Q2 2021 Real Matters Inc Earnings Call
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Good day, and thank you for standing by welcome to the real matters second quarter 2021 conference call.
At this time, all participants on a listen only mode.
After the speaker's presentation, there will be a question and assets.
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If you have a client it further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Ms. Lynn book on Vice President of Investor Relations. Thank you. Please go ahead.
Thank you operator, and good morning, everyone welcome to real matters Natural result conference call for the second quarter ended March 31, 'twenty 'twenty. One 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 results for the three and six months ended March 31.
2021 so really accompanying slide presentation as well as the financial statements and MD&A are posted in the investors section of our website at real matters Dot com.
During the call we may make certain forward looking statements, which reflect our 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.
Please see the slide entitled caution regarding forward looking information in the company's slide presentation for more detail.
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 32020, which is available on SEDAR and as 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 margin adjusted EBITDA and <unk>.
At EBITDA margin non-GAAP measures are described in our MD&A for the three and six months ended March 31, 2021, where you will also find reconciliation to the nearest ifr rest measures.
I'll now turn the call over to Bryan Bryan.
Thank you Lynn and 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 second quarter. 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.
We were very pleased with how the business performed in the second quarter, we delivered strong financial results and I'm also delighted to report that we went live with our first tier one lender in U S title marching the achievement of a significant milestone in the execution of our long term growth strategy, we've crossed the chasm into.
The largest market segment in title with the launch of this client and we are now live in title with one of the largest banks by asset size in the U S. I wanted to take this opportunity to thank the team for their hard work in getting us here.
As you know it's been a multiyear journey to get to this point the tier one lenders represent a focal point of our long term strategy given their size and strength.
Continuing to grow our title client base and market share within this segment will be key to achieving our fiscal 'twenty 'twenty five objectives.
Turning to slide three consolidated net revenue increased to 29, 8% year over year to $46 $7 million and adjusted EBITDA was up 32% to $19 million driven by very strong growth in our U S title segment.
In the second quarter, the 10 year Treasury yield rose roughly 80 basis points, while 30 year fixed mortgage rates climbed approximately 50 basis points as spreads tightened display.
Despite this moving interest rates, we continue to see a robust mortgage origination market in the second quarter and both of our business segments in the U S outperformed the market as a result of year over year market share gains and new client additions.
U S appraisal segment revenues increased 7% year over year to $76 $3 million driven by higher market volumes market share gains and new client additions, which together drove higher origination revenues.
The increase in origination revenues was offset in part by a 34, 3% decline in other revenues, which represent home equity and default transactions origination.
Origination only revenues were up 12% year over year compared with an estimated 10, 7% increase in the addressable market, which takes into account the impact of veteran affairs volumes as well as waivers.
In the quarter, we launched two new lenders in U S. Appraisal. We also continue to rank at the top of our lender scorecards, which drove market share gains in the main origination channel year over year.
Operational excellence continues to be our principal focus as we drive toward achieving our fiscal 2025 objectives of doubling our U S appraisal purchase and refinance market share at the midpoint of the range.
Our U S. Excuse me on our U S title segment second quarter revenues rose, 30% year over year.
Growth in our centralized title operations continued to outpace the market with revenues, increasing 78, 4% compared to an estimated 71% increase in refinance market volumes.
The significant increase in centralized title revenues was partially offset by a $5 $1 million decline in diversified title revenues and a $1 $7 million decline in other title revenues, which represent home equity and real estate owned to transactions.
As we've noted in previous quarters, we've been focusing our workforce and attention in our centralized title operations due to its significant growth and have reallocated a portion of our diversified employee base to service this growth.
As we outlined in our Investor day last fall, we intend to more than triple our U S title refinance market share.
6% to 8% by the end of fiscal 2025 from 2% today.
In line with our strategy in the second quarter, we went live with our first tier one lender in U S title and launched three other new lenders or.
Our sales pipeline continues to be strong and we remain confident in our ability to launch new clients in title.
And our Canadian segment second quarter revenues were up 65, 6% year over year and adjusted EBITDA increased to $1 3 million from point $8 million in the second quarter of fiscal 2020.
Hydro appraisal volumes from increasing market share with certain Canadian clients, a stronger mortgage origination market in Canada and foreign exchange were partially offset by modestly lower revenues from insurance inspection services due to COVID-19.
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.
Consolidated revenues were up 17, 5% in the second quarter of fiscal 2021 compared to the same quarter last year due to significant revenue growth in our U S titled segment.
And continued growth in Canadian and U S appraisal segment revenues.
And our U S appraisal segment, we serve as higher origination volumes from higher market volumes market share gains and new client additions.
Firstly revenues related to home equity and debt.
Default volumes declined year over year.
Transaction costs in our U S appraisal segment increased 10, 7% year over year compared to the seven percentage increase in revenues to the same period.
As a result.
But he was down four 4% to $16 6 million.
And net revenue margins declined 260 basis points to 21, 8% from the 24, 4% we posted in the same period last year.
Due in part to the mix of mortgage origination volume serviced and appraiser Onboarding to service higher volumes, which was partially offset by servicing fewer low margin home equity volumes.
Operating expenses in our U S. Appraisal segment increased five 3% seven 4 million up from $7 million in the second quarter of fiscal 2020.
Due to higher payroll and related costs from higher origination volume serviced.
As a result, adjusted EBITDA declined to $9 2 million from the $10 4 million in the second quarter of fiscal 2020.
Adjusted EBITDA margins in our U S appraisal segment decreased to 55, 5% in the second quarter of fiscal 2021 from the 59, 5% we posted in the same quarter last year.
Turning to our U S titled segment second quarter revenues were up 30% year over year as the 78, 4% increase in centralized title revenues was partially offset by a 71, 7% and 56, 8% decline in diversified and other revenues respectively.
As we mentioned on prior calls.
<unk> in diversified titled revenues, It's part of our planned reallocation of resources to support the growth of our centralized title operations.
Transaction costs decreased 13, 3%.
Net revenue margin expanded to 76% up from the 50, 590% we posted in the second quarter fiscal 2020.
The expansion in net revenue margins was due to the flow of volumes in the second quarter, which saw us close more transactions.
The new orders we received.
As Brian mentioned earlier, we launched our first tier one lender and U S title during the second quarter.
Given that the client launched late in March This launch had no impact on our second quarter revenues and very little impact on transaction costs from the quarter.
Operating expenses in our U S title segment increased $5 1 million to $15 3 million from the second quarter of fiscal 2021.
The year over year increase in operating expenses is due to the capacity you've seen us building for several quarters now to service higher volumes and to support a tier one client launch.
Operating expenses in the second quarter are consistent with the expense and investment we reported in our first quarter. This year.
We are confident in our current level of investment.
Support our existing customer base.
Adjusted EBITDA increased $13 million in the second quarter of fiscal 2021 up from the $7 1 million, we posted on the same quarter last year and adjusted EBITDA margins increased 480 basis points to 46, 1% as a result of higher net revenues and net revenue margin.
Partially offset by our ongoing investments to build capacity for growth in our U S title business.
We remain confident in our ability to achieve adjusted EBITDA margins of 50% to 55% by the end of fiscal 2025.
In Canada revenues increased 65, 6% on a year over year basis to $12 four.
4 million, while net revenue margins contracted by 360 basis points due to a reduction in insurance inspection services as a result of COVID-19, and the mix of mortgage origination volume serviced.
Canadian segment operating expenses were 0.5 million in the second quarter down 7% from the second quarter of fiscal 2020.
Adjusted EBIT margin increased to 76% from 58, 3% in the same quarter last year as we leveraged our appraisal operations.
Higher overall volume environment and incurred modestly lower travel and entertainment expense due to COVID-19.
In total second quarter consolidated net revenue increased 29, 8% to $46 7 million up from the $35 9 million reported in the second quarter on fiscal 2020.
And consolidated net revenue margin increased to 36, 2% from the second quarter of fiscal 2021 up from 32, 8% in the second quarter of fiscal 2020 due in large part to the contributions made by our U S Hydro business.
As a result of our solid operating performance consolidated adjusted EBITDA was $19 million from the second quarter of fiscal 2021 up from the $14 6 million from the same quarter last year.
And consolidated adjusted EBIT margin increased modestly to 47% in the second quarter of fiscal 2021 versus the 46% we posted in the second quarter of fiscal 2020.
Due to higher revenues and net revenue margins on our U S titled segment, which was partially offset by capacity investments we made in both our U S title.
And U S appraisal segments to serve as higher volumes and to support the launch of our first tier one client entitle.
These investments were partially offset by lower travel and entertainment expense as a result of COVID-19.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $149 2 million, which was on par with our cash balance at September 32020.
Cash from operations of $18 3 million was partially offset by share purchases under N CIB totaling $8 million in the quarter.
In the first two quarters of fiscal 2021, we've spent nearly $27 million on share purchases under our N CIB, which is higher than the 17 and $22 million, we expense in fiscal 2020 and fiscal 2019, respectively.
In the quarter, we purchased approximately.
594000 shares at a cost of $8 million.
Post quarter end, we purchased roughly 250000 additional shares under our NCI.
With that I will turn it back to back over to Bryan Bryan.
Thanks Bill.
So in summary, we posted excellent financial results from the second quarter, and we achieved a major strategic milestones for the company with the launch of our first tier one lender in title.
With U S mortgage rates hovering around 3%. We continue to believe that these conditions are supportive to mortgage market dynamics.
That said, we continue to take a long term view on the business.
Since the company's founding in 2004, we've seen our way through multiple peaks and troughs in the mortgage market.
Our commitment to driving operational excellence and driving market share has been the underpinning of our success and we continue to manage our business through that lens, because we believe that the true value of our business will be realized by building a business that can weather the peaks and valleys and thrive over the long term.
Market share remains the most important metric and growth driver of our business is how do we measure success internally, it's how our clients reward us for a job well done and ultimately what will drive our financial performance outside of how the U S market mortgage market performs.
<unk> our plan is to double our U S appraisal market share and triple our U S title market share by the end of fiscal 2025, and we remain confident in our ability to achieve those objectives.
With that operator, we'd like to open it up for questions now.
Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone.
Or withdraw your question press the pound key.
Standby, while we compile the Q&A roster.
Yeah.
And your first question is from the line of Dinos Metropolis from BMO capital markets.
Hi, good morning.
So we've obviously seen the deceleration on refi activity.
Applications per day day.
In recent weeks.
So maybe if you can stay on in terms of.
How that's impacting the business and then in terms of how your customers.
Sorry, responding I guess, what I find confusing as debt, even with rates, where they are you're still seems to be a very large population of a potentially viable mortgages.
I guess, what's your take on why we've seen a slowdown and how Michael interest be able to mitigate that.
Thanks Dana.
It's a it's still an incredibly strong market I mean.
Recent Goldman's report suggests that 50% over half of <unk> of mortgages in the U S. Right now are in the money for refinance.
So we think there's still a tremendous amount of opportunity out there.
In the refinance space as well as you know we've got the purchase spring market starting to take hold and from analysts reports that we've seen it looks like that's going to be a very positive impact on Q3 and Q4.
So I think I think there's lots there we also think that debt.
There is an opportunity that's coming in the spring summer, where we think the some of the key lenders will start pushing the marketing and reaching out to more customers. So we think theres still a very robust pipeline of opportunity in the space with rates sitting as they are right now.
<unk> hovering around 3%.
Okay.
Appreciate that you can't disclose the tier one is but is there anything you can say maybe in terms of what their overall market share it looks like just to kind of frame that.
Well I think what we said was that this was a bank that has sort of.
One of the largest banks by asset size in the U S. So that I think hopefully lets you know that it's one of the very top banks in the mortgage space.
In terms of the pace of the ramp I mean, I realized it's kind of early days.
But I mean, how might this look relative to your experience with some of your appraisal ramps I mean, we've obviously seen debt over a couple of years, you've been able to get to north of 20% from 30% I think even with some of your tier ones what would be the dynamic here or is it really too early to say at this point.
Well, yes, it's been it's been a month.
Very enthusiastic month for us. So we are definitely seeing seeing the volume come on and working against the Kpis to make sure we're performing.
And longer term I think what we talk about Santos is in the first year, our goals to get to 5% to 10% market share. So that's our goal here and so we'll keep working on this tier one and of course continued conversations with the other tier ones. So that we can we can look to continue to keep that sales pipeline.
Moving through and we think with the launch of this first one we think that definitely provide some reinforcement.
Great and just last one from me any any change in terms of the dynamic relative to last quarter.
Yes.
No so the waivers pretty well tapped out where we suggested they were theres actually been a slight decline in the refi.
It was 47 years to 44%, but generally it's as we've we've predicted and as we were we'd planned for Dennis.
Great Alright, thanks, a lot Gwen.
I appreciate the questions.
Hey, Noah.
Operator, if you could please take our next question.
And the next question is from the line of Robert Young with Canaccord Genuity.
Hi, Good morning, maybe just continuing on the tier one title wind discussion.
Now that that's public.
How do you expect that that news will impact.
The pipeline of other business in amongst other tier ones tier twos.
Just the broader opportunity for you in the title business.
Thanks, Rob I appreciate the question Yeah, no. So I think this helps really reinforce the sales conversations that we're having so we'd let folks know last quarter that we are in sales conversations with the majority of the tier ones and so I think us now being able to announce that we have a tier one going on.
Debt only supports and reinforces those conversations and it also of course helps our conversations as we look further down to the sort of big tier twos.
So we think it's a real plus real positive Rob and it's definitely continuing to move those those conversations going that are in the sales pipeline.
Okay and then the title business has a has a lag a 45 day lag you said so the economics for this tier one won't show up until.
The current quarter I think you said it started a month ago. So was that a month before the quarter end or a month ago as of today's date.
So right at the end of Q1, so a little bit more than a month's free.
Now ago, So it's sort of right. The end of March so that will kick in and to your point, Rob That's where we will see with that 45 delay we'll start seeing revenue hit halfway through the quarter. This this quarter.
And the cap on capacity increase for that that would have fallen largely in Q2 or where should we expect that to ramp up.
So I think capacity and by that you mean opex for managing that well both opex, but also the I guess the net revenue margin you have to expand the.
I guess the network.
Yes, so continue to invest so I think we've done.
Very good job I think in getting our capacity up both capacity for us in capacity on the network over the past quarter as we continued to ramp out of Q1.
So we think we'll hold steady there Rob we think we've made the right investments to prepare ourselves to make sure. We're doing what we need to do around the tier ones as well as of course, the rest of the customer base. So so that we feel is in good shape and on the net revenue side that has more to do with mix as you know.
And what we call the timing piece, Rob on the flow so.
So we had an incredible as you know net revenue and EBITDA round title in Q2, and so that will be slightly different in Q3, but it will continue to be very strong in.
Above or within our targets our long term five year targets of $60 65 per cent around net revenue margin.
Okay, and then in the appraisal business Youre still taking share and.
On growing that business, despite the way marine and so.
As you look forward over the next year I think you said it it's playing out relatively as you'd expected.
Just as you look at the.
The risk that the gse's or taking on with this higher level of wavering or is there any insight you can give given your industry involvement around that the appetite for this wavering in the industry, maybe any any color around that would be helpful. And then I'll pass the line.
Okay, Yes. So I think you started with the market share piece. So aligned with you. There. We think the market share continues to grow and is very healthy so positive growth above the market. This past quarter and we continue to expect that going forward.
And around waivers.
Waivers I guess in the future. We continue to think that that will slowly tracked down over time. The change that's coming in now is the mix. So we're definitely going to see a higher proportion of purchase volume coming in some of the big tier ones have opened back up.
Into cash out refi, so that mix will definitely evolve this quarter and the next and so we just assume that that will slowly take that overall waiver rate down from.
Okay. Thanks.
And your next question is from the line of Daniel Chan with TD Securities.
Oh, yes, thanks for taking my question.
Sure Dan Good morning.
Did we lose share.
[laughter].
I'll, let you move on.
Mr. Chen Your line is open Sir.
Okay, maybe we may have lost time.
Moving on.
The next question play, Okay, you're going to move on Sir Okay.
And your next question is from the line of Martin Kona with ATB Securities capital market.
Good morning, guys. Thanks, very much for taking my call.
At the risk of being repetitive here wanted to ask about the tier one volumes.
Can you talk about the rate at which <unk>.
Volumes have been ramping up over the quarter.
I believe an appraisal things started.
The first tier one started with a trickle and built from there.
On the tier one in title started at a higher level and just just what can you tell us about.
The rate at which volumes are ramping.
Sure. So margin it has been I think we're on week five now so it's still it's still a little bit early to make a long term prediction.
The first five weeks, but our expectations.
<unk> continue to be as we laid out and as we've experienced on the appraisal side that the first year, we're still targeting 5% to 10% market share with with our tier one I think we're doing a great job. The team is doing a great job I think we're seeing already and as I say in the first five weeks.
On the the way in which we're processing the operational execution I think is very sound. So.
I think the way we're looking at it right now we will continue to perform and we assume that we will continue to grow that share in our first year.
Super.
Long does it take to demonstrate performance with any one lender.
Well I mean, there is of course nuance between the lenders, but it's in the first few months you're definitely.
Martin start seeing how are you.
You are performing.
Some of the lenders do scorecards monthly, sometimes they do them quarterly, but we of course are keeping a very close eye on performance day in day out with with new New partners that we bring on especially a tier one.
So we're monitoring it of course day by day, they are monitoring probably more on a monthly basis. So it takes a few months to get.
Just sort of get on on the same page to make sure we're delivering against the expectations.
Great and.
When COVID-19 started and rates plummeted, we saw lenders trying to slow down the rate at which people refinanced.
A large spread between the 30 year bond rates.
You see that reversing as rates have sort of popped up here.
Well, we're definitely seeing the spread come down Martin for sure from from where it was before and the banks have of course been building up capacity. So there's still room for we think anyways, there's still fairly fairly decent room within the spread but definitely the spread has moved itself down.
And.
As I stated a little earlier, we think the competition will start ramping up.
Now that net.
Net with a little bit of rate impact, we think thats when the lenders start start ramping up their competitiveness. So.
Assume there'll be some more marketing activity that we see coming out over this quarter on next.
Is there any price pressure anywhere in your business.
No I mean, there is no material price pressure there.
Pretty complex state by state and so the the big lenders, especially they want to keep things very consistent Martin across the different vendors that they provide their services. So no there's very little fee discussions or fee material feature fee changes.
Awesome.
Last question.
This home equity ever come back.
On.
Price appreciation residential real estate in the U S has been quite high and people are bombarded with advertisements on.
Regarding what they can where they can invest their money.
Yeah, So listen I mean, it's there are natural cycles to these sorts of things so.
Yes of course home equity at some point.
People will look at potentially taking it more equity we know that.
Folks have been fairly fortunate from our government support standpoint so.
Therefore, we've seen home equity go down quite a bit, but we're even seeing right now Martin some of the big players, who actually put cash out on hold has have opened cash out refinance back up so theyre now seeing that there is that opportunity to provide more.
Equity to folks that want to take some money out of their home.
Great. Thanks for that on the.
I have no other questions.
Okay. Thanks, Martin I appreciate it.
Again, ladies and gentlemen, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is still want to ask a question.
And your next question is from the line of Richard <unk> with National Bank financial.
Yes. Thank you.
I guess last time, we chatted I guess, we talked about the biggest concern around scaling on the title side was this notion of load balancing.
And you've obviously made some investments in sort of fortify any risk from that standpoint. So.
In the very early days.
If you're on pretty well positioned given what you've seen so far.
Yes, Thanks, Thats a really good question Richard So we have I think we've made the investments. So you can see that we've made fairly significant investments in the title business in order and in preparation for exactly where we are now.
We think we've made the right investments and as we talk about looking forward. We think we've got what we need right now to get the tier one up in the position we need I think from a performance standpoint, as well as move along we announced last quarter a fairly significant tier two that we launched so and then the <unk>.
Of the.
The customers that we have keep building market share. So we're feeling really good we think we've we've built up and put that capacity in place that we need for at least the next few quarters.
Okay. That's helpful and I guess on the same question given that your investment in the infrastructure is in place now and then.
Probably set up to support more tier ones.
Should we kind of see a progression in terms of the operating margin and EBITDA margin expansion as we kind of look ahead over the next 12 to 24 months.
Well on title listen we continue to stay focused on our five year targets. So Richard as you probably know that means 60% to 65% on net revenue and 50% 55% on on EBITDA.
Now we are doing it there's still a lot of work on the tier ones. So we will stay focused on the long term goal. We may fall slightly short of that especially around EBITDA in the short term simply because of the extra work that the team needs to put in as we sort of buildup that volume with some of these.
Tier one and tier two big tier one and tier two players but longer term. The plan is to continue to stay focused on that $50 to 55% on EBITDA.
Okay, and just a last one from me and I apologize on your tongue.
Just on that joined the call little bit late on the data initiatives here.
On the fact that you are very active obviously on the tier ones and the title side.
Is it sort of on conflict.
Kind of pursuing these data initiatives are you kind of come from across the right opportunity that you've got the capacity to do both.
Yes.
We do Richard we have the capacity, but to your point right. Now we are incredibly focused on this tier one win and continuing to make sure. We're moving net sales pipeline forward in.
The title space appraisal of course, we will continue to keep focused on but as you can see it's really pounding away the machines very well oiled on appraisal so.
The desk net short term focus is title, making sure. We continue down this tier one journey that we've we've laid out for folks we continue to take a look at the data opportunity, but to your point title is definitely taking up the lion's share of managements time right now.
Okay, great congrats on that tier one win.
Hey, Richard Thank you really appreciate it.
Operator can we please have the next question. Your next question is from the line of Steven Leigh with Raymond James.
Thank you.
Ryan.
On the so I'm going to keep you on tighter than tier one.
So the bad debt.
Your market share how many tier ones do you need.
So I'm actually I turn that that question Steven over to Bill because he'll tell us exactly what was modeled when we went through our our five year.
Outlook at Investor Day.
Thanks, Brian Great question, Stephen I think when we when we were thinking long term.
I'm sure that we've certainly got sort of four or five of the big tier ones in our plan through the 2025 OLED varying levels of market share as you would expect us as we've seen in our appraisal business when they launch you've got that sort of natural progression of market share growing over periods of time, so not unlike on.
Our appraisal business.
And model the title business Similarly in that debt.
We at different stages of ramp with lots of assets.
Trusted partner entitled So hopefully that answers your question.
Okay.
That's helpful and Brian Youre welcome on this big Tier Twos do you call them big tier twos because.
Can have volume comparable to tier ones.
The lower end of tier ones, Stephen So some of the big players out there in the tier two space.
Some of them being non lenders those folks do have significant volumes okay.
Okay, and how many of those are like the big tier twos.
When we talk about tier twos, we're sort of talking about the top 25 bank.
Bank. So if you take the big fix out then I guess, you're sort of talking about 19 1920 other tier two banks.
Right and so how many on road would you consider big tier twos.
The top half top assets up have pretty big.
Okay alright, thank you.
From.
There are no further questions at this time that concludes today's call. Thank you for joining you may now disconnect.
Thank you.
Thank you.
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All right.
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