging for us compared to the core origination. But as you've seen this past quarter, we have brought on some good home equity volume, but you're still seeing that 27.5% net revenue margin on the appraisal business. So I think the team's doing an excellent job as we bring on home equity volume and of making sure that we're continuing to keep our eyes on the unit economics and the net revenue type margins.

All right. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect.