Real Matters Inc.

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0:38 Thank you, operator, and good morning, everyone. Welcome to Real Matters financial results conference call for the first quarter ended December 31, 2021.

With me today are Real Matters' Chief Executive Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning before market opened, we issued a news release announcing our Q1 results for the three months ended December 31, 2021.

The release accompanying slide as well as the financial statements and MD&A are posted in the investor section of our website at realmatters.com. 1:09 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. 1:24 Please see the slide entitled cautionary note regarding forward-looking information in the accompanying slide presentation for more detail.

You can also find additional information about these risks in the section, of the company's annual information form for the year-ended September 30, 2021, which is available on SEDAR and in the Investor Relations section of our website. 1:46 As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA and adjusted EBITDA margins.

Non-GAAP measures are described in our MD&A for the three months ended December 31, 2021, where you will also find reconciliations to the nearest IFRS measures. 2:07 With that, I'll now turn the call over to Brian.

2:10 Thank you, Lyne. Good morning, everyone and thank you for joining us on the call.

I'll kick things off today by discussing some of the highlights of our first quarter and some of the key drivers behind our numbers. Bill will then take a deeper dive into our segment financials and I'll wrap up the call with some brief remarks prior to taking questions.

2:33 Turning to slide 3, we reported consolidated revenues of $107.8 million as strong growth in our US Appraisal and Canadian segments was offset by a decline in US title. We grew share with our clients and delivered record first quarter net revenue in US Appraisal.

Our US title operations continue to perform well, delivering against our Tier 1 lender scorecard in the quarter and landing us a top our Tier 2 clients scorecards. With plenty of movement in the 10-year Treasury yield, the US mortgage rate environment was dynamic with significantly higher rates presenting a market headwind for our business in the first quarter.

3:22 First quarter mortgage market volumes were also more in line with the seasonality, we typically see in the October to December timeframe with a slowdown in activity due to the holidays. That said our first quarter US Appraisal mortgage origination revenues, which includes purchase and refinance increased 13.9% year-over-year, compared to an estimated 1.5% decline in total origination market volumes.

The increase in US Appraisal revenues was principally driven by the mix of volume service, net market share gains and new client additions. 4:04 In the quarter, we launched four new lenders in US Appraisal and one new channel with an existing top 100 client.

US Appraisal purchase revenues were down 0.8% compared to an estimated market decline of 9.3%. It's worth noting that the purchase market in the prior year quarter was exceptionally robust.

It was the highest first quarter purchase market volume we have seen since going public making it a tough year-over-year comparable. 4:38 US Appraisal refinance revenues were up 23.3% compared to an estimated market increase of 10.8% in the addressable refinance market.

Our market estimate includes a year-over-year decline in the use of GSE waivers, which helps increase the size of the addressable refinance market for appraisal and offset the 31.2% total market decline for refinance market activity. 5:09 In our US title segment, first quarter centralized title revenues declined 60.6% year-over-year against an estimated market decline of 31.2%.

Outside of market movements, we continue to focus on performance as the main driver of growth in our title business. We continue to perform at the top of our Tier 2 lender scorecards and as a direct result, we continue to win market share.

5:41 In addition, we expect that our performance on the Tier 1 lender scorecard will set the stage for further market share growth and the expansion of channels with this lender. The performance equity we are building today will also help support the sales cycle with prospective clients.

We launched one new top 100 lender in title in the quarter and subsequent to quarter end, we launched an additional top 100 client. We continue to move our pipeline forward and remain focused on bringing on new lenders throughout the year.

6:18 In our Canadian segments first quarter revenues were up 13.2% year-over-year from increasing market share with certain Canadian clients and increased revenues from insurance inspection services. 6:32 With that, I'll hand it over to Bill.

Bill?

6:38 Thank you, Brian. And good morning, everyone.

Turning to slides 4 and 5 for a closer look at our financial results. US Appraisal segment revenues increased 14.1% year-over-year to $79.3 million due to the mix of volumes serviced, net share games with existing clients and new client additions, which were offset in part by lower estimated addressable market volumes.

7:08 Transaction costs and our US Appraisal segment increased 16.9% year-over-year and net revenue increased 4.2% to $16.4 million, while net revenue margins declined 200 basis points to 20.6% compared to the same period last year. The decline in net revenue margins was due in part to the mix of mortgage origination volume service, which included complex properties with higher appraisal fees.

That said and as Brian mentioned earlier, we delivered record first quarter US Appraisal net revenue this quarter. 7:48 Operating expenses in this segment increased 14.7% to $7.9 million in the first quarter of fiscal 2022.

Due to higher capacity levels in the quarter, and the mix of volumes serviced. Adjusted EBITDA in US Appraisal decreased modestly to $8.6 million from $8.8 million in the first quarter of fiscal 2021.

And adjusted EBITDA margins contracted to 51.9% on lower net revenue margins, and higher payroll costs due to higher capacity levels in the quarter and the mix of volume service. 8:26 Turning to our US Title segment.

Revenues declined 59.4% year-over-year on lower estimated refinance volumes of 31.2%. Diversified revenues totaled $0.5 million, representing a decline of $1.9 million from the first quarter of fiscal 2021 as a result of rationalizing this service offering last year.

8:51 Transaction costs and our US title segment decreased to 58.9% while net revenue margins were strong at 66.4%. The modest contraction in net revenue margins against the same quarter last year, was due to the flow of volumes between comparative quarters, partially offset by higher net revenue margins from diversified title and other titled revenues.

9:17 Operating expenses in the segment decreased $4.8 million to $10.3 million in the first quarter of fiscal 2022, due to lower volumes serviced. Adjusted EBITDA was $0.4 million in the first quarter of fiscal 2022, down from the $11.6 million we posted in the same quarter last year, and adjusted EBITDA margins contracted to 4.1%, just following to the impact of lower volumes.

9:45 As we've done in the past, we'll continue to manage operating expenses relative to volume service, while ensuring that we make the right decisions to support our long term objectives. In Canada, revenues increase 13.2% on a year-over-year basis to $12.2 million, while net revenue margins contracted by 180 basis points to the mix of Appraisal Services supplied and appraiser onboarding.

10:13 Canadian segment operating expenses were $0.7 million in the first quarter, up from $0.4 million in the first quarter of fiscal 2021 and adjusted EBITDA margin decreased to 57.7% from 73.7% in the same quarter last year, due to an increase in operating expenses attributable to higher payroll and related costs, other expense and FX. Last year, we redeployed certain Canadian staff to service the title business, but the resumption of more normal operations in Canada, following the removal of certain COVID restrictions, these employees have returned to the Canadian segment.

10:56 In total, first quarter consolidated net revenue was $28.8 million compared to the $44 million reported in the first quarter of fiscal 2021, due to lower revenues and our US Title segment. Consolidated net revenue margins were 26.7% in the first quarter of fiscal 2022, down from the 36.6%, we posted in the first quarter of fiscal 2021, reflecting lower margins in our US Appraisal and Canadian segments, and lower net revenue generated by our US Title segment.

11:31 Consolidated adjusted EBITDA was $5.9 million in the first quarter of fiscal 2022, down from $17.4 million in the same quarter last year and consolidated adjusted EBITDA margins decreased to 20.6% due primarily to lower volume service in our US Title segment. 11:50 Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $73.3 million at December 31 2021.

In the quarter, we directed 100% of the free cash flow we generated this quarter to share purchases under our NCIB, purchasing approximately 700,000 shares at a cost of $5.1 million. At the end of the quarter, we still have 3 million shares remaining under our current NCIB and we intend to continue to be active in the NCIB, which we will balance with other strategic opportunities as they present themselves.

12:30 With that, I'll turn the call back over to Brian. Brian?

12:38 Thanks, Bill. Overall, we're feeling good about the business as we continue to focus on operational performance, managing scale, launching new customers and driving market share growth.

The long-term potential for our business has not changed and we remain confident that we will achieve our fiscal 2025 objectives. 13:00 As Bill mentioned earlier, our view is that the current trading price of our shares is not reflective of the value of our business, which presents an opportunity to return value to shareholders through share purchases under our current NCIB.

13:16 With that operator, we'd like to open it up for questions now.

13:51 Hi, good morning, guys. Brian, last quarter, you talked about how some Tier 1 customers were coming back into play.

Just wondering how that pipeline has progressed over the last quarter and whether you have some visibility on the timing of those customers potentially coming on board to the platform?

14:09 Got it. So Dan.

I know that's specifically a title question and so I think one of the benefits we continue to see is that our performance on appraisal with over Tier 1s continues to be incredibly robust and we keep hitting the top of the scorecard with them and as I've discussed in the past, we use that performance equity to drive our conversations on the title side. So I think with the Tier 1 that we currently have on the title platform, performance, incredibly strong in the first quarter, so we will continue to work on driving that.

And I’ve mentioned the majority of Tier 1s right now are in conversations around title. 14:52 So we will continue to play that off.

With some market dynamics that are going on. Our team will continue to lean in though and drive for more Tier 1 coming onto the platform in the future.

15:06 Okay. Thanks.

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

15:23 Great question, Dan. When I think about the title business and OpEx, in particularly.

I think we've said – as I said before, I'll say it again, that it really is balancing that market dynamic against costs in the business, but we also have to be mindful of what we expect, to present itself in the back half of the year. So I think we're going to be prudent managers of our OpEx spend in the coming quarters in particular and then again we've always got satisfied with that long-term view of, what – what's coming next.

So super hopeful that we've got some additional volumes coming our away from generalexpansion with our current installed base and title and that will help support the current spending level.

16:15 And then Brian one last one for me at your Investor Day, you did present data analytics playing and you did mention that you may acquire into that. Just wondering how that's, how you're thinking about that strategy balancing, the volatility in the market against declining valuations in the space, whether acquiring into the spaces is still in the playbook?

Thank you.

16:40 Great. Thanks, Dan.

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

17:09 Great. Thank you.

17:40 Yes, thank you. Brian, you guys had some pretty, great memories on the appraisal side given the backdrop in the market here.

Just wondering, if you can kind of give us a sense of the share gains and appraisals with respect to your Tier 1 on their clients?

17:41 Sure morning, Richard. Yes, so, on appraisal as you mentioned, the performance continues to be incredibly strong Richard, we actually as of the new year, we had reviews with two of our Tier 1s and we are again number one on both of those scorecard.

So as we've talked about with performance and operational excellence, we continue to move market share and so we're seeing that come through with the performance that we've got in the business. So, across the Tier 1s, we continue to be at the top of the scorecard and continue to move market share and frankly, Richard not just with those lenders, but we also are seeing it across our Tier 2s and 3s?

18:23 Okay, and then maybe sort of, I guess related that question and you look at sort of your other Tier 1 that may not be sort of out there maths, in terms of allocation to real hires, like, can you give us some context of how much room is left there?

18:38 Yes. So, Richard, we talk to our biggest Tier 1s, where we have significant market share, and they've made it incredibly clear to us, but there was no ceiling with them.

So we continue to drive towards that long-term view of 50%, for the lenders that we talk about that are on the front of the train. So those – that are in the high 30%, low 40%.

And, and of course, the ones that are at the back, we continue to see progression there as we try and move them to the high 20% and into the 30%. So frankly, we're seeing that entire train, move, Richard, as we expected to.

19:19 Okay, and just the last one, for me, it was especially the waivers, sort of going through your filing here, and they're still sort of playing to 2025. One, we've got to see a meaningful impact of those waivers coming off, like, has the environment changed at all?

Obviously, you look at the volumes in the market and the backdrop, you would think that, we would actually see that sooner, but maybe kind of give us a bit of color or update there?

19:46 Sure. I mean, if we look back at least quarter-over-quarter, Richard, we see last year, we were up in the in the 30 plus percent range, this year expectation is that we'll be down in the lower 20% range.

So we're definitely seeing the progress that we had, had looked for, with declining – declines in the waiver rates. As we look at Richard, I mean, unfortunately, it's difficult to comment on what's going to happen with the 10-year over the next couple of quarters and other dynamics in the market.

But our view again continues to be that long-term, that waiver rate will continue to come down, you're going to get it no matter what in our view over the next few quarters, if refi – if refi continues to come down refi and we see cash coming back up. If I reflect back to 2018, 80% when we saw the rates moving up 80% of the refinance volume with cash volume, and with over $9.1 trillion of value in homeowners homes and from what we can see from research, a fair bit of appetite for home renovations and those sorts of things.

We have a feeling there will still be a pretty decent refi market as we go forward. But and then therefore that mix of the what's in the waivers, will definitely I think continue to drive that waiver rate down.

21:20 Okay, great. Thank you.

21:23 Thank you.

21:33 Hi, good morning. Brian, can you speak to just getting all [Indiscernible] sold in the market, that having any impact on customer behavior in terms of how the lenders are thinking about, how they allocate share or restructure your total discussions in terms of how they're thinking about bringing on a new supplier?

21:53 So, Thanos, I was fortunate enough to spend some time last quarter with our Tier 1 in the title space with the leader of that group and what they shared with me is as they looked out over the year, within their customer base, they felt they had 40% of their customers that were still re-financeable, up to 4%, so still a significant target within their own customer base. So as they were looking at capacity planning for the year, frankly, they were looking at keeping it quite steady.

So I think the dynamic that we'll see play through the sort of back part is this quarter and usually launches with Superbowl, we're one of the bigger players in the market, there is a lot of advertising around Superbowl. We then see a more aggressive advertising plan, generally across the board.

So we'll see how that plays through and therefore generally what type of volume that along with of course the tenure year sort of plays through in the market. So that's only, I think generally we're seeing our lenders be quite thoughtful about what they think the opportunity is this year.

They still there's a strong market for refining, they definitely willing to dig into their customer base in order to encourage some of those that refi activity and Black Knight continues to put out a report continues that says somewhere around $7 million North American homeowners are in the black to make a – to actually mortgage their homes to make the refinance. 23:37 So, again, we'll just have to see how that all flows through, I think, than us.

And for us, as you know, market share is really driven by performance. So with our operations team and title continuing to move the needle up on the scorecards, we expect that we will continue to win market share with our customers.

23:57 Great. On the FHA last fall, I talked about ramping up the use of desktop appraisals.

I guess, firstly maybe started to see that then and secondly, has that resulted in any sort of change in your business in terms of share or revenue per transaction or anything?

24:17 Yes. Thanks, Thanos.

I mean, interestingly, we still don't have the specifics around the desktop announcements. Unfortunately, months after that announcement, we still don't sort of have the requirements around what needs to be done around desktops.

That being said, right now anyway, send us the way we're looking at some of those non usual appraisals is frankly for us right now. The margin in that business is still very complimentary to the margin in our business.

We, of course, can do desktops, if required, but we are not seeing a real increase in that business. Right now, we're still seeing the channel force and the work that we generally do as playing by far the vast majority of appraisal orders.

25:12 Great. Thanks.

25:13 Yes. Thanks, Thanos.

25:25 Good morning. Just wanted to get more context around something you said earlier in the call, that you said that you wanted to be mindful of what you saw in my present itself in the back half of the year around volumes and so is that just the market returning to normal seasonality and your expectations that things will get busy in the April time period?

Or is there the channel extension? Maybe even puts more context around that as if that was just a title comment or just a general comment?

25:53 Sure, well, I need to bring that up, Rob. I mean, that would impact both of our businesses.

I think the original comment was a little bit more around title. But as you know, seasonality really starts kicking in around March, April.

So on the appraisal side of the business, we should see some robust growth there, just because we assume that purchase will, will be a strong part of the program for Q3 and Q4. I think that common when it was made earlier was was more around title and our view that with market share, we assumed to continually gain market share with the performance that we're seeing against the Tier 1 and Tier 2.

But beyond that, we've talked about channel expansion and so our view is that in Q3 and Q4, we should see some of that channel expansion with both the Tier 1 and Tier 2 that we launched last year. So I think that's, that's more specifically what that comment would be about Rob.

26:54 Okay. And then I wanted to just maybe in a very simple way, understand better the, you said that there was share gain in title, but the title revenue decline is quite a bit higher than the estimated market decline that you gave.

And so I'm trying to put those two statements in a context [Indiscernible] gaining share against the steeper decline relative to the market?

27:20Yeah, so I mean, our focus is, Rob has been on freeing up capacity in our system to make sure that we are very focused on performing and driving operational excellence with the Tier 1 and Tier 2s that we have on the platform today and so that that performance, we know drives market share, we see the benefit in market share growth with those customers. And so that's why we are focused in the second half of the year on continuing to grow market share with those customers and expand, expand our share with those customers.

So sometimes that comes with some challenges with the Tier 3s and Tier 4s. But as you know, we are wholly focused on driving Tier 1 and Tier 2 performance and market share.

28:05 Okay, I guess the other thing that could be a driver is the emphasis of the Tier 3 and Tier 4. Earlier in the year that's still something that's in place or you started to reengage with some of those customers yet, the emphasize [Indiscernible] capacity.

28:21 Yeah, we've been fortunate there, Rob, we have had some wind back there. We have had some wind backs.

But as I say, I mean the real focus long-term for the 2025 targets, is to make sure that we continue to move the Tier 1s and Tier 2s in the right direction.

28:36 Okay, okay. Thanks for taking the question.

28:38 Thanks, Rob.

28:56 Okay, good morning, I thought we could start on US title and focus on your Tier 1. I think it's been three quarters that it's been live now and initially, you'd said that you were targeting 5% to 10% share over the course of the first year.

So maybe you can provide us with an update on how you're tracking against that target. And, any thoughts on, where your share with that client can move over there over the second year of going off?

29:21 Thanks, Gavin. Yeah, so we, I think we shared at the end of last year that we had a very good year with the Tier 1 and to your point, we talk about getting to 5% to 10% in the first year.

And after the first couple of quarters, we're very fortunate to get ourselves into the double digit. So we continue to focus on ramping that share Gavin and we will continue to focus on ramping that share.

I think one of the unique opportunities there is beyond driving just to share with the business we have today is expand the channels with that customer as I say I think we're very optimistic, barring market movements, etc. But we're very focused on bringing that channel up live in the second half of this year.

So that's really I think, where we're going with Tier 1s continue to perform, continue to win market share in the core business and then diversify into another channel.

30:22 That's great. And then just Secondly for me and US Appraisal, the net revenue margins have been kind of hovering just over 20% in recent quarters, given kind of the shifting mix towards more complex jobs.

I guess I'm wondering if that's a good run rate for now, do you see a pathway to maybe back towards the 23% or 24% level, perhaps bypassing on some of the increased costs that you're seeing onto the lender?

30:45 To your question, Gavin, I'm going to ask Bill to take that question, Bill.

30:50 Sure. Thanks, Brian.

And great question, Gavin. I think the in the short-term, Gavin, I would say to you, there's still elevated levels of refinance activity.

And so as a consequence, we're still sitting firmly in the more complex camp, at least in the near term. So, from a run rate perspective, I would think somewhere in the neighborhood of what you saw in this first quarter of the year would probably be fair for at least the next couple.

But certainly longer-term, once the refinance market starts to settle and cooled down a bit, then we fully expect margin expansion easily up into the 23%, 24%. Which where we were, pre-COVID and then secondarily, I think we still got, as you know, lots of room to expand into the 26% to 28% range by 2025.

31:43 Great, that's it for me. Thank you.

31:57 Hi, thanks, guys for asking, for taking my question. So you want to share in title for three quarters.

Now, can you guys talk a little bit about the pace of increase at the Tier 1 and when that was market share losses may turn around?

32:20 Yeah, so Martin, I think, when we take a look at the title business, we've looked back, as you know, and communicated that we made some decisions around our Tier 3, Tier 4 portfolio in order to open up the capacity to take on the Tier 1s and 2s and so our view is, I think you should see that market share ramp start moving in the right direction, in the second half of this year, aligned with market share growth with our current customers, as well as that channel expansion piece and then layer on top of that new customers, as we mentioned, we brought in sort of during the quarter and just subsequent to the quarter we brought in two more top 100 customers. So I think you'll start seeing that momentum continue into the second half and you should see that market share start tracking in the in the positive – in the positive trajectory.

33:18 That's great things. Now, with some of the estimates out there for the refinance market, even with share gains, it might be tough to not lose more volume.

What might that mean for EBITDA in title?

33:40 So I think that question is around, I believe, anyways, is around, how do we manage our costs, our cost base, Martin, depending on the volumes in the market. And so I think there's two ways we look at that.

The first one is, we are very focused on execution and operating the business appropriately and so with volumes, if there is significant movement in volumes, then we manage OpEx to that. But we have to balance that, with the fact that we have aspirations out to 2025, which includes bringing on new customers, expanding our share with the customers we have.

And that performance that we've got with our Tier 1 and Tier 2, that of course, is paramount for us that we continue to drive the types of results that we're seeing on the scorecard. 34:32 So I think that's the balance that we have, Martin, as we look forward, we look forward to some of the short term headwinds that we're experiencing, and I think we demonstrated in the past that we are quite agile in managing our OpEx around that.

But we also need to ensure that we keep some OpEx capacity for our expected expansions in market and our market expansions as well as our new customers that we're expecting in the second half of the year.

35:05 Great. Thank you very much.

If I can ask one more in the MD&A. It references timing of orders as a reason for lower margins in title.

Is that, I mean, that sounds like share gains are kind of kicking in. I believe, you meant – you said the same thing last year at this time and the translated into adding your first Tier 1.

Can you give us anymore color on new customers?

35:41 Yeah, I can, Martin so when we talk about flow, the reason we address that is because that is very relevant for our net revenue margin in title. So, flow for us simply means that from the start of a title order, it takes us somewhere around 45 days until we see the revenue and there's some expenses that we need to take up front.

So when you see very strong margins, as you saw this past quarter, it often means that we are delivering more in that quarter. Therefore we're realizing more revenue than we are necessarily spending on orders.

And again, a chunk of that has to do with the 10-year Treasury. The trajectory that we've seen on that moving up and potential impacts, headwind impacts from volume as we look forward.

36:36 So that's really the dynamic that plays there. It's not relative to just a particular launch of one or another, but really the dynamics between how the market is moving and therefore, how we are closing and opening orders within that particular quarter.

36:54 Got it. Okay.

Thank you. It's all for me.

36:59 Okay. Thanks.

37:06 Okay. Well, thank you operator that – that I think then wrap things up for today.

Appreciate all of you joining the call and please take care. Thank you.