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

Good morning, and welcome to the Real Matters Conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to your host today, Lyne Fisher, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, operator, and good morning, everyone. Welcome to Real Matters' conference call. With me today are Real Matters' Chief Executive Officer, Jason Smith; and Chief Financial Officer, Bill Herman. Yesterday afternoon, we issued a news release indicating that the company is not aware of any undisclosed material development that would cause yesterday's movement in the company's share price. In the release, we also shared our views on the market, which is subject -- the subject of today's call. 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. These forward-looking statements are based on management's experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe to be appropriate and reasonable in the circumstances. The forward-looking statements reflect management's beliefs based on information currently available to management, it should not be read as a guarantee of the occurrence or timing of any future events, performance or results. Forward-looking information is subject to risks, uncertainties and other factors that are difficult to predict that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. A comprehensive discussion of the factors which could cause results or events to differ from current expectations can be found in the Risk Factors section of the company's annual information form for the year ended September 30, 2019, which is available on SEDAR and on our website. With that, I'll now turn the call over to Jason.

Thank you, Lyne, and good morning, everyone, and thank you for joining the call on such short notice. Given the extreme volatility in capital markets we've seen over the last week due to the COVID-19 pandemic, including the sharp decline in our share price yesterday, we thought it prudent to hold this call and update investors on the state of our business and provide our views on the U.S. mortgage market going forward. These are unprecedented times, and so we are taking additional measures to ensure our investors have a firm understanding of where we stand today. First off, I'd like to iterate that we are not aware of any undisclosed material development that would have caused yesterday's movement in the company's share price. As we stated in the release, during the month of March, we have received record daily order volumes in both our U.S. Appraisal and U.S. Title businesses. In recent weeks, it was widely reported that mortgage lenders faced capacity issues related to the volume of refinances they were processing, noting that they were not able to handle the loan volume they were receiving and were, therefore, incented to keep rates slightly higher to stem the rush of incoming volumes. With the 10-year Treasury yield hitting historical lows of 1% and below, mortgage rates in the U.S. tracked to 3.2%, a level well below the mortgage rate in place for most U.S. mortgages. Mortgage companies across the country are experiencing a surge in mortgage demand. Many lenders are still busy trying to process the loan applications they've already received that they're pushing their interest rates above the prevailing funding rate so they can actually deliver on the loans they already have in their pipeline. Notwithstanding the short-term impact that COVID-19 may have, as of today, we continue to receive strong volume, and the appraiser and notary networks on our platform are performing well. Further, although a handful of consumers and field professionals have not been comfortable proceeding with an appraisal inspection or mortgage signing, the vast majority of loans we have received have been met with the consumer wanting to fulfill the mortgage and a field professional wanting to support the local transaction, and both have respected social distancing. This local dynamic is resulting in most mortgage requests, even in this environment, coming to fruition. To date, we have not seen any material change in our appraiser or notary capacity. The vast majority of field professionals on our network are accepting orders from us, and it's business as usual. That said, we've been proactively communicating with our field professionals to ensure that they take extra precautions by asking the right questions, practicing social distancing and doing things to minimize surface contact during appointments to protect themselves as well as homeowners. We are very proud of the field professionals on our network and their diligence during these uncertain times. From an operations perspective and under our business continuity program, we have moved approximately 80% of our network management and operations to a remote model as a precautionary measure and have not seen any material change in our productivity as a result. Further, being able to sale over the remote network management is a core capability of our company and a core tenet of our business continuity commitment to our regulated lenders. We are very pleased that this has transitioned over seamlessly and without any interruption to our clients. We believe that low U.S. mortgage interest rates will create a large, multiyear market opportunity for us. At recent mortgage rates, we estimate that more than 14.5 million U.S. mortgages are incented to refinance, representing roughly 70% of outstanding mortgages. This estimate is based on saving at least 75 basis points and an estimated mortgage rate of 3.25%. These figures also take into account appropriate loan-to-value and credit scores. Further, under normal credit market conditions with a spread of 1.7%, a 10-year Treasury rate of 1.2% would deliver a mortgage rate of 2.9%, which is well below the conditions necessary to drive this level of mortgage refinances. We further estimate that if lenders increase underwriting capacity by 20% annually, it would take approximately 2 to 3 years to cycle through this volume. Let me give you some additional color on how we arrived at this estimate. We believe that the industry currently has the capacity to service 1 million mortgages per month. If we assume that there are 6 million purchases per year, this leaves the industry with the capacity to service 6 million refinances per year or 500,000 per month. Assuming lenders are able to increase their capacity at a rate of 20% annually to respond to additional demand, it would take over 2 years to service this swell in refinance volumes. Yesterday, the Mortgage Bankers Association announced that refinance activity remains very high. Applications were up 100% from 1 month ago and 402% year-over-year. Despite everything that is going on in the world today, our clients are reporting to us that they continue to see high application volumes, although they also have no certainty with respect to issues that they may encounter at the local level. Finally, I want to highlight Real Matters' strong balance sheet. As you know, at the end of December, we had over USD 80 million on our balance sheet and no debt. We also have access to over USD 40 million in credit lines from our banking partners, if required, giving us a total liquidity position of over USD 120 million. And as we've said before, we view adjusted EBITDA as a proxy for cash. We are very well capitalized, which also puts us in a very strong competitive position. Overall, Real Matters is well positioned due to our business model and our financial strength. Before I open it up for questions, I'd like to sincerely thank our team, the field professionals on our network and our shareholders for their unwavering support. Now more than ever, you're enabling us to support thousands of homeowners at a time when they need it the most. With that, I'll open the line for questions. Operator?

[Operator Instructions] And the first question comes from Robert Young with Canaccord.

You said in the comments that the appraiser or notary network was operating well. Maybe you could expand a little bit on that. I think you said that most or the vast majority of in-person appraisals are going through. Is there anything around performance or ability to scale to these volumes, your ability to continue to scale the appraiser network, are you confident there? And has the COVID-19, has that led to any concern on the availability of appraisers and notaries in the future?

Thanks, Rob. So maybe I can address your scale question first. If we were to look at March, as I said, we had record volumes. I would say we had no difficulty in managing volume across the network. And we see big numbers. We see 400% up year-over-year. We see 100% up month-over-month. But really, if we go back and look a year ago, we were near multi-decade lows of refinance activity. So I think the constraint in the industry is actually underwriting capacity within the lenders. And so even at March, when we were humming, we're seeing record volumes. We had no issues scaling that work and getting these requests fulfilled, and we were operating very well. And so now if we introduce COVID-19, certainly, this has interrupted everyone's life. And as I said in the script there, in my opening comments, that we had a handful of cases where the consumer and the appraiser or closing agent have decided not to proceed. We have to remember that there's a consumer who wants to have this mortgage. This is going to reduce their mortgage payments. This is going to -- they're doing a cash out. It's going to put cash in their pocket. So they started this process incented to want to get this loan done, and you've got an appraiser and a credible field agent network that live in that community that are feeling that it's their duty to be helpful here. So it's a handful of issues that we've had, and the network is performing very well.

Okay. And then what do you see as any risk that the banks might see the refinance volume in front of them, they might see that as a higher level of risk and ramp back their activity there.

Yes. I mean look, I think that banks' pipelines were completely full, and they were actually raising rates to slow down the volume. I mean 14.5 million mortgages incented to be refinanced at 3.25% and yet the industry only has the capacity to manage 1.5 million a quarter. So I think that's more the dynamic, and we could see a raise in rates. We could see changes in rules. But we're dealing with such a large number of mortgages here that the industry can't handle. So I think that will continue to be supportive. But notwithstanding, these are uncertain times and things could happen at the local level. And we're, of course, watching that very closely. But I think we continue to see very strong volumes, including today. And just to put it in context, like these are numbers that if you saw and looked at mid-February, we'd be like, wow, those are really strong numbers. So we're going to be thoughtful, watch the ground. We're going to make sure we're careful about the safety of the network and communicating properly and being good partners with our banks. But it's business as usual at the moment.

So I guess, would it be fair to say that the mortgage lenders are dealing with catching up on volume that they had in their system even before the pandemic concern?

Yes. I mean normally there's a lag before we receive files, and we're watching that closely. But as I said, I mean, a good proxy is that consumers still want to get these loans done. The networks still want to do it. Those are happening every single day. And we'll watch the situation closely. But so far, it's business as usual.

Okay. Last question for me is just if you look out beyond COVID-19, hopefully, this all wraps up quickly and it isn't the horrible stuff that's happening right now for long. Do you think that this is going to accelerate your Title business like the larger lenders going to recognize that there is a better way to do this? And given that all of the backlog that they have, if they slow down a bit, are they going to look at Real Matters more closely? Then I'll pass it on.

Yes. Thanks, Rob. Yes, I think, as I said in our last conference call, I think that when you've got this surge of volume, I mean, these are mortgages that we never anticipated were going to hit our business. These were mortgages that were never going to be refinanced. They were already at low rates. So this pushed the whole industry at a time lender capacity was low on a historical basis. So I think that, that is supportive of us being able to service in the big need of the regulated banks that we service on the Appraisal side and supporting them on our Title business. That is our focus. As you know, we're long focused. We're focused on that market share. And servicing our biggest bank customers on the Title business is an objective. I would say that we're also, I think, being recognized for having a stellar execution in this environment and a very strong balance sheet, which I've talked about for many years now and how important that is. And I would say that from a competitive position, there are other players in the market that would be servicing banks that may not have those strong resources. So I think from a competitive position in this environment, this really allows our operating model and our platform to shine.

[Operator Instructions] And the next question comes from Thanos Moschopoulos with BMO Capital Markets.

First of all, thank you for doing this call. More information is always welcome in a climate like this. I guess, firstly, how should we think about any potential gross margin impacts on your operations? Anything we should anticipate on that front given more remote working and other circumstances?

Yes. Nothing I would call out there specifically. I mean, certainly, with a surge of volume that we were seeing in a very high refi market in -- as February and March proceeded, you would see a thinning of that net revenue margin because we would be looking to build capacity within the network, but -- from where we reported the previous quarter, but all in line with how you would have seen volumes move and affect our network in the past. So nothing I would call out there specifically, Thanos.

Okay. And in terms of building up capacity, is that process being at all impeded? Or can the regional managers just reach out to appraisers remotely and bring them on board as they have historically?

Yes. Look, I think it's a local business, and our model, where we have a region manager that's overseeing this network and with the health of our platform, is going really well. We have phenomenal relationships. That loyalty has been really strong in our network. And we're getting all of the orders done that we need to get done.

Okay. And then on the OpEx side, any changes we should anticipate there relative to your prepandemic trajectory? Or should it be kind of business as usual on the OpEx side?

Why don't I turn that question over to Bill. Bill?

Sure. Thank you, Jason. And thank you, Thanos. I don't think that we have any significant line of sight to a change in OpEx. So I think the short answer will be business as usual for the time being.

And the next question comes from Richard Tse with National Bank Financial.

Just a quick one here. Obviously, you've got a surge going on, on the refi side. I was wondering if you'd maybe give us a bit of color in terms of what you're seeing on the new originations market.

Yes. It's an interesting time of the year. As you can imagine, in January and February, you don't typically see strong purchase activity for new homes or existing homes. But we did see strength in January and February more than you would normally see, be it that weather or rates or just the economy coming into it. And then you really can't get a handle on a pure spring market until the last 2 weeks of March in a normal year. So the majority of volumes that are coming in the door are refinances. And I wouldn't say that we've seen anything to date that COVID-19 has changed with respect to that, but we're watching it closely. Putting in context our refi -- our Title business is all refi, so it's sort of indifferent there. On the Appraisal side, I'd say that backdrop is how many mortgages there are that are in the money to be refinanced, and so I would say that if there is a drop of purchase activity, that I would expect the refinance activity would take its place just given the capacity constraints that we said before. But we're going to watch this. These are uncertain times, and we'll keep our eyes and ears open.

And the next question comes from Daniel Chan with TD Securities.

Your balance sheet is strong. You're one of the few companies in this environment that's going to benefit here and possibly accelerate your growth. Given the pullback yesterday in the stock price, any thoughts on using the buyback to support the shares here?

Yes. Maybe I'll turn that one over to Bill.

Sure. Thanks. So Dan, I think you've heard this from us a number of times. We remain an opportunistic buyer under our NCIB. And our current share price -- the current share price, we certainly believe that our shares are undervalued, so we're continuing to support the stock under the NCIB and active in that regard.

Okay. And then, Jason, you said you're seeing a lot of applications. There are some questions on how the banks may respond here. But is there any sense or chance that the uncertain economic impact, with that, that the lenders will start seeing a more -- will start taking a more cautious approach to lending and maybe start tapping the brakes a bit until there's more clarity on borrower's ability to pay the loans?

Yes. I mean, look, these are drivers that are not in our control. And we're talking to our lenders. And real estate is -- and mortgage lending is a local business. So you could have an issue in one part of the region and volume and attention could flip to another, and so we're just going to watch that very closely. And I would say, though, that our focus, Dan, is on the long game. I mean this is a 2- to 3-year massive refi opportunity for us and whether or not it slightly got slowed down or materially got slowed down because of some significant change within the lenders in the short game, I think to the extent that you believe that rates will stay low after this, then that would be supportive of this very large market opportunity. And so that's what we'll stay focused on. But I suspect we'll continue to do business in parts of the country and be supportive. And I really like to think about what we do is essential to homeowners right now, helping them lower their payments, helping them access cash in their home, so they can -- the equity is huge in the home right now will be our focus. I think the lenders are feeling that important role in the process. I think the Fed has been buying mortgage-backed securities. They understand this important role. So I think there's a lot of drivers here to try to be helpful and I think that will be supportive in the short run, but we're focused on the big, long game.

Yes. That's helpful. And then final question for me. The housing supply in the U.S. has been pretty low for quite a while now, but is there any sense the housing development activity has also slowed as a result of the outbreak? And what kind of impact would that have on purchase originations?

Yes. I don't have a data point on that. I think one interesting discussion I was having was actually around 1/3 of all homes after the financial crisis were purchased with cash and by investors who turned them into rental. And they've had a phenomenal gain on those properties since then. And so it might be interesting if, in an environment like this, that, that shapes out and we see some of that supply come back for homeowners to purchase instead of renting because, certainly, at these rates, it's more cost-effective to have a mortgage and own it as to rent. But in terms of new construction and supply, I have no data on that at the moment.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Lyne Fisher for any closing comments.

Thank you, operator, and thank you, everybody, for joining our call on such short notice. Please be well and stay safe. Thanks.

Thank you.