Q2 2023 The Real Brokerage Inc Earnings Call
Good day, everyone and welcome to the real brokerage second quarter 2023 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Jason Lee Sir the floor is yours.
Good morning, everyone and thank you for joining us today for real second quarter 2023 earnings call.
With me on the call today are our chairman and Chief Executive Officer, Michel Rustler, Our Chief Financial Officer.
Good morning, real filed its financial statements and management's discussion and analysis for the second quarter ended June 30th 2023 on SEDAR and Edgar.
Documents, along with the accompanying earnings press release can be found on SEDAR and Edgar.
I will turn the call over to Samir I'd like to remind everyone that the company will be making statements about its future results and other forward looking statements. During this call actual results may differ materially from these forward looking statements and the risk factors that could cause. These differences are detailed in our Canadian continuous disclosure documents and SEC reports.
<unk> disclaims any intent or obligation to update these forward looking statements, except as expressly required by law.
With that I'd like to turn the call over to Chairman and Chief Executive Officer, Dr. Polak Mirror. Please proceed.
Good morning, and thank you Jason during the second quarter real once again delivered best in class growth with our agents closing a record number of transactions translating to record revenue and adjusted EBITDA profitability.
This comes despite a challenging market backdrop that has resulted in many other brokerages posting year over year declines.
Meanwhile, we see our agent productivity stabilizing and believe there is further upside as the market rebounds.
We are pleased to have achieved the important adjusted it beat our profitability milestone as communicated last quarter.
This is the direct result of the impressive agent growth. We've experienced are hard focus on maximizing our already efficient cost structure over the past year and the revenue generating changes we made to order model earlier this year.
Due to the strong results this quarter and the strength of our platform. We anticipate remaining adjusted EBITDA positive in the back half of the year.
To provide context to our operating performance you ended the quarter, Let's review the state of the market.
Elevated mortgage rates continued to depress residential housing activity due both to affordability concerns on the buy side and the reluctance to give up low rate mortgages on the supply side.
U S existing home sales were down 21% year over year, and 2% quarter over quarter on a seasonally adjusted basis.
However, our strong agent growth in conjunction with the seasonal upswing and home sales volume resulted in another record beating quarter for real.
Revenue for the quarter topped 185 million, which represents a 65% year over year increase and a 72% sequential increase from the prior quarter.
Against this backdrop, we're proud to be the premier destination for productive agents.
During the quarter, we grew our agent base by nearly 1500 agents, bringing the total number on our platform to just under 11500 agents. This represents a 105% increase from the second quarter of 2022.
Although per agent productivity still lags, where we were in the first half of 'twenty 'twenty. Two we saw a meaningful rebound that drove volume for the quarter to a record 17537 closed transaction, which is 72% higher compared to the same quarter of 2022 and 60% higher sequentially.
We also continue to expand our geographic footprint during the quarter, we opened in Delaware and in South Dakota in the U S as well as medical right in Canada. We now have agents operating in 47 States, Washington D C and four Canadian provinces.
We expect to be in all 50 states by the end of the year.
Most of our brokerage growth had lives in expanding in our existing markets. We are excited to be nearing this important operational milestones.
Agent churn was six 5% for the quarter, an improvement from eight 3% over the prior consecutive quarter and seven 2% in Q2 2022.
Our revenue churn, which we define as the revenue generated by churn agents over the prior two quarters improved to three 8% from four 3% in Q1 2023, but remains above 2.1% in Q2 2022.
To put this into context the impact from churn is incredibly low compared to the impact of the impressive inflow of agents joining our platform.
Nonetheless, we have also been actively reviewing our onboarding and training procedures to make sure that every agent that joins our platform is empowered from day one to be successful at real.
The bottom line is that we are focused on developing programs and resources to help our agents run their businesses effectively.
In just the past few months, we've launched a quarterly agent recognition program to celebrate success and foster community, we have overhauled our marketing sensors to make it easier for agents to discover and distribute content and we launched a new agent Onboarding program with weekly training.
I would also like to provide an update on several of our important initiatives yesterday, we announced the full public rollout of Leo our new AI powered virtual calls theaters that is fully integrated into our recent transaction management platform.
Leo can answer at agent questions in real time, 24, seven leveraging grills extensive proprietary knowledge base to create a completely customized experience.
This release has been gone through an alpha testing phase with a select group of agents and we are excited to now offer this to all agents.
This will save them time, and make our already lean support team, even more efficient, which fundamentally aligns with our core philosophy of becoming the premier technology, driven brokerage by building scalable solution for agents.
We will continue to improve and add features to Leo ensuring that our agents and employees realize the full potential that AI has to offer.
We are also working hard to lay the foundation for our industry changing with two weeks because we've spoken about in prior calls last year, we export a quiet expediter 11 through lending, which we have rebranded as real title and one real mortgage respectively.
Acquisitions serve as the bedrock to the one stop shop home buying experience we are developing.
While the revenue contribution from these divisions is still relatively small they are essential building blocks and all growing fast.
We are pleased to announce that we expect to be releasing the initial version of our consumer facing app.
With an integrated mortgage application process at our annual rise conference taking place from October 22nd through the 24th.
As I've said before.
Our one stop shop vision truly represents a revolution in the way people will buy and sell homes. We view. This initial app release is the first step in a multiyear journey and the kind of language followed reflects our commitment to making sure that we build this correctly from the onset.
We are excited to share the app and we'll have more to share on several other important initiatives at the conference email Colbert.
And with that I'll turn it over to Michelle for financial update.
Michelle.
Thank you Danielle and thank you everyone for joining us I'll start there isn't anything that I keep I actually went out to the second quarter.
The Ohio Moms really locked in a lot of thought one Steri shield and then go in the second quarter, which represented 56%.
Okay.
The total number of transactions on our platform during the quarter increased to 17537.
72% year over year.
Okay.
The median sales price of properties don't Theyre able to 849000, which represents a modest 1%.
A decline compared to the same quarter in 2022 in line with the broader market trends.
Revenue increased to 185 million, a 65% increase compared to a year ago.
Gross profit increased 91% year over year to $17 8 million.
Gross margin expanded year over year to nine 6% and eight 3% in Q2 2022 important.
The improvement from a year ago. It looks like the combination of greater fee income associated with a model changes we outlined on last quarter's call as well as its still small but growing revenue from our higher gross margin title and mortgage business.
As of June 30 of 2023, 10, 22% of our agent quite exceeding their commission cap a notable increase of eight 2% as of March 31st.
They'll show it can't quite 5% level for the same period in 2022.
The capped cohort represented 52% of commission revenue in Q2, 'twenty 'twenty, great compared to 53% in Q2, 2022 and 43% in Q1 'twenty two 'twenty three.
The fee income is particularly worth highlighting nuclear while still relatively small as a percentage of total revenue the income generated by a $1 1 million during the quarter, which represents a 121% year over year increase and a 49% increase from Q1 'twenty 'twenty right.
Importantly, this is revenue that essentially slows down directly to our bottom line and is reflective of the Thea Jackman announced earlier this year. Meanwhile, the revenue generated by our title and mortgage business. It continues to ramp up.
We view these visits there that's building blocks for a one stop shop.
And are taking care to execute thoughtfully and how we integrate and expand these operations into our existing platform.
We continue to explore other initiatives to enhance our marketing that we look forward to sharing more details on in upcoming quarters.
Meanwhile, we shall agent productivity it'd be about evenly even as it remains depressed compared with last year.
Revenue per productive agents acquire measure of agent productivity rebounded to $34700 compared to $26000 in Q1 of 'twenty 'twenty right.
They'll behind $41400 Q2 of 2022.
The number of transactions closed by this cohort improve the throughput or compared to 2.7 in the prior quarter period and $3 eight in the prior year period.
Strip out the effect of new agents, joining we also track the commission revenue per productive agent already on our platform at the beginning of the quarter.
This has been largely the same store sales figure was appointed by the retail industry.
This cohort close for my Boy transaction, we generated $45500 on average compared to 4.3 transaction generating $46700 in Q2 of 2022.
We know what our productivity was stabilizing on last quarter's call and we will take considerable product any upside as market conditions improve.
Looking at the geographies, we operate in nine 9% of our U S agent ended the quarter with cap start a slight increase from nine 7% in Q2 of 2022.
Up from eight 2% in Q1 of 2023.
Our Canadian capped agents experienced meaningful increase of 12, 9% in the quarter with cap got it person seven clean or anything right at the end of Q1, although this is still well below the 20% level in Q2 2022.
Canada now represents 10% of our agent base up from 8% one year ago accounting for 15% of commission revenue in Q2 of 2023 compared to 18% in Q2, 2022 and 11% in Q1 'twenty we agree.
Our highest earning only agents were steady quarter over quarter I, 0.5% of our agent base down from one 6% in Q2 2022.
These agents generated 10% of total commission revenue up from eight 5% the prior quarter, but down from 19, 4% in Q2, 2022 Eric.
Climate to achieve and maintain rate got it reserved for our most productive agents in a sustained period of market weakness is evident in its decline.
In Q2 2023, 56% of commission revenue was generated by our agents representing the buy side, what does that look on the sell side and what does that lets them go.
Representation.
This has remained relatively unchanged each quarter over the past year and it does not include revenue that we book related to interim URL, which accounts for approximately 2% of the overall care at all.
Shifting over to Opex, our total operating costs for the quarter, including revenue share was $21 5 million. This represents 11, 6% of revenue compared with 12% in Q2 2022.
Our operating expense per transaction, excluding revenue share, which is a core component of our agent like rental declined 12% year over year to $788.
We are excited about the significant progress we've made optimizing our cost structure over the past year as the housing market turned negative while transaction volumes on our platform continued to grow and we look forward to realize further operating leverage better little model provides.
Our revenue share expense, which is our largest operating costs were $7 7 million compared to $4 4 million in the prior year period.
Revenue share expense per average agent with $715 down 17% year over year from $861.
Note that compared to prior earnings calls this metric is based on the number of average agents during the quarter rather than the total at the end of the quarter. We believe this is more indicative of the underlying trend given the high growth of our agent Bank.
As a reminder.
Revenue share as marketing expenses, the benefit of our sponsorship structure not only helps attract new agents, but also drives retention and higher productivity across our platform.
Our head count ratio, which we define as full time employees, excluding real title in one year mortgage employees divided by the number of agents that are currently on our platform improved two one to 113 compared to $1 52 in Q2 of 2022 but remained relatively flat compared to one to 114 in <unk>.
Q1 of 2023.
While we have continued to experience strong agent growth. We also expanded our hiring during the quarter, particularly on our technology team as we invest in the next growth phase for now.
We continue to experience increasing returns to scale for our brokerage business. The size of our transaction processing team remained at nine employees unchanged on both a quarter over quarter and year over year basis.
These employees process, all 17537 transactions that closed during the quarter, well 1949 transactions per employee.
Don't anticipate needing to make any significant additions as they continue to grow our transaction base.
We believe that these metrics that highlight the efficiency and scalability of our platform that is made possible by the strength of our tech stack.
We view this as one of the biggest competitive advantages for our business and this should become even more apparent as we continue to scale.
Rayos net loss for the quarter was $4 $1 million compared to a $4 $2 million net loss in Q2 2022.
This translates to a loss per share of two cents in both periods adjusted EBITA for the quarter was positive $2 $6 million compared to $583000 in Q2 of 2020 to.
This represents an inflection point for our company that we have been talking about for several quarters, having achieved this milestone we expect to be adjusted EBITDA profitable for the full year 2023.
Turning to our financial position, our unrestricted cash and investments balance increased $8.6 million $28 $1 million as of June 30th up from $19 $5 million as of March 31st.
This consists of $17 $2 million of unrestricted cash and $10 $9 million in short term investments.
Before I close out my comments I would also like to note that on July 28, we announced that we intend to voluntary delist from the Toronto stock Exchange following review of the costs and benefits of maintaining a dual listing.
Our Canadian business is growing rapidly and we will continue to invest in this region.
Consolidation of share trading onto a single exchange simply reflects our dedication to being alcohol conscious and efficient as possible shares will be delisted effective as of close of market on August 11th and will continue to trade on NASDAQ capital market under the same ticker.
This concludes my financial remarks, I will now ask the operator to open up the line for Q&A. Operator can you. Please poll for questions.
Certainly everyone at this time, we'll be conducting a question and answer session.
Have any questions or comments. Please press star one on your phone at this time.
We do have still posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone please.
Please hold while we poll for questions.
Your first question is coming from Darren <unk> from Roth M T M.
Your line is live.
Hey, guys good morning, nice quarter and good to see the positive cash flow.
Couple if I may just kind of big picture I think you've added.
And the last four quarters like well over 1500 agents and I appreciate that your.
Economic model is probably more attractive than some some other legacy players in the space, but there are peers that have kind of similar offerings I guess, maybe to me or strategically.
One why do you think you're just seeing so much traction in terms of agent growth. When you know other brokers and brokerages Orange and then to could you hear me talk about the pipeline of some of these bigger agencies this might.
Might be coming on in the next six to 12 months and kind of how that compares to the prior 12 months.
Sure. Thank you Darren so yeah, I think that's as we communicated before we believe that our model is extremely attractive, especially in times like these when the.
Transaction volume in the market decreases in agents or just looking for more cost effective solutions.
The more value at a lower cost and I think that this is what has been dragging more agents to our way I can tell you that what we've been sensing in the past a month or two.
A lot of those larger teams are now really hurting just because of production and what we're hearing from them is yes, we are intending to join real but first we want to stabilize our businesses. So what they're telling us is that they're gonna joined in September or October . So we do feel that most of the large teams that were kind of feeling the pain in the market at the moment.
And and at the same time, we also see churn of Nonproductive agents are rising. So for example last quarter about 10% of our churn maybe a little bit more than that where agents that just declared that they are leaving the industry compared to about 4% are in the prior quarters. So we do see mortgages, leaving the industry overall.
But in terms of pipeline, we have a very strong pipeline of both individual agents and high performing teams as you know we added a the biggest performing team. So far a couple of weeks ago in California are doing over $1 billion in annual sales. So we do see larger teams joining in terms of production in <unk> and we have a solid pipeline.
Perfect. That's helpful. And then maybe just one last one for me a financial one for Michele maybe my math is correct. Thank you grew share was roughly 73 1 billion year on year.
He goes to like a six 4% EBIT five yield on that revenue.
Revenue growth.
I guess my question.
Is that the type of leverage we can expect from the company going forward.
E that 6% yield is a good bogey to garner usage model.
Or are there areas of reinvestment that may lower that number going forward. Thanks.
Hey, Darrin.
Yeah, I mean, you know we've been laying the groundwork for an adjusted EBITDA profitability for a while I think that that is a you know a.
A good indicator of where we can expect it to be there many quarters, but there's also a seasonality component to it.
You should take that into account it seem to think about opex going forward.
You know I think last year. It is that well what does that compare to last year. So it was 11, 6% and this quarter our revenue compared to 12% in the same quarter last year. So we're talking a little bit a little bit ahead of last year, but you can go faster, but that's a good model opex as a percentage of revenue.
Great. Thank you.
Thank you. Your next question is coming from Stephen Sheldon from William Blair. Your line is live.
Hey, Thanks for taking my questions.
First one here great to hear about the pipeline with larger team.
Also seemed like the data implies that your average home price in <unk> transaction volume was up quite a bit sequentially.
So curious if are you seeing them move up in the price range of homes that your age agents are transacting and if so is that something that's just naturally happening or is there also any support from adding more agents focused on higher end homes luxury homes to your platform just any detail there.
Yeah. Thanks, Steven actually if if we compare the average home price are sold on our platform last quarter compared to the second quarter of 2022, we see a 0.8% decline.
So that's kind of what in line with what the market conditions, we are seeing prices going up nationally so I expect that the.
Or or average price points.
The increase so accordingly.
We are seeing more of let's say luxury agents joining us we had a big announcement of a person or an agent cold coffee that joined US last week, a huge splash he's focused on the on the luxury market and we think that that will attract more agents that are just focusing on the higher price points. So I wouldn.
Expect a big jump, but probably.
A steady.
Increase in the price point that we're handling all the platform.
Got it that's helpful.
And then it sounds like we'll get the full release the consumer facing solution here in the fall which is great.
Just curious what the initial feedback you've gotten from those consumers that I think you've been running it in beta programs. There in recent months I'm curious kind of what feedback you've received from consumers that have been participating in that.
And kind of how you kind of roll this out.
What do you think it'll allow you know your company to do.
Well I have to say that we are extremely excited about the consumer facing app that we're building and we have to remember that this is something that nobody has tried before so there are a lot of unknowns and a lot of things that we just have to try by ourselves and we don't have any data points do rely on this is why it's so complicated and it's taking a little bit of time, but yes, we have been expire.
Many with some components, we do not have I read your app. So the apples not use body consumers. However, some of the components were used by the consumers for example, our fast 14, our mortgage offering which allows agents are guaranteed closing within 14 days from their loan application and we have done a few of those and the fees.
It was just amazing I mean, both our agents and their clients were just amazed by the fact that we were able to close on one occasion into.
In 10 days, so you know.
Being able to provide a clearer to close within 10 days of loan application that's something that.
It doesn't happen every day and we want to make it standard long term.
I think that we are starting to see a future where the home buying journey is just seamless and convenient and quick and just eliminate all of the friction independent that exist at the moment. So I think that as the time goes by.
We're getting more and more energized and excited about the consumer facing offering because we're building.
Great. Thank you.
Thank you. Your next question is coming from David Marsh from singular research. Your line is live.
Hey, good morning, guys, congratulations on the quarter and achieving positive it's a it's an impressive accomplishment.
Let me start with.
The title business could you provide us an update with regards to the title business and how many states are rolled out in and Oh, how many transactions have actually runs through it are in the most recent quarter.
Sure. So our retail is now operating in 11 States. We added a few states during the past couple of months. What we are now focusing on is are the JV offering through our highest performing teams and agents. So about 95% of the revenue last quarter came from the JV and.
<unk> revenue grew by 87% year over year. So we are very happy with the growth. We think that there's tremendous upside steel that we can realize over there revenue was close to $1 billion on re entitled side and were just working very closely with our highest performing things just do have them sign up with the JV.
<unk> funding to the transactions over we see the the attach ratio on the JV at about 70%, which is super high and it's just about scaling that business right. Now we have to remember that that business is in its infancy. So it takes a little bit of time to ramp it up.
Looking a little bit ahead into the future, we do see a world in which tied.
Title is just the components seamless component in the home buying journey so.
It'll just be integrated into our in our automated systems and it'll just be a check the box thing for consumers. So that the longer term strategy is just doing better that include the consumer facing app.
Got it got it and then the same question with regards to the mortgage business.
Sure so.
We acquired the mortgage business about seven months ago. It took us a little bit of time to get them immersed in into real revenue.
Revenue in the second quarter was a little bit over $350000 that was more than 100% increase compared to the first quarter of going into 'twenty. Three so we're really happy with the results. We're now exploring also a JV opportunity just allowing our agents to.
To become partners in India, our mortgage company as well.
But as I said, the more exciting side of the mortgage business is everything that we're building on the technology side and the and just trying to go festivals in offering and embedding that into the consumer facing up so we do see that business scaling at the second half of the year. So revenue will continue to go up but alongside that we are building that into.
The consumer facing out the door.
And how many states are you I'm afraid the mortgage platform and at the moment.
I believe it's right now at our 12 states.
Okay great.
Alright, well, that's primarily what.
I had a top of mind I guess the gist.
Lastly, I mean can you just talk about.
Overall stayed out of their car of the of the real estate business and in terms of.
Direction, not just transactions, but I mean are you starting to see any more listings on a relative basis or as supply is still pretty tight and.
Just talk about what your expectations would be for a recovery there and how that would play out in terms of Ah Yeah, I'll hand in hand, with what the fed is doing so.
Yeah, good questions, though.
The market is extremely tight on both ends both on the supply side and demand side in the beginning of June the middle of June what do we have seen is just the drop in our in demand due to the rising rates. So mortgage rates were at around 70% are live a little bit over that so for about two to three weeks, we have seen a decline in our indoor.
Home sales are in the market, which was kind of interesting. We are now seeing about rebuilding what we have seen on our talks warm in the past the three weeks I would say, there's a spike in new listings coming into the market. So that was an interesting trend that we still don't have market data like overall national market data of both we can only speak about what.
They're happening on our platform with our agents and we have seen a spike in do these things coming to coming into the market I don't know if that's indicative of the future.
But I think that as soon as we understand what the fed is going to do with our with the rates and the market gets a little bit of clarity I think that we will see mortgage rates stabilizing and maybe even the decreasing a little bit towards the end of the year and that'll be a positive but at.
At the moment, we're seeing.
Solid demand not enough supply.
I think the 37% of homes are now selling over asking price, which is interesting and we are also seeing price.
Prices starting to go up nationally so interesting market dynamics.
Yeah, that's really great color I appreciate that Samir yeah.
Congrats on the quarter guys.
Thank you Dave.
Thank you once again, everyone. If you have any questions or comments. Please press Star then one on your phone. Your next question is coming from Tom White from D. A Davidson your line is live.
Great. Thanks, guys for taking my questions two if I could one we're seeing some signs that the momentum that you guys have been enjoying is triggering a bit of a kind of a competitive response to some of the other kind of brokerages with similar models to yours, you know in terms of them, having to kind of Sweden the value prop for their agents to me I'd be curious to hear about.
How you think about tenant needing to stay ahead of some of those you know maybe larger competitors when it comes to kind of the overall appeal or the overall value prop or financial package for your agents. How do you think about needing to kind of stay ahead or you know maybe your willingness to do so or ability to.
You know without kind of impacting maybe the the margin ramp of the business and then I just have a follow up.
Sure.
So we are very happy to see other brokerages flooring, our path and are doing some of the things that we're doing I think that that benefit with the agents and at the end of the day everything we do is for our agents and if others. Other agency and other brokerages can benefit from that that's that's that's great. We don't see any needs to change anything right now we don't really feel that.
The pressure that you're talking about we think that we have an amazing offering for agents and a lot of agents that are buying into that I understand why others want to make some changes to to be able to offer something that is close to what we're offering I think that we have a huge competitive advantage when it comes to technology and it'll probably take others a few years to catch up to that so not really concerned at all.
On that front.
But overall I think that yes, other brokerages are hurting and and they're feeling the pain and maybe they need to do things to kind of alter their value proposition I don't feel that this is the case with real.
Okay. That's very helpful. Thank you.
Then just a second.
Congrats on the on the EBITDA profitability.
It was nice to kind of gross margin expansion year over year in the quarter I imagine that a few model changes were a driver of that maybe a fewer agents are a lower proportion of agents capping.
Can you just help us think about the.
The potential for gross margin expansion, you know kind of next year like or after like once you lap. The fee model changes are just kind of curious whether you think maybe by this time next year, if things like ancillary.
This is our mortgage and title or or maybe even things like instant payments might be.
You know ramps to a degree where you know we can kind of continue this upward marches on gross margins.
Sure. So I can start and maybe Michel would want to try to get I think that we have a few initiatives in the pipeline on the further monetization of the platform I think that if you look at other brokerage the vast majority of the revenue we've kind of pass through so the the agent portion of revenue is not monetize that.
Any other brokerage and this is something that we're looking at and just exploring opportunities to monetize that because just think about it real and I'm just throwing out a number closing, let's say 500 and $600 million. This year about 90% of that revenue is pass through and we think that there are ways to monetize that huge portion of the revenue in and we were.
Be coming up with some initiatives towards the end of the year. So I think that moving forward. If we take that into account and we also take our title business and mortgage businesses into accounts.
Well I think that there's a lot of upside in margins I don't want to state the number and we're not really providing any guidance at the moment, but I think that the positive trend will continue and we will probably be probably see a more meaningful.
Increasing gross margins are sometimes next year.
Great. That's very interesting. Thank you. Thanks, so much thanks Michelle.
Thanks.
Thank you very much Mr. Lee there appears to be no further questions.
Yeah.
If you have any additional questions on today's earnings release, please feel free to contact me directly operator would you. Please give the conference call replay instructions once again.
Absolutely in order to access the replay you need to call 8774814010, with a confirmation code of 48756.
Once again the replay phone number is 8774814010 and the confirmation code 48756, the replay will be available at one P M eastern today.
Ladies and gentlemen, you may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
