Real Matters Inc. (REAL) Earnings Call Transcript & Summary

I move that this meeting be terminated.

Can I have that seconded, please?

I second the motion.

All in favor, signify by raising your hands. [Voting]

Any opposed? [Voting]

I do declare that this meeting is now officially terminated. And I'll turn the floor over to Jason Smith. Thank you.

Thank you for that exciting presentation, Blaine. Thank you, Blaine, and good morning, everyone. For those of you joining us via webcast, and as a reminder, the accompanying slide presentation for today's event can be found in the Investor Relations section of our website. As Blaine remarked earlier, joining us from our senior executive team today are: Bill Herman, Bill is Executive Vice President and Chief Financial Officer; and Brian Lang. Brian joined us in June, is President and Chief Operating Officer. His appointment to this newly created role represented the continuing development of Real Matters' leadership team and our evolution as a growth-oriented company. Brian is the former President of Mastercard Canada. His background in technology, serving the banking industry, made him an ideal fit for the role, and we are delighted to have him on board. Please note that my presentation may contain certain forward-looking statements about the company's business and the industry in which we operate as well as references to non-GAAP measures. Details regarding forward-looking information and non-GAAP measures are on the screen behind me and can also be found in our MD&A. Last year, I opened my remarks at the AGM by reiterating our commitment to shareholders, which centered around our focus on the long-term growth of our company and building a business that can weather peaks and valleys. Our strategy hasn't changed over the last year, and our financial performance in fiscal 2019 clearly demonstrated why it's so important that we stay the course and take a long-term view. Looking at our performance over the last 5 years, you can see that we have grown net revenue at a CAGR of 29%. During that time, we went from a single vertical focus on residential mortgage appraisals with less than 3% market share, servicing Tier 2 and Tier 3 lenders, to winning and launching the sixth largest U.S. banks by asset size in our U.S. Appraisal segment and growing our market share to 10.6%. We also entered the U.S. Title business in April 2016 through the linear acquisition and have grown that business from 0.2% market share to 1% share in a span of 3 years. We also increased adjusted EBITDA in our U.S. Title segment by more than 30% to $13.7 million in fiscal 2019. On a consolidated basis, we grew adjusted EBITDA by a CAGR of 54% from 2014 to 2019. And we did so while strengthening our balance sheet and buying back 5.4 million shares. At the end of fiscal 2019, we had cash of $71 million on the balance sheet, and that subsequently increased to $80.9 million at the end of the first quarter of fiscal 2020. Real Matters' financial position is stronger than ever. Our fiscal 2019 results demonstrated how our platform approach drives profitability on incremental volumes. On a consolidated basis, the business delivered $29 million in adjusted EBITDA, an increase of 400% from the $5.8 million we reported in fiscal 2018. While U.S. mortgage origination market transaction volume declined by an estimated 8% in fiscal 2019, we continued to gain market share, and we serviced record-high U.S. appraisal and U.S. Title transaction volumes, which drove a 15% increase in consolidated revenues, a 220 basis point expansion of net revenue margins and a fivefold increase in adjusted EBITDA. We made significant progress towards achieving our fiscal 2021 objectives, ending the year within our target ranges for consolidated adjusted EBITDA margins and U.S. title market share 2 years ahead of schedule. Our strong performance in fiscal 2019 keeps us on pace to achieve our fiscal 2021 targets. Taking a look at our U.S. Appraisal segment on Slide 8. We increased market share to 10.6% in fiscal 2019, up from 9% in fiscal 2018, and we posted market-adjusted growth of 17.2%. Over the course of the year, we expanded our existing client relationships by entering additional channels, like new construction and complex appraisals, and maintained our top performance ranking on client scorecards. We launched 7 new top 100 lenders, including the sixth Tier 1 lender, which means that we are now live with all 6 Tier 1 lenders. We believe we are the only provider delivering appraisals to all 6 Tier 1 lenders today. It's been a multiyear journey to get to this point, starting with the launch of our first Tier 1 lender in 2015. We've made great strides since then, successfully winning each Tier 1 lender and progressively growing share by leveraging our platform and partnering with our network of field professionals to outperform our competitors. As you know, the Tier 1 lenders represent a focal point of our long-term strategy, given their size and strength, and so this milestone is an important marker of how we are executing on our strategy. Today, Real Matters serves approximately 1 in 9 U.S. residential mortgage appraisals, and we believe we are the largest provider of residential mortgage appraisals in the U.S. In U.S. Title, we ended the year with a 1% share of the $10 billion U.S. title market, hitting the low end of our fiscal 2021 market share range. Our U.S. title segment also posted market-adjusted growth of 73% in fiscal 2019. Our strong financial performance in U.S. Title was the direct result of the integration work we did porting the business onto our platform in the prior year. We went live with 15 new lenders in the U.S. Title in fiscal 2019, including 6 top 100 lenders. Looking ahead, we continue to target additional top 100 lenders, including our existing Tier 1 appraisal clients. Our value proposition is resonating with lenders. The pace of refinance market activity in the latter half of fiscal 2019 and the continued strength we saw in the first quarter of fiscal 2020 has brought performance to the forefront of the conversation with lenders, and highlighted the need for them to add new lenders. We continue to drive these conversations with our existing appraisal clients and remain optimistic about our growth prospects in this segment. Fiscal 2019 was an excellent year for Real Matters. We did exactly what we set out to do: grow market share, improve net revenue margins and improve operating leverage. Looking ahead, we will maintain our focus on our core network management capabilities: to drive a competitive performance advantage, which we believe will allow us to achieve our market share objectives; and we will continue to be thoughtful about the company's use of capital as we invest for growth and create long-term value for our shareholders. As always, we are grateful for the trust of our customers, the loyalty, partnership and professionalism of our field professionals and the commitment and dedication of our employees. We're also very appreciative of the continued support and ownership of our shareholders. I'll now open the floor for questions. If you have a question, please raise your hand, so we can provide you with a microphone for the benefit of those joining us via webcast.

Yes. I mean, I don't know that much about your business, but since you already have 10%, 12% of the appraisal market, doesn't it get harder growing from here?

That's a great question. So when we look at our objectives that we set out in -- for 2021, it was to actually get to 15% to 20% of the market. We ended the year just over 10% at September 30. And we can do that with actually -- without adding any new clients. When we launch one of these customers, they start off with a very small part of their business. So maybe 1% in that first quarter. And then based on our performance, the next quarter, we'll get another market share award, the next quarter another market share award. So we get many years here of market share expansion. So we actually have a good line of sight to getting to that target range by 2021, just with the clients that we have. Now that wasn't meant to be a terminal value of where we think we can grow. We see market share expansion beyond that. And then we also have this other effect that in the last few quarters, the bigger regulated banks deposit-taking institutions, appear to be taking back share relative to the nonbanks. So that would actually be a further tailwind on the appraisal business. So we think we have lots of growth there yet to come. Great question.

It looks like a strong U.S. mortgage market that we're in the middle of right now. You said that you're seeing some of the Tier 1 larger regulated banks taking share. Maybe if you could expand on that. Is there anything that you're seeing from your position that would give you confidence in near-term share growth with these large Tier 1 customers? Or is that a longer-term driver that you're talking about?

Sure. Well, I think when I -- first of all, I think, be them Tier 2 or Tier 1, deposit-taking regulated institutions, I think that they're performing in a sort of a reasonably similar way. So I think they're both benefiting relative to the nonbanks that would just wholesale loans out to Fannie or Freddie. In terms of how we're performing with them, I think what's interesting is that we continue to rank at the top of their scorecards. So best operational performance is what drives that market share gain with them. And we haven't been capped by any one Tier 1 bank yet. And so we have, I think, north of 40% share now. We continue to drive share, not just in other channels, the main origination channel as well. And so I think we're on a mission to be the platform for the industry, and we're going to keep working away at it.

And you said performance has become a bigger part of the conversation just recently. Are you talking about the ability for you to scale with the volume now, relative to other alternatives that the banks have? Or are you just talking about the share gains driven by the performance that you provide in the network of appraisers?

Got it. So if we were to actually look at refi activity, be it either in our Appraisal segment or our Title segment. If we went back to this time last year, refinance volumes were actually at multi-decade lows. And so although we've doubled since then, it's off of a multi-decade low in terms of the refinance activity we'd be seeing here today. So most of the vendors in the space are staff models. So they're going to do the appraisal with staff appraisers or they're going to do the title with their own staff folks. And when you've had a doubling of volumes and the rest of the industry has been down at barebones levels this time last year, they struggle to scale. The banks themselves are struggling to scale. They're adding underwriters as fast as they can because of their capacity now. They can bring in folks from other parts of the bank. So they have a little bit more room. Our model is a network model. So our ability to drive is by building that capacity within the network. So it definitely favors us. But -- and then that drives to why our performance advantage can widen even further in a model like this. So I think if the banks are struggling with their staff-based vendors to perform, it's driving that discussion about why launching and adding an additional vendor is rising to the forefront.

Thank you, Rob Young, from Canaccord, for your question. If you could please state your name and tell us if you're a shareholder before?

My name is [ Abner Maziman ]. I'm a shareholder, and I have a question in 2 parts. The first part is, have you lost any client yet? And if you have, what were the reasons given? And if you haven't, which I think is more likely, unless I am proven wrong. Then the second question applies, in the old [ GIUC ], which may be much before your time...

I remember it.

Okay. They used to claim afterwards, the guy who bought them, claimed that companies that have an advantage always underprice what they're doing. And clients should be happy but not ecstatic. So when you are growing very fast, it's at least some probability you're underpricing what you're doing. So to a certain point comes a stage if either somebody buys you out and they jack up the price, lose 10% of the clients, but if they price 50% higher, it's a net gain. Or comes a stage in which you begin to harvest the market. You're well before that. So again, the first question is have you ever lost a client? And if you did, why? And if you haven't, at what point would you become so big you can start cheekily raising prices and start squeezing the clients because you are, in effect, the industry standard?

I won't comment on that last part, as it's being webcast and recorded. But so we -- when we went public only a few years ago, it's a very sticky business. We had to go back and see any evidence of client loss. On the Appraisal side, we had lost 2 clients out of the hundreds that we service. And one was because they were bought, so not because of our performance. And the other one was because as we got into deployment with them, we found that they want to adversely select us, not for price interestingly enough, but for pushing values, trying to get the appraised value to what they need you to close the deal. And that's not the right client for us. So I cannot think of another at scale, a client, there is a very sticky business. When I drive to price, it's interesting. We're in a regulated market. So those dynamics that go around traditional software pricing be it enterprise or consumer are very difficult to play through out of this business. So appraisal fees tend to be set at the state or county level. They tend to be consistent across the vendors and across the banks. And if anything, the pricing in the industry has been going up. It hasn't been coming down. The same plays well on the title side, it's even more strict in terms of its regulation. And all the disclosures around who gets to -- who can share and what -- how pay what is a great moat around this business. It was one of the attributes that I loved about both appraisal and title, is they're not price-driven activities. So there is some latitude in driving price, and we would position ourselves to the higher end of that, not to the lower end of that. We've always focused on being the quality provider in the marketplace. So that would be on the client side. On the -- what we pay outside those, so driving to margin, that is a key attribute to what we do. So if we can take volume as we grow and put it in fewer and fewer appraisers in tighter areas, we often like to think about them as a FedEx truck driving around with only one package on the truck. As we load, that's how we get pricing power with our appraisers. So that's what's been driving the margin expansion in the business, and is actually a very important component of how we drive earnings. Thank you.

I'm [ Alex Dezanine ] from Dallas, Texas. I'm a Shareholder. The first question I had was on the appraisal side of the business. It seems like you guys win or have such a higher standard of service due in part to technology. Are there any competitors, traditional or less direct guys like CoreLogic or Fidelity National that have features or tech that you admire?

It's a great question. I don't think I've ever been asked that before. I would say with respect to what we're doing at appraisal management, I would say the answer is no. Most of the technology out there is really been built around workflow automation and appraisal management. So it's around -- we have staff appraisers or we have cheap appraisers and they make errors. So how are we going to efficiently manage our operational structures or our quality control structures? So many of the technologies are around optimizing the workflow at the back end of the bus. Our objectives and our technology are driving on network management at the front end of the bus. So how we engage the right appraiser to do the job right the first time. We don't want to correct the error. We don't want to have a workflow or a QC process that catches the error. We want to prevent it upfront. So the technology investment and the operational investments are actually directly opposed in terms of where we fund versus our competitors.

And again, kind of on the appraisal side, it's -- I think you're more customer-focused than sort of focused on competition. But have you seen the competitive dynamics change at all over the past 18 months or 2 years with guys trying to get into the market that it looks like you guys are growing really well in?

We always watch. But we have not seen the competitive landscape change. I think what's interesting about the U.S. mortgage market is the segmentation is really important. So I'm a big Crossing the Chasm fan, and there are thousands of banks in the U.S., but the top 100 banks do 80% to 90% of the volume. And those banks have fundamentally different needs, even within that 100 segmentation, top 6 takes very different than maybe federal credit union, that it makes it very difficult. They tend to be a national player. So the upstarts try to get in and start with a really small 3-branch community bank that's servicing features and functions and maybe a giveaway. And as you move up, the banks are focused on reliability, consistency and security, and they have to sign off on us as if they did the work. So they're actually a balance sheet strength, et cetera. So it's a really hard chasm to climb. We see lots of attempts. We had some folks -- we were fortunate to launch right after the mortgage crisis when so many of those lenders at the bottom end of that had to make a flip out and put a compliance later in. So there's maybe 3 of us at the time. I know 2 of them are gone -- or one of them -- I don't know what happened with the third one, but might be inside another organization somewhere. But I think what we did well was being very focused, disciplined on where we were going and where investments were. So we actually shed clients from the early days in order to focus on the features and functions in investments and service that we need to do in order to drive to get the volume. And even then we'll be knocking on a Tier 1 bank door and they'd be like that's cute when you guys are national and can handle an order anywhere, then come back and talk to us. And so if any win the regional banks, and as we started to get into the Tier 1s, then they tend to move as a segment and a cohort. So we're finding the title business is moving in a very similar fashion.

And then lastly, my last question is, on a title business, your appraisal business to me, the value prop seems much more clearer and your advantage seems much more clearer today. And then 10 years out, what are the pain points you would really like to solve on the title business to grow your market share there?

Great. So today, we're focused on centralized refi. And when I use that word centralized, it really is around how the volume is organized. So it's the bank requiring a vendor, connecting to their mainframe, and that's the same thing we do on the appraisal side. So it's operationally driven. You bring in the dynamic then of the consumer. What was the consumers' experience? So a consumer NPS rating would be important then on that dynamic. But it's a sort of similar quarterly progression where they're reviewing and scorecarding us versus their other vendors that drives the share gains. So that plays really well and lines up to our core appraisal execution. When we move then beyond refi, and this is all that's in our 2021 plan so far, stay tuned, we plan on going after the centralized, purchase-driven business from the same banks. So -- versus a decentralized sort of retail execution. So think about call center-driven purchase activity, prequalifying for a new purchase loan and being able to integrate within those systems. So where operational excellence is important, but where we're also integrating into the rest of the execution for the bank to drive a great customer experience. And we think that will bode well. The low-hanging fruit, of course, is the refi for us to drive that. Thank you.

Any other questions? Okay.

Great. Thank you all. That concludes our meeting, and thank you for joining us today, and enjoy the rest of a snowy day.