The Real Brokerage Inc. (REAX) Earnings Call Transcript & Summary

I'm an analyst in the tech group at William Blair covering real estate, including covering Real now, which is exciting. So for compliance purposes, required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website at williamblair.com. So yes, we just initiated coverage on Real Brokerage last week, and so we're thrilled to have them participate at the conference again this year, participated last year as well. So good to have them back. The residential brokerage space is highly competitive in our view, but Real seems to be differentiating itself based upon efficiency-based kind of a technology platform that's allowing it to provide market-leading compensation to agents most in the space if they have seen growth. Agent growth at least contracted some here in the first quarter, but Real continues to, I think, put -- just put up a record quarter of agent growth in the first quarter. So we think it's a great time to be looking at the story. So from the company today, we have Chairman and CEO, Tamir Poleg. We have CFO, Michelle Ressler, up here in front. I've also got Jason Lee as well on the IR team sitting here as well. So thank you all for being here. With that, we'll turn it over to Tamir for a presentation. We'll open up for some Q&A after that.

Thank you, everyone, for being here today. My name is Tamir, I'm the co-founder and CEO at Real. We are a technology-powered real estate brokerage. We started the business back in 2014. When we looked at the real estate brokerage industry back then, we realized a few things. One was the fact that it's a large industry. There are 1.5 million agents in the U.S., generating roughly $100 billion in annual revenue for brokerages. This market, at least back then, was dominated by traditional players. And you probably know all of them; Re/Max, Century 21, Coldwell Banker. All of them work in the same model. All of them rely heavily on offices for distribution of services. All of them also apply manual labor in order to process transactions. And when we looked at their models, we realized that agents are paying a lot of money through their brokerages and getting very little value. So at that point, 9 years ago, we realized that there is an opportunity to create a different kind of brokerage and that's why we created Real. Fast forward to today, we are licensed in 47 states in the U.S. and in 4 provinces in Canada. We have over 11,000 agents working with us exclusively. By the way, an agent can only work with one brokerage. So all of the agents who decided to join us had to leave their prior brokerages. To give you a sense of what it means to be at 11,000 agents, it means that we are a top 10 brokerage in America right now, even though probably you never heard about us, which is interesting, but we'll get into that. We're -- we have 150 employees, a fully remote company, even though we're headquartered in New York, raised $64 million to date, still have $20 million in the bank. We are cash flow positive. As of this quarter, we're also adjusted EBITDA profitable, which is a huge milestone for us. But going back to the fact that we are publicly traded, in 2020, we took the company public, initially on the TSXV in Canada and then a year later, we listed on Nasdaq. The reason for going public, at least back then, when we were a tiny company making $10 million in revenue was our decision to create an equity incentive program for our agents. If you think about a brokerage, there are 3 parties that actually help a brokerage grow. One is the team, the investors and the third are the agents. So we decided that we wanted to create an incentive program for agents and doing that on a publicly traded platform is more appealing. So we decided to go public. The same summer of 2020, we -- alongside going public, we also changed something in our marketing strategy. Instead of acquiring agents online, meaning paying Google and Facebook, a lot of money, in order to advertise, we decided that we are going to rely on our agents to go and attract their friends and their communities, and this is how we're going to grow. Almost overnight, our growth just accelerated tremendously. So in 2021, we grew revenue by 635%. Last year, which was a rough year for real estate in general, you probably are aware, we grew revenue by 212%. And in the first quarter of 2023, when the market contracted by about 30%, we were the only player in the brokerage space that actually grew positively. We grew 75% year-over-year. So tremendous growth. And the reason why we're growing so rapidly is a combination of 2 things. One is growth in agent count. Last quarter, we grew agent count by 120% year-over-year. And the second thing is growing per agent productivity. We constantly improved the per agent productivity by attracting higher-producing agents and also helping them close more deals. The reason why so many agents are attracted to us, at least in our view, is that we hit a perfect balance between what we offer agents. So the benefits that we offer, the value that we create for them and how much we charge them. And we will go back -- we will go into the business model. But if you had to ask an agent, a Real agent, why did you join Real? They will probably specify 5 main reasons: One, freedom and flexibility. Think about the average real estate agent. They're independent contractors. They have no job security. They have to be affiliated with the brokerage. And typically, the broker in their office tells them exactly what to do and how to do, how they have to handle their business, and they end up building somebody else's brand. When they join Real, they feel as if this is a platform for them to grow their business on and they have the freedom and flexibility to build their businesses the way they think is best for them. #2 is the economics. Typically, at a traditional brokerage, an agent would be paying monthly fees of $100 to $300, and then they would be splitting their commissions with the broker on a 70-30 basis. 70% will go to the agent, the brokerage will retain 30%. In our case, there are no monthly fees. We have an 85-15 split with the agents. And even that is capped. So there's a cap on how much agents are actually paying us every year. And this is extremely attractive. On average, an average agent will be paying half of what they are paying at a traditional brokerage. And for the higher producers, they will probably be paying less than half here at Real. So this is very attractive for them. #3 would be the technology. We are a technology company. We are mobile focused because we believe that agents should be out nurturing relationships with their clients, and they need a powerful tool, an app that helps them manage their business. The technology that we built is an operating system for agent businesses. We help them with everything, everything from searching listings to creating contracts, to marketing themselves, to educating them, to supporting them. Everything is in the palm of their hands, and it's an extremely powerful tool that we invested tens of millions of dollars in. The fourth reason why agents are joining us is culture. And culture in a brokerage probably doesn't mean much to all of us here or all of you who don't really know the industry, but for agents, culture is extremely important. They want to be at a place that allows them to get to the next level in their career. They want to be around people who want to collaborate and want them to succeed. And I think that the fact that agents have equity in the company helps them feel as if they're part of something bigger. So culture is extremely important, and that attracts a lot of agents to the company. And #5 would be the financial opportunities. Aside from the favorable economics for agents, we allow agents to make money in different ways. If they attract their friends to the company, they make a piece of the revenue that those friends are generating for the company. They earn equity in the company they have built. We recently introduced a JV model on the title side. We own a title company and agents can become owners in a title company and monetize their transactions not only through commissions, but also through title services. So all of those opportunities are extremely attractive for agents that, again, are independent contractors and small businesses. In terms of our business model, the vast majority of our revenue comes from splitting our commissions with our agents, as I said, on an 85-15 basis, with a $12,000 cap. So once agents pay us $12,000 a year in commission split, they get to keep 100% of their commissions and they only pay a small transaction fee of $285. Again, very attractive. On top of that, there's a joining fee, a onetime joining fee of $249. There is an annual brokerage fee of $750 and then a transaction fee of $30. Those fees may add up, but compared to all other brokerages still very attractive. Earlier this year, we actually increased our fees and introduced a couple of new fees, and those additions or those new fees will result in about $5 million straight to our bottom line this year or even more than that. So a minimum of $5 million. And we are proud to say that we didn't see any churn. We didn't see any pushback from the agents. The reason why there was no pushback is because most of the decisions that we're making are done in discussion and collaboration with our agents. So we have the process of about 5 or 6 months with some agents group explaining to them the situation, and the result was those fees that we introduced. And again, agents are both the clients of the company and they are also shareholders in the company, which makes them look at things from two different perspectives. A little bit about our technology. And as I said, we are mobile focused, and we look at technology as 4 main buckets. One is productivity, everything that helps agents save time and make more money from the very simple task of searching listings in real time to a powerful CRM, to a 24/7 support to the ability to actually draft contracts and send them for review and e-signatures. This is a proprietary product that we have. By the way, the vast majority of our technology is proprietary aside from the CRM that we offer the agents. The second bucket of technology is marketing. And I started by saying that you probably never heard about Real because we are not a consumer-facing brand. People today do not choose agents based on their brand affiliation. People choose agents because they know that, that person is an expert or they've seen their yard signs or their social media post. They know that, that person will help them buy or sell a home. And we acknowledge that, and we understand that, and this is why we decided that we are going to focus our marketing resources into helping our agents brand themselves within their communities. And that has an off-line aspect. When an agent needs to order business cards, yard signs, brochures, you name it, everything is doable or available on our marketing platform. On our app, everything is customizable. They can order. It gets shipped to them. And there is an online aspect to it. Almost 100% of people today start their home search online. And as an agent, you have to be there. You have to meet them online. So we help our agents with their online presence. They get a personal branded website, a personal branded app. They can invite their clients to download the app, visit the website, look at their buyers, look at their listings, chat with them directly. And by the way, everything is included in the package. They don't have to pay any extra for anything that we offer them. The next bucket of -- the third bucket of technology is community. As a company, we don't have offices for agents to use. We think that offices is a huge burden, a huge expense. We don't need it. A lot of our agents or teams just run their own small office spaces. But we also understand that agents want to interact. They want to be sometimes have access to each other, ask questions, celebrate success, create in-person meet-ups. So we have a community feature on the app that allows them to do exactly that. And it's pretty amazing because in many ways, it replaces the physical office and even more than that because when you join Real, all of a sudden, you have access to super successful agents and teams around the country, and you're not confined to that office or a physical space. And it's really pretty amazing to see all of the interaction on the community. The fourth bucket of technology is brokerage operations. Think about a back office of a brokerage where people sit, they provide agents the support, the transaction management, the payment processing. We almost automated all of that. We are the most efficient brokerage in America. Typically, at a brokerage, you would have 1 employee for every 20 agents. Our ratio is 1 to 114. And this is due to a lot of software that was developed in order to replace those human tasks that are being handled in the back office. And by the way, this ratio keeps improving. So we consider that as a huge competitive advantage. It's a huge moat, and we are also getting -- we are always getting better when it comes to that. A little bit on our financial performance. As I said, last year, we grew very rapidly. Right now, as you all know, the real estate market isn't doing great. There's a decline in transaction volume overall. Despite of the market conditions, we are growing very rapidly. We added -- we grew agent count by 120% last quarter. Our agent count growth continues and we think that 2023 is going to continue or to be a strong growth year for us, driven by the fact that more and more and more agents, I think that on a high picture, what's happening right now in the industry is that those 1.5 million agents, 90% of them still work for traditional brokerages. And over the next 10 years, probably 50% of them will be migrating to newer models, and we are one of very few players that are presenting newer models. So $100 billion pie being redistributed, and we are very well positioned to become one of the major beneficiaries of that change that's happening right now in the market. As I said, we are very focused on the agents. But about 1.5 years ago, we realized that there is a lot of pain on the consumer side. I don't know how many of you went through the mundane process of buying a home, but buying a home is not a great journey or a great experience right now. It's broken. It just builds up a lot of anxiety. You have to deal with different stakeholders. It takes a lot of time. There is very little visibility. And we understand that if we truly want to help our agents, we also have to care about their clients. And while we think that agents are critical to the transaction, the human component is critical. We also believe that technology can create great experiences. Last year, we did two acquisitions. We acquired a start-up in the title space and a mortgage company because we believe that if you want to create an end-to-end consumer experience, for homebuyers, you need to own the three main building blocks of a real estate transaction; mortgage services, brokerage services and title services. And right now, we own all three of them. And what we are building is a consumer-facing app that will provide our agents, clients a much better home buying experience, a much faster one, a more transparent one. And we think that this will be a game changer in the industry. From the company's perspective, doing that will allow us to monetize transactions much better. If you think about our business as a huge funnel, right now, we're inviting agents for our platform. Those agents are bringing transactions. The only way we monetize is through broker commissions. But if we were able to monetize through offering a mortgage to that same client, or home insurance or title services or a series of other services, there is potential to make 7x more money out of the existing transaction base, and I'm not even talking about the growth that we're experiencing in transaction volume. So for us, it's a strategic move. We think that this is the future of home buying and this is also the way for us to become massively profitable in the future. And as I mentioned, we are turning into profitability this quarter. Maybe I'll talk for a minute about the market. In the past 4, 5, 6 quarters, everybody was expecting the real estate market to crash. Everybody was expecting prices to crash. What's happening is -- I wouldn't say the opposite, but the real estate market is resilient. What's happening right now in the market is the same kind of phenomenon that we've seen in the first half of 2022. Bidding wars, a lot of buyers out there, offers over asking price, and this is holding prices. The problem is that there is not enough inventory. Homeowners are not putting their homes for sale. A lot of buyers are looking to buy. And we think that as soon as mortgage rates drop to below 6% or 5.5%, there will just be a buying frenzy. And I think that the market is more resilient than all of us realize, and this is the feedback that we're getting from our agents right now. The problem is not buyers. The problem is inventory. From a competitive landscape point of view, right now, we compete with all of the brokerages out there over agents. So the traditional brokerages, the nontraditional brokerages, our closest comparable is a company called eXp trading under EXPI. They started in 2009, I believe. And they're now at 85,000 agents. The models are kind of they remind of one another. But I think that if we look at Real 2 years from now, 5 years from now, we will probably not be positioned as a real estate brokerage. We will be positioned as a real estate services platform because we're offering all of those additional services. And because we're building this unique proprietary consumer-facing journey, so even though we're now labeled as a brokerage, we're probably going to shift into a different direction and the market will start realizing that. So for us, the next couple of years are going to focus on continuing to grow agent count, continuing to drive more transactions into this funnel and then monetizing real estate transactions in a much better way through additional services.

Yes. That's great. Well, that's a good place to start. We've got about 10 minutes left, and maybe I'll start with a couple of questions, then we can see if anyone in the audience has any. But I guess on the agent growth, what are you seeing right now with the agent pipeline? What -- and your ability to attract larger teams. Like how are you thinking about that for the remainder of 2023 and 2024?

It's a good question. I think that overall, we have to acknowledge the fact that because of this downturn or a decrease in transaction volume in the market, a lot of agents are leaving the industry. So I think that this year, we'll probably see 10% of agents just leaving the industry because there is not enough volume to sustain everybody. We grew agent count or we were the brokers that attracted the most agents in the first quarter. I think that the same will happen in the second quarter as well. So this momentum continues. What was the...

Bigger teams. So why...

So it's a good question. Because of the fact that when you're a small player, it's difficult to attract larger teams or higher producers because they want to know that you're established, you have a track record. They count on you with their businesses. So for us, at the beginning, attracting a $100 million team was difficult, a team that sells $100 million worth of homes. Then, our larger team was a $400 million team that we attracted. Now we are in conversations with a couple of billion-dollar teams and more than that, that are interested in joining us. And I think that this is due to the fact that we are becoming a household name and everybody is starting to notice us. There's a lot of buzz in the industry around Real. So I think that over the next couple of months, we will see a couple of billion-dollar teams joining us.

Yes, hopefully. On the efficiency side, I mean, you gave the metric; one, I think it's brokerage employed to 114 agents. Where have you been able to -- like what specifically has allowed you to drive that efficiency? And how do you think about your ability to keep efficiency moving higher over time? Will you need to, at some point, start adding a lot more brokerage employees to support the process?

I think that the opposite is probably true. I think that the efficiency ratio will probably continue and improve. The reason why we were able to do it is, first of all, focus. We understand that brokerage, as a stand-alone, is a low-margin business. And if you want to succeed in that business, you have to be extremely efficient and lean. So from the very beginning, we were focused on efficiency. I think that what allowed us to be that efficient or build those proprietary systems in-house is an excellent understanding of real estate and an excellent understanding of what software can do. And the combination of those two allowed us to build it and also a lot of feedback from our agents. The fact that you have so many agents, thousands of agents providing you constant feedback on what you're building just allows you to improve. So I think that efficiency will continue to be a major factor. We are now intending to bring that efficiency into our mortgage business and into our title business. And I think that this is one of our competitive advantages overall.

Do you get any pushback from the level of support you're providing agents?

Actually, on the contrary, we are a full-service brokerage and agents here experience a better service than they were experiencing when they were sitting in the same office with their broker or their brokers team. So I think that the opposite is the reality.

And then on the consumer side, I mean, that's something apprehend a lot about how complex the process is, how -- especially first-time homebuyers just don't have much of visibility. You guys already have the tools in place for agents to have visibility into the next step in the process or pulling in some third parties into the platform as well. Now you're talking about -- I don't know exactly when, but hopefully maybe in the next couple of quarters, I don't know, but pulling in giving consumers the ability to have that visibility in the process too. As you think about pulling in consumers, what do you need to get right?

I actually think that it's much more than visibility because if you would have a roomful of brokers and agents and you would ask them, what is it that buyers want when they contact you? They would tell you great service, education, responsiveness, that type of things, but what buyers truly care about or what they want is the home. Like, they don't care about nothing. They don't care about a mortgage, a title company, an agent. They just want a home. They want to take their money and get a home as quickly as possible, as smoothly as possible. So I think that there is a need to completely reimagine the home buying process. Now we understand that this is the biggest financial decision that an individual will make. They need an adviser. They need an agent to hold their hands, educate them. But they don't want to go through all of those steps and all of those documents and all of that time and all of that back and forth and all of that uncertainty around whether the transaction will close or not and when will it close? So we're trying to just take all of those things that currently do not work and deal with them in the background without involving the consumer. So that, for them, once they meet our agents, they will download the app. The app will ask them about their desired property. They will ask them about their financial situation. And within minutes, we will be able to tell them, okay, this is what we can do for you in terms of mortgage. This is a guarantee. This is not a question mark. This is not maybe we will close, maybe we will not close and then go look for homes. Once you see something that you like, put an offer. We can close in 14 days guaranteed and that's it. You will not hear from us in the next 14 days. You also -- you only see us at the closing table or maybe we'll even come to your home and get you to sign the papers. So we think that it's just mind blowing to think that e-commerce has evolved so much and it's so convenient to buy things today, but still buying a home is the same journey and process as it was 40 years ago. And that needs to change.

There's been very little innovation on that side. We've got about 3.5 minutes left. I don't know if anyone in the audience have any questions. Otherwise, I'll keep going.

There is a 10% decline [indiscernible] how does that step to 19%? And particularly, if you can quantify it like in ratio terms, sort of like agents to supply [indiscernible]?

So transaction count has dropped by anywhere between 25% and 30%. It takes -- I mean sometimes agents just keep their license active, but they're not doing anything. And I think that all agents are suffering right now. So I don't think that there's any agent who would tell you this is a great market, and I actually increase my business compared to last year. So I think that we will probably see another couple of percentages of agents leaving the industry. And then they will -- when the market picks up, there will be more business to fewer agents. And in 2008, I believe, we saw was close to 40% or so of the agents who left the industry.

It kind of laid out, I think, over like a 3 or 4-year period -- over the next 3 to 4 years...

I mean, the 2008 crisis. I don't think that this is anywhere the same. But it's also -- the market knows how to correct itself. And the agents that were closing 1, 2 transactions a year and all of a sudden, there's not enough work, and it's more competitive than before, then they filter out.

Any other questions?

Since you launched the title JV, how is participation [indiscernible] and then also, is that a material source [indiscernible]?

So the ancillary services are still very young at Real. We launched the title JV just a few months ago. Title JVs is an opportunity for agents to actually become partners in the title company and then make money out of title services. We have two different JVs. One is for capper, so the agents that are producing higher than average and then there's an open JV that is open to all agents. Again, we started just a couple of months ago. We actually see great adoption by the agents. So on the title JVs, we see attach rates of north of 70%. So the agents are sending most of their transactions to that title company, which is great. And now we're expanding to additional states. So I think that this is still early on, but very encouraging signs.

Sounds good. Well, I think we can end it there unless there are any other pressing questions. If not, we'll move it up. So thank you so much, Tamir. Thank you for being here. Breakout is going to be in burn and be upstairs. So if you want to dig in more, come join us up there. Thank you.

Thank you.