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Edited Transcript of REAL.TO earnings conference call or presentation 6-May-20 2:00pm GMT

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Q2 2020 Real Matters Inc Earnings Call THORNHILL May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Real Matters Inc earnings conference call or presentation Wednesday, May 6, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brian Lang Real Matters Inc. - President & COO * Jason Smith Real Matters Inc. - Founder, CEO & Director * Lyne Beauregard Fisher Real Matters Inc. - VP of IR & Marketing * William P. M. Herman Real Matters Inc. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Daniel Chan TD Securities Equity Research - Research Analyst * Gavin Fairweather Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research * Paul Steep Scotiabank Global Banking and Markets, Research Division - Analyst * Richard Tse National Bank Financial, Inc., Research Division - MD & Technology Analyst * Robert Young Canaccord Genuity Corp., Research Division - Director * Steven Li Raymond James Ltd., Research Division - Director & Equity Research Analyst * Thanos Moschopoulos BMO Capital Markets Equity Research - VP & Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the Real Matters Second Quarter 2020 Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Lyne Beauregard Fisher, Vice President, Investor Relations. Thank you. Please go ahead, ma'am. -------------------------------------------------------------------------------- Lyne Beauregard Fisher, Real Matters Inc. - VP of IR & Marketing [2] -------------------------------------------------------------------------------- Thank you, Operator, and good morning, everyone. Welcome to Real Matters' financial results conference call for the second quarter ended March 31, 2020. With me today are Real Matters' Chief Executive Officer, Jason Smith; President and Chief Operating Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning before market open, we issued a news release announcing our Q2 results for the 3 and 6 months ended March 31, 2020. The release, accompanying slide presentation, as well as the financial statements and MD&A are posted to the Investor Relations section of our website at realmatters.com. 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 and 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 and 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, and under the heading “COVID-19 Impact on Risk Factors” in our MD&A for the 3 and 6 months ended March 31, 2020, each of which is available on SEDAR and on our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA, and adjusted EBITDA margin. Non-GAAP measures are described in our MD&A for the 3 and 6 months ended March 31, 2020, where you will also find reconciliations to the nearest IFRS measures. With that, I'll now turn the call over to Jason. -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Lyne. Good morning, everyone, and thank you for joining us on the call. I will kick things off today by discussing some of the highlights of our second quarter. I'll then hand it off to Brian, who will provide his remarks regarding performance of our operations in Q2 and through the first stages of the COVID-19 pandemic. Bill will then take a deeper dive into our segment financials, and I'll wrap up the call with some brief remarks prior to us taking your questions. Turning to Slide 3, we reported another very strong quarter in Q2 as we continued to outpace the market in terms of growth. We recorded market-adjusted growth of 18.5% in U.S. appraisal and 145.5% in U.S. title as a result of significant year-over-year increases in market share and new client additions. We also benefited from a very robust U.S. mortgage refinance origination market due to lower interest rates. As we've outlined previously, our model is built to scale. Our second quarter results continue to demonstrate the impact higher volumes have on our financial performance. Consolidated adjusted EBITDA increased to $14.6 million from $2.8 million in the second quarter of 2019. Sustained strength in the U.S. refinance origination market continued to provide a healthy backdrop for our growth. The spring purchase season started early this year and was off to a strong start prior to the onset of COVID-19 in mid-March. Notwithstanding the impact that COVID-19 had in the second half of March, which impacted lender underwriting capacity and the purchase market, we continued to see weekly mortgage origination volumes that were higher than any week in 2019 through the end of March and, in fact, through April. In fact, the month of March held up very well in the face of COVID-19 and accounted for 40% of net revenue in the second quarter. We reported consolidated revenues of $109.6 million in the second quarter of fiscal 2020, up 73.3% year-over-year, and consolidated net revenue was up 79% year-over-year to $35.9 million. We estimate that U.S. market volume was up 23.1% in the second quarter of 2020 relative to the same quarter last year. Our estimate of the market change includes growth in the U.S. mortgage origination market of 40%, which was offset by a decline in estimated home equity and default volumes of 10% and 45% respectively. The increase in total origination volumes of 40% comprises estimated purchase volumes that were down 5% and an increase in estimated refinance volumes of 122%. We also estimate that average loan sizes for purchase and refinance activity increased about 18% year-over-year. We posted another very strong quarter in our U.S. appraisal segment, with market-adjusted volume growth of 18.5% year-over-year. For origination-only volume, market-adjusted growth was 19.4%. Much like in Q1, we benefited from significant year-over-year market share increases with our clients, including our tier 1 lenders. We also launched 1 new top 100 lender and went live in a new channel with another top 100 lender during the quarter. U.S. appraisal net revenue was up 64% and adjusted EBITDA was up 116.5% on a year-over-year basis. Our U.S. appraisal business benefited from a strong purchase volume up until the onset of COVID-19 in early March, which subsequently caused a significant slowdown in purchase activity. Conversely, refinance market activity was strong throughout the quarter, with a significant spike in early March, which helped offset the slowing purchase market and filled lenders' pipelines to capacity. We believe that COVID-19 reduced productivity and, in turn, industry underwriting capacity at the end of the quarter, placing a ceiling on a number of applications that could be processed. As a result of these capacity constraints, lenders moved to increase rates in mid-March, which caused refinance application growth to slow towards the end of the quarter and into Q3. Our U.S. title business benefited from the same market dynamics. However, given its heavy refinance focus, the title business has, and will continue to, demonstrate outside gains relative to our U.S. appraisal business in a low interest rate environment. We had very strong year-over-year market share growth in our U.S. title business in the second quarter. We also went live with 3 new lenders. U.S. title revenues are also typically recognized 45 days after application, and so the early March surge that benefited our U.S. appraisal segment will carry over into our third quarter results for U.S. title. Second quarter U.S. title segment revenues rose 108.3% year-over-year, and we've recorded market-adjusted volume growth of 145.5%. We calculate market-adjusted volume growth based on our estimate of the total market. However, our U.S. title segment almost exclusively services refinance activity. We estimate that U.S. refinance market volumes were up 122% year-over-year. The significant increase in adjusted EBITDA and adjusted EBITDA margins in our U.S. title segment reflects the scale of our business from higher volumes. As we continue to grow in U.S. title, we expect this segment will contribute an increasingly higher proportion of consolidated adjusted EBITDA, going forward. Our U.S. title sales pipeline is strong, and our team continues to advance discussions with current and new potential clients. We are demonstrating the resilience of our model and our ability to maintain our competitive advantage in this environment. The heightened level of refinance activity continues to highlight the need for lenders to add new vendors. We have the capacity to launch new clients. However, most lenders are focused on managing through COVID-19 issues than adding underwriting capacity at this time. We continue to be actively engaged in discussions with prospective clients, and we remain confident in our ability to grow. In our Canadian segment, second quarter revenues were up 40.6% year-over-year, and adjusted EBITDA increased to $0.8 million from $0.4 million in Q2 2019, driven by higher appraisal volumes from increasing market share for certain Canadian clients, and a strong mortgage origination market in Canada. The Canadian mortgage market has been less resilient to the impacts of COVID-19 because it does not have the same market for refinances that exist in the U.S. And so we expect weaker results in the third quarter as a result of the pandemic. Our insurance company clients have put a temporary hold on their insurance inspections during COVID-19, and we expect these inspections to be completed once the restrictions are lifted. In the interim, we have redeployed some of our internal resources to support our growing U.S. title business. Up until the onset of COVID-19, the Canadian mortgage market had been stable for a long time. A return to stronger collateral underwriting standards may be a favorable trend for us in the Canadian management market post-pandemic. With that, I'll hand it over to Brian. Brian? -------------------------------------------------------------------------------- Brian Lang, Real Matters Inc. - President & COO [4] -------------------------------------------------------------------------------- Thanks, Jason. Second quarter proved to be very busy for Real Matters. Both our U.S. appraisal and U.S. title revenues hit a record high, and our U.S. title business closed the highest number of transactions in its history. Not only did the business continue to perform at the top of lenders' scorecards, we managed to do this while shifting our operations to a remote work model because of COVID-19. Starting March 16th, Real Matters moved to a remote work environment for 96% of its 700-plus employees. The move was made in a matter of days, with virtually no loss in productivity. As we've said before, being able to failover to 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 transition occurred seamlessly and that we have continued to operate without any interruption to our clients. Despite these challenging times, the appraisers, notaries, attorneys and abstractors on our network continue to deliver unwavering in their support as essential service providers and consistently going above and beyond for our clients and their customers. Without them providing these essential services to the mortgage industry, tens of thousands of Americans would not be able to move into their new homes, access equity in their existing homes, or lower their monthly mortgage payments at a time when they likely need it most. Because of the strength of our network, we have continued to deliver appraisal and title and closing services across the country. Although a handful of borrowers and field professionals have not been comfortable proceeding with an appraisal inspection or mortgage signing, the vast majority of transactions are being completed while adopting social distancing techniques to eliminate physical contact. To date, we have not seen any material change in our appraise or closing agent capacity. Our clients continue to be satisfied with our turnaround times in U.S. appraisal, and we are meeting closing dates in U.S. title and managing exceptions exceedingly well, demonstrating our ability to maintain our competitive advantage in this environment. During the second quarter, Real Matters launched Safe Space appraisals and Safe Space closings to support the field professionals on our network and to align with guidance provided by World Health Organizations, as well as state and local authorities. We received very positive feedback from the appraisers and notaries on our network, as well as praise from clients about our response to the pandemic. I'd like to take this opportunity to thank our team and all of the field professionals on our network for their outstanding performance during the quarter. Without their commitment and professionalism, we would not have been able to support our clients and continue to perform throughout this pandemic. I'd also like to thank our clients for their continued trust and partnership. Looking at where we are today, I'm encouraged by the conversations that are unfolding at the federal, state and provincial levels as we move forward in our thinking and planning our path toward a recovery from this pandemic. As certain geographies begin to ease restrictions, our team has also begun planning for the months and years ahead. Our annual planning sessions are also already underway, and we look forward to sharing some of those plans with you at our Investor Day this fall. As Jason mentioned earlier, our company is poised for growth. We hired 58 new employees in the second quarter, another 29 new employees were on board in April, and we continue to actively recruit additional talent. With that, I'll turn it over to Bill. Bill? -------------------------------------------------------------------------------- William P. M. Herman, Real Matters Inc. - Executive VP & CFO [5] -------------------------------------------------------------------------------- Thank you, Brian. Turning to Slides 5 and 6 for a closer look at our financial results, consolidated revenues were up 73.3% in the second quarter of fiscal 2020 compared to the same quarter last year due to significant revenue growth in both our U.S. appraisal and U.S. title segments. Revenues in our U.S. appraisal segment were up 65.4% year-over-year, while revenues in our U.S. title segment increased 108.3%. Canadian segment revenues were also up year-over-year by 40.6%. In our U.S. appraisal segment, we serviced higher origination volumes due to an increase in market volumes, market share gains, and new client addition. Our average revenue per unit increased in the second quarter as we continued to service a greater proportion of higher-priced origination volumes compared to lower-priced home equity and default volumes. Transaction costs in our U.S. appraisal segment increased 65.9% year-over-year, a reflection of the increase in volumes serviced. Net revenue of $17.4 million was up 64% in this segment, and net revenue margins declined a modest 20 basis points to 24.4% versus the second quarter of fiscal 2019. On a sequential basis, however, we reported a 140 basis point increase in U.S. appraisal net revenue margins as the pace of relative investments we made in our appraiser panel to service higher current and future volumes slowed in the second quarter of fiscal 2020. Operating expenses in our U.S. appraisal segment increased 20.8% to $7 million, up from $5.9 million in the second quarter of fiscal 2019, a result of higher payroll and related costs due to higher volumes serviced. This increase in payroll and related costs partially offset the increase in net revenue, resulting in a 116.5% improvement in adjusted EBITDA year-over-year. In addition, adjusted EBITDA margins in our U.S. appraisal segment increased to 59.5% in the second quarter of fiscal 2020, up from the 45.1% we posted in the same quarter last year. Compared to the second quarter of fiscal 2019, we converted each incremental dollar of net revenue to adjusted EBITDA at a rate of 82% in our U.S. appraisal segment, 79% when you exclude the impact of adopting IFRS 16. As Jason mentioned, second quarter revenues in our U.S. title segment increased 108.3% year-over-year while transaction costs increased 112.8%, leading to a contraction in net revenue margins of 90 basis points. The decline in net revenue margins was a reflection of strong order volumes received in the second quarter of this year due to falling interest rates, which we will convert to revenues in the third quarter. In addition, net revenue margins declined on lower margins earned on diversified services we supplied. We typically incur transaction costs to search the title on a mortgage origination order 45 days in advance of recognizing revenue, which we recognized in connection with the closing of the transaction. Accordingly, the sequential decline in net revenue margins was in line with the expectations we set out during our first quarter conference call. U.S. title revenues attributable to reported volumes for this segment, meaning revenues generated from our mortgage origination clients, increased to $20.6 million, or 182% from $7.3 million in the second quarter of fiscal 2019. And our average revenue per unit increased due to geographic mix. Diversified revenues increased to $7.2 million from $5.1 million in the second quarter of 2019 due to higher capital markets activity, partially offset by lower commercial and search revenues. Operating expenses in this segment increased to $10.1 million from $7.6 million in the second quarter of fiscal 2019, and adjusted EBITDA increased to $7.1 million from the $0.8 million we posted in the same quarter last year. Consistent with our performance over the last several quarters, the scalability of our U.S. title operations was on display this quarter and delivered a significant improvement to adjusted EBITDA year-over-year. Compared to the second quarter of fiscal 2019, we converted each incremental dollar of net revenue to adjusted EBITDA at a rate of 72%. When you exclude the impact of the adoption of IFRS 16, the conversion rate was 70%. In Canada, revenues increased 40.6% to $7.5 million, while net revenue margins contracted by 240 basis points due in part to a higher proportion of revenues earned from lower margin appraisal services. Canadian segment operating expenses were $0.6 million in the second quarter this year, down 13% from the second quarter of fiscal 2019, and adjusted EBITDA margins increased to 58.3% from 40.6% in the same quarter last year. Putting this all together, second quarter consolidated net revenue increased 79% to $35.9 million, up from the $20.1 million we reported in the second quarter of fiscal 2019 on strong contributions from both our U.S. appraisal and U.S. title segments, as previously noted. And consolidated net revenue margins increased to 32.8% in the second quarter of fiscal 2020, up from 31.7% in the second quarter of fiscal 2019, due in part to a greater proportion of consolidated net revenue coming from our higher margin U.S. title operations. As a result of our strong operating performance, consolidated adjusted EBITDA rose to $14.6 million in the second quarter of fiscal 2020, up from $2.8 million in the same quarter last year. And consolidated adjusted EBITDA margins increased to 40.6% in the second quarter of fiscal 2020 versus the 13.8% mark we posted in the second quarter of fiscal 2019. In the second quarter, we recognized a $0.4 million benefit to adjusted EBITDA as a result of adopting IFRS 16 with no comparative benefit recognized in the second quarter last year. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $89.1 million, an increase of $8.3 million from the first quarter of fiscal 2020. And we continued to purchase shares under our normal course issuer bid, purchasing approximately 1 million shares at a cost of about $9.8 million in the quarter. From the inception of our NCIB, our Normal Course Issuer Bid, in June of 2018, we've returned real value to our shareholders, purchasing nearly 7 million shares at a total cost of CAD39.1 million, the Canadian equivalent of $51.8 million, which represents 7.9% of the total shares issued and outstanding prior to entering our NCIB. And since we first reported our financial results publicly in June of 2017, we've added $18.5 million of cash to our cash and cash equivalents position. Today, not only do we have over $89 million of cash on our balance sheet, but we have access to $40 million to credit facilities available to us. In addition, because we count the majority of the largest mortgage lenders in the United States and Canada as our clients, we've seen continued strength in our ability to collect amounts owed to us. We're also proud to report that we have not utilized any government assistance since the onset of COVID-19, and we don't currently see a need arising in the future. With that, I'll turn it back over to Jason. Jason? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [6] -------------------------------------------------------------------------------- Thanks, Bill. Overall, we were very pleased with how the business performed in the second quarter. We delivered excellent financial results notwithstanding the exceptional circumstances that were caused by COVID-19. Our business proved to be very resilient in the face of this pandemic. We continued to gain market share, launch new clients, and we delivered a 73.3% increase in revenues and adjusted EBITDA margins of 40.6%. Looking ahead to the second half of fiscal 2020, the effective volumes carried over from March applications should drive U.S. title closed volumes higher, buoyed by very strong market share growth even factoring in constrained lender underwriting capacity. In U.S. appraisal, we believe that our volumes for the first quarter of 2020 are a good benchmark for where lender underwriting capacity is at today, notwithstanding a potential reduction in productivity as a result of lenders sustaining remote work environments. With 2 months left in our third quarter, we are not assuming lenders will significantly increase their underwriting capacity for the remainder of the quarter, although it is possible considering that 10-year treasury yields are supportive of more volume than the industry can currently address. Over the next 2 quarters, we believe that, even with potentially higher unemployment, increased forbearance rates, and strength on nonconforming mortgage product availability and reduced property values, higher demand from eligible refinance candidates will continue to fill lender underwriting capacity. We believe that the ability of lenders to increase their underwriting capacity during COVID-19 remains the most significant hurdle to mortgage market growth in the near-term. As we've indicated in our weekly market updates, lenders are actively recruiting additional underwriters to add capacity for the near-term and to support the long multi-year surge in refinance volume coupled with the return of a growing purchase market. Once industry underwriting capacity grows, even if U.S. 10-year treasury rates increase to 1% to 1.2% and remain at those levels for the next few years, we believe this will translate into 30-year mortgage rates of no higher than 3% as spreads normalize. We believe this will create a large, multi-year market opportunity for Real Matters and provide a tailwind to our market share growth strategy, a tailwind that we have not had since going public in May of 2017. Real Matters' long-term strategy has not changed. We are confident in our ability to grow market share in both U.S. appraisal and U.S. title by continuing our focus on our core competency in network management to deliver better performance to our clients. Overall, Real Matters is well-positioned due to our business model, our client base, and our financial strength. And we continue to grow. As Brian mentioned earlier, we continue to hire new talent to support the growth of the business. As we have said before, we view adjusted EBITDA as a proxy for cash, and EBITDA conversion on incremental net revenue has been very strong. We are also very well-capitalized, which is competitively favorable for us. We currently have $89.1 million U.S. dollars on our balance sheet and no debt. We also have access to over $40 million in credit lines from our banking partners, if required, giving us a total liquidity position of nearly $130 million. Before we take your questions, I'd like to echo Brian's earlier comments and thank our employees and the field professionals on our network for their dedication and commitment, as well as our clients for trusting us with more and more of their business. I'd also like to recognize our long-term shareholders for their continued support. -------------------------------------------------------------------------------- Lyne Beauregard Fisher, Real Matters Inc. - VP of IR & Marketing [7] -------------------------------------------------------------------------------- With that, Operator, we'd like to open it up for questions now, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Daniel Chan from TD Securities. -------------------------------------------------------------------------------- Daniel Chan, TD Securities Equity Research - Research Analyst [2] -------------------------------------------------------------------------------- Congratulations on a good quarter. How has your scorecard rating changed since the pandemic? Do you still rank at the top of the tier 1 lenders? And do you know if you've increased the distance from your competitors? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [3] -------------------------------------------------------------------------------- I think the quick answer is we remain at the top of our scorecards. That's our strength. There's been a lot of movement at the local, state, or county level, depending on what's going on in terms of working through the early stages of the COVID-19 pandemic. So as lenders initially tried to figure out how to interpret rules, et cetera, it created some confusion within the whole industry. And I think our ability to jump quickly on communication, both with clients, with our network, to really drive our operating model forward just positioned us really well. So I really like how we're positioned in this market. -------------------------------------------------------------------------------- Daniel Chan, TD Securities Equity Research - Research Analyst [4] -------------------------------------------------------------------------------- And what's your network capacity at if the lenders are at full capacity? Do you need to make any significant investments to increase it? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [5] -------------------------------------------------------------------------------- Yes. We're sitting really well there. I think the best data point I can go back to, Dan, is actually in early March when rates dropped, and we saw a huge surge of purchase activity, as well as the refi activity that ultimately forced the lenders to increase rates as the volume was flowing in beyond their capacity. We actually managed the network really well. And so I think we've just -- that was a great test on sort of how our capacity was in the network and what we might be able to look forward to as we exit the pandemic and as these low rates support very strong refi volumes. -------------------------------------------------------------------------------- Daniel Chan, TD Securities Equity Research - Research Analyst [6] -------------------------------------------------------------------------------- And last one from me. You mentioned that your strategy hasn't changed, but is there any opportunities, or are you thinking about accelerating any parts of it, given the large opportunity ahead of you? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [7] -------------------------------------------------------------------------------- Yes. Look, I think we're very focused. We have large markets that we're serving in appraisal and title. They're the largest revenue opportunities that [they're] external from mortgage lending operations themselves. And so when we saw the rates drop late February, early March, and we realized the potential where it is right now, I mean, this is really going to unlock mortgages that were never going to see the light of day. These were mortgages that we never expected we would be refinancing or would be flowing across our networks. And we've got to remember that, at this time last year, industry refinances were near multi-decade lows. So I think that this is a perfect environment for us to be accelerating our client pipelines as soon as we get out of the pandemic. The industry's going to need to add vendors for growth. So we've been marching up through the tiers, from our tier 3 title clients to our tier 2 clients. We've had a longstanding plan to launch the tier 1s. And I think that this higher volume just accelerates that cycle for us, as well as unlocking new opportunities on appraisals. So I think you're going to see us laser-focused on those big markets and on executing this. However, we're also, as Brian pointed out, been active in our planning process, and we're still on that. So I think this fall we still plan on holding our Investor Day, and we'll sort of lay out the next 5 years and how we think about our businesses [unfolding]. But I think we'll be very busy for the next couple of years. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from the line of Robert Young from Canaccord Genuity. -------------------------------------------------------------------------------- Robert Young, Canaccord Genuity Corp., Research Division - Director [9] -------------------------------------------------------------------------------- Now, Fannie Mae has extended some flexibilities to appraisers given the crisis, and I was wondering if you could talk about what impact you're seeing on your business, if any. Do you see any permanent changes? Do you see any indications that the physical in-person appraisal is at risk? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [10] -------------------------------------------------------------------------------- Yes. Thanks, Rob, for the question. We noted that the GSEs and the broader regulators, to some extent, created proactively quite quick, as we were entering the pandemic, greater flexibility to have a licensed appraiser do a reduced-scope appraisal, actually, on the same form, or do a drive-by. So I would like to state that it's always required, that licensed appraiser. And what was going to be interesting is, notwithstanding those flexibilities provided, what were the lenders going to do, given that they like to maintain flexibility to be able to sell loans to other channels, securitization, et cetera? And so what was incredible was that the vast majority of orders were coming in as full interior appraisals, and that continues to this day. And so our margin profile is good on those other products. On an absolute dollar basis, it's very similar to a full interior. But we were sort of happy to see that happen, and we haven't seen a change in that. On the network side, the network, as Brian said, was just fantastic. Consumers don't need to be in the house, shaking the hand of the appraiser. In fact, the consumer not being there, leaving the lights on, leaving doors open, standing out on the back deck so the appraiser can go in and do their piece is what they prefer. They don't need to hear about what renovations or things that the consumer did. They want to assess that, and then use benchmarks in the market. So, really, the appraiser panel just executed very well, and we've had no issues in completing interior appraisals. I would also say, actually, the change when you're an appraiser, they know how much the inside value -- inside of the home can impact value of home A versus home B. And so, actually, they're less -- they'd prefer to do the interior, and they feel it gives more credibility to the analysis that they're performing. -------------------------------------------------------------------------------- Robert Young, Canaccord Genuity Corp., Research Division - Director [11] -------------------------------------------------------------------------------- And then, you highlighted the fact that loan size is up by 18%. So I'm curious about what that metric means for your business. Does this suggest that the backlog of refi is lengthened? Like, are banks prioritizing larger refinancing upfront? What's driving loan size, and why would that be an important indicator for investors? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [12] -------------------------------------------------------------------------------- Sure. I think it's important that, when we see reported either bank origination numbers through their quarterly disclosures or industry models report what was originated, say, in the last quarter, they report in dollar terms. And when you have the average loan size either going up or going down, our business runs on volume. So it's very important to adjust for that. So I would say that's the first dynamic there. I think what's going to be really interesting is on the refinance side. If you've got a larger mortgage, then you need less of an interest rate differential, as rates drop, to incent you to refinance in absolute dollar terms, because you've got to pay for your appraisal. You've got to pay for your title. But then, based on that spread, there's no other penalty. If you've got a larger mortgage, you just (inaudible) more incentives. And I think that what we typically see here is a reduction in the average loan size as you move through the large refi opportunity. So it's something we're going to watch. I think it's important for investors to watch. And especially with respect to assessing how long this wave's going to go. We think that, with a return to purchase, we're probably a little more pessimistic than the rest in terms of how strong purchase will be next year. But there are so many refi opportunities, at least 14.5 million by industry analysis, that that's 2 to 3 years to work through that refi volume. So I think what the loan size is will be important as we get out to 2023 to sort of assess what's left. -------------------------------------------------------------------------------- Robert Young, Canaccord Genuity Corp., Research Division - Director [13] -------------------------------------------------------------------------------- Last question from me. Brian said that you were hiring in the quarter and in April. You said that the lenders are dealing at full capacity. So my assumption would be that your network is scaled up. You don't need to add a lot of people. What are the extra people required for? I mean if you can talk about the implications on your profitability, going forward, given lenders are at full capacity and there may not be a lot of need to scale out the managers that you have in the regions? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [14] -------------------------------------------------------------------------------- Got it. So I think the principal focus of our hiring is on our title business. And the reason for that is, of course, we've had very strong market share growth. But as rates dropped, I mean, this really changed the outlook with a significant tailwind to the business. So, really, it was anticipation, and we started the hiring process in anticipation of that stronger growth. So we anticipate staying on that. It's largely around our title business. But we do not see a change in our operating margins. In fact, with greater volume, we expect to see continued improvement there. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- The next question comes from the line of Thanos Moschopoulos of BMO Capital Markets. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [16] -------------------------------------------------------------------------------- Jason, in terms of the capacity situation with the lenders, obviously a lot of uncertainty there. But could you expand maybe in terms of the discussions you're having with your clients, what they're saying as far as their optimism or pessimism regarding their ability to expand capacity over the next 3 or 6 months? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [17] -------------------------------------------------------------------------------- Yes. So I think they're all hiring. I know of one large non-bank that actually has 3,000 underwriting job postings. I think we're still early days in this. And I think they're more focused on this long-run opportunity than what's going to happen here in the next couple of months. So I think this isn't a short-term thing for them. This is, as rates drop, this is going to be a significant tailwind to the industry. And so we've seen many reports, many lenders talk about their intention to hiring. Two of the large, big tier 1 banks actually diverted underwriting capacity from their home equity line of credit business, which is very low right now, and moved it over to the new origination market so they could build capacity. So I think it's different for each lender. Their underwriters are now working remotely. And so, that has been something for a large bank that they had to work through. So, I think there's that strong intention to hire, and then we'll just see what the conversation rate's going to be. They've got to get them trained. They've got to get them laptops. They've got to remotely on-board them from home. And so I think our view is, in the balance of Q3 and into Q4, I think we should -- it's thoughtful to think of there being a cap on increases to that underwriting capacity. But I think, as we get into Q4 and they're able to convert these hiring pipelines into productive employees, and if states open up and folks can have some return to the business office environment, I think we'll see that product typically pick up. I think once we get into 2021, that that's where it's really important. And we think that the industry will be aiming to increase their underwriting capacity, hire 20% more to handle the volume. So, when we think about that, plus our market share growth rates that we've had, you can sort of see the 2021 for us is shaping up to be a strong year. We're going to hire, and we're going to work with our customers through that. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [18] -------------------------------------------------------------------------------- And in terms of the 18.5% market adjusted growth in appraisal this quarter, is it still the case that's being predominantly driven by tier 1 share gains? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [19] -------------------------------------------------------------------------------- Tier 1 and tier 2, yes, for sure. We haven't been capped by any lender. We feel very good about our performance and our market share growth continuing. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [20] -------------------------------------------------------------------------------- And finally, for Bill, you mentioned [each incremental] transaction have a 72% incremental margin. How do you see that trending over the next few months? Does that ratio stay steady, or should there be some increase to that? -------------------------------------------------------------------------------- William P. M. Herman, Real Matters Inc. - Executive VP & CFO [21] -------------------------------------------------------------------------------- Well, I think maybe time will tell clearly, Thanos. But I think, when we think about this quarter and you'll punch it up against Q1 in particular, I think you're seeing that phenomena happen on a repeated basis, and 2 quarters isn't necessarily a pattern. But all that to say I think that we'll probably see more of the same coming up into Q3 and beyond, would be my expectation, and perhaps even a slight advancement of that, over time. So kind of be my view on that. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Your next question comes from the line of Gavin Fairweather from Cormark. -------------------------------------------------------------------------------- Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [23] -------------------------------------------------------------------------------- I thought I'd start out on the purchase market. You've been pretty consistent in your commentary around expecting a soft (inaudible) book in April and then in the months ahead. But starting to see a few kind of green shoots in the market in terms of the applications trending higher, so curious if you're starting to question that a little bit, and maybe what you're hearing from lenders in terms of the potential for a delayed spring market. -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [24] -------------------------------------------------------------------------------- Got it. Yes, it is surprisingly strong purchase business versus (inaudible) debut in terms of ability to get homes sold. And it's still down significantly from, say, what we were seeing in early March, but still you saw the MDA data. A few weeks here now, we've seen purchase applications increase. And so, look, when we look at our appraisal business, it's really indifferent to whether or not it's a purchase transaction or a refinance transaction. And since there's so many refis available that the real issue becomes back to that underwriting capacity constraint. So we're kind of indifferent if it's a purchase or a refi. I guess if the purchase business picks up sooner and stays stronger, it really gives support that we've got closer to that 3-year time to work through all of these mortgages that are incented to refinance with the banks hiring 20% underwriting per year is sort of how I think about it. So, look, I'm happy to have that. Of course, our title business is all refinance, and increase in purchase won't impact that side of the business at all in terms of our client base and our large market share growth opportunity. So, yes, I think it's a good sign. We're watching states and counties start to open up in the U.S. We're just remaining cautious but very focused on the long-term for our business. -------------------------------------------------------------------------------- Gavin Fairweather, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [25] -------------------------------------------------------------------------------- And then, just on the pipeline of new kind of sales (inaudible). -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [26] -------------------------------------------------------------------------------- Gavin, I think we lost you there. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- We'll go to the next question from Richard Tse from National Bank Financial. -------------------------------------------------------------------------------- Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [28] -------------------------------------------------------------------------------- I was wondering, [from an] operational standpoint, you uncovered any opportunities during this crisis that made sort of (inaudible) in terms of, like, costs, like people (inaudible) offices. Is there an opportunity to sort of scale margins even further here? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [29] -------------------------------------------------------------------------------- I'm going to actually turn that question over to our COO, Brian Lang. -------------------------------------------------------------------------------- Brian Lang, Real Matters Inc. - President & COO [30] -------------------------------------------------------------------------------- Yes, so I think, listen, as I think a lot of businesses have, we've gone through quite a transition into a very new working paradigm. So, as I mentioned in my comments, we moved from the teens of remote workers to now around 95%. So, Richard, I think, longer-term, we're going to be quite thoughtful around what our workforce looks like, going forward. We're talking very much about continuing the remote strategy that we've had of having people remote. It makes a lot of difference in our business, having people spread out throughout the states. There's lots of local title regulation, a title skill set that's very helpful when you have a remote force. And so, the new hires, a tremendous proportion of the new hires, much over 50%, are now being hired as remote employees. So I think that we should see some benefit in that, longer-term. I don't think it'll be short-term because we've got a fair real estate footprint now. But longer-term, we're definitely thinking about a much more remote workforce. -------------------------------------------------------------------------------- Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [31] -------------------------------------------------------------------------------- And then, kind of on a (inaudible) note, given the current backdrop, how would you be thinking about capital allocation for the remainder of the year? And is there sort of any permanent shift in thinking maybe on that front, given some of the things you've seen to date? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [32] -------------------------------------------------------------------------------- Yes. Look, I think we continue to -- we'll always maintain a strong balance sheet, given that our clients are regulated banks. I think it positions us well there. I think, in the current environment, acquisitions are not likely, given just what we see out there in appraisal and title. And we're laser-focused on this organic execution, and we think we have a lot that we can do there. So, when we come back to capital allocation, we continue to think that buying back our shares is a very effective way to return capital to shareholders. And notwithstanding that we do that in a very disciplined manner. So we like that approach. I think, as we get into -- when we look at to support this business, really, we don't require large capital, or increase in capital investment. So, the growth is about the operating model, and in fact, the bigger we get, the more standardized we get in terms of moving up into the tiers of the client. So I think we're good there, and we'll just stay on the level of investment that we have. But as we look to the next 5 years, under our Investor Day this fall, I think we're going to talk about where we see that going, and we'll do a fulsome sort of breakdown on how we think about capital at that time. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The next comes from the line of Steven Li from Raymond James. -------------------------------------------------------------------------------- Steven Li, Raymond James Ltd., Research Division - Director & Equity Research Analyst [34] -------------------------------------------------------------------------------- Jason, a follow-up on the underwriting capacity. If rates stay low, is there a scenario where lenders not expand capacity? Like, can they be distracted by something else? Or we can take that capacity growth for granted if rates stay low? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [35] -------------------------------------------------------------------------------- Yes. Look, I think that once we're out of this sort of near-term pandemic, and you can hire and you can train, I think there'll be shifts. If you do think that unemployment will be high, that some industries, such as travel, might be significantly disrupted, I think there'll be a big pool of folks there that the mortgage industry can hire from. So, look, I think these are mortgages that were never going to refinance with rates at higher levels. And if you think the 10-year rate's going to stay below 1.2% with the next years, or the Fed doesn't raise rates, then I don't see a scenario where, as we get into 2021 and 2022, that the banks aren't -- or all lenders are not aggressively hiring. Again, we're seeing one big non-bank has got 3,000 postings out there right now. There's multiple data points out there around how the lenders are trying to hire. So I think it's can they convert them in the near-term, but then I think I've got strong confidence around that in 2021. -------------------------------------------------------------------------------- Steven Li, Raymond James Ltd., Research Division - Director & Equity Research Analyst [36] -------------------------------------------------------------------------------- And then, similar to an earlier question, electronic closing, remote online authorization, are you seeing those trends in title and closing? And does this impact you positive or negative? Thank you. -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [37] -------------------------------------------------------------------------------- Sure. Well, on remote or electronic closings, I think that, should the industry move there, we're ready. And you still need a network to support that, and especially exceptions. But we're ready from a technology and from a [exception] management perspective. However, I do believe that change happens very slowly here. There's multiple layers. You've got the state has to sign onto it. The investors have to sign onto it. The lender has requirements that they have to sign on to, and so on, so forth. So, I just think, around this, the change management is going to be significant. But we're ready with a solution should it move there, so I think it's neutral to us at this time. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Next question comes from the line of Paul Steep from Scotiabank Capital. -------------------------------------------------------------------------------- Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [39] -------------------------------------------------------------------------------- Just wanted quickly, for you or Bill, on title, in the MD&A, you talk about a backlog being created because some of your volume couldn't be cleared based on closings of municipal offices. Could you just -- how big's the backlog, dollar size, if the [data's] actually material? Was any of that revenue recognized, or should we expect a bump to come? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [40] -------------------------------------------------------------------------------- I see. Well, I'll start off and say that the county closings impact, very tiny, so less than 2% of the volume. So I don't think there's anything significant with respect to those counties reopening in terms of new revenue recognition, et cetera, that would be significant, I think is the easy answer there. Bill, is there anything you'd want to add to that? -------------------------------------------------------------------------------- William P. M. Herman, Real Matters Inc. - Executive VP & CFO [41] -------------------------------------------------------------------------------- Yes. I would just say, clearly, we can't recognize the revenue until the closing has obviously occurred, so that event obviously has not been satisfied. So there's no, clearly, revenue recognized in this quarter specific to that. I think, Paul, as Jason mentioned, I don't think this is significant event for us, would be my immediate reaction. Obviously, is there going to be a bit of a bump as they reopen? Of course, but I don't think it's going to be significant in any way, would be my view. -------------------------------------------------------------------------------- Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [42] -------------------------------------------------------------------------------- Just on the title business, could you talk a little bit about is there an opportunity out there to force the business over time in terms of picking up either M&A or doing anything organically in this time period to open yourself up for more of the purchase market on the title side? Thanks. -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [43] -------------------------------------------------------------------------------- So really we see, especially with rates dropping so low, I really think that we're going to see one of the larger refi opportunities multi-year that has existed, and the industry doesn't have enough vendors to manage that. So I think it's very supportive for us launching clients on our title side. And as we get into those larger lenders and we're able to prove and through execution our excellence they already enjoy an appraisal on title. I think that that starts to allow us to really focus on when the bank is pre-qualifying a homeowner for purchase and inserting ourselves in that cycle. So I still think that the cycle here should be get live and get in that large install base of clients on refinance, work through that. And then, as we start thinking about at some point the large refi wave that we were never expecting is going to reduce, that's when we want to be growing share with the broadest base of clients that we've installed, as well as focusing on that purchase market opportunity with those clients. So we're going to be very strategic here around how we manage through this incredible volume wave. And that will be really targeting those customers we think we have great long-term purchase opportunity with, as well as really landing as large of an install base as we can such that we can grow share and keep the business growing on the other side of that. But I think that's as we get into 2023 and 2024. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Next question comes from [Deepak Patel] from [Stifel GMC]. -------------------------------------------------------------------------------- Unidentified Analyst, [45] -------------------------------------------------------------------------------- Thanks for taking my questions. I had a question on title and closing. I know that you're expanding with new tier 1s. What's been the impact of COVID on the pace of new rollouts here? And what's the outlook for that, going forward? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [46] -------------------------------------------------------------------------------- Yes. So I think we're still focused on launching new tier 2s, progressing through the sales cycle with our tier 1s, obviously with the backdrop of there'll be more volume. We think that's very supportive for us getting there within these clients. But the lenders have a lot going on right now managing COVID-19, managing the remote, trying to hire, et cetera. And so I think, as we think about the next 2 quarters, we are still landing clients, but we've landed such a large client base over the last 9 months, really it was always the plan to have those clients and their share growth really power the back half of this year. So I think that's how we're thinking through those new client launches. We continue to launch clients, though, in the environment. -------------------------------------------------------------------------------- Unidentified Analyst, [47] -------------------------------------------------------------------------------- And then, when I think of tier 1s, whether it's title and closing or appraisal, tier 1s versus the top 100 versus the smaller market of lenders out there, what do you expect in terms of market share changes there? And how could that change some of the growth expectations for the business, going forward? And I've got one more after that. -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [48] -------------------------------------------------------------------------------- Sure. No, it was actually a fantastic question. And I think there's a lot of commentary around, in this environment, the regulated banks who have been, over the last year, you look in their quarters, slowly sort of regaining some share. This could really put a focus on them, so that would be supportive for us. We have an outsized gain, or share, sorry, of deposit-taking institutions. Our appraisal business, we, of course, have some phenomenal large non-bank. So I think it actually favors larger lenders within those tiers, and those tiers getting bigger overall. That would be very good for us. They tend to focus more on operational excellence, as you would expect, and that is our laser focus sweet spot. So I think that would be very supportive. -------------------------------------------------------------------------------- Unidentified Analyst, [49] -------------------------------------------------------------------------------- And then my last question, I know on strategy, you've mentioned no change, not to expect M&A, wait for your Investor Day this fall. I'm just curious if you can go on offense here and maybe talk about your technology (inaudible), anything there that you can accelerate on the data side or the technology side that could strengthen your remote versus the competitors? -------------------------------------------------------------------------------- Jason Smith, Real Matters Inc. - Founder, CEO & Director [50] -------------------------------------------------------------------------------- Yes. Look, I think one of our core strengths as a business is our annual planning process. We rebuild the 3- to 5-year plan, (inaudible) [size of plan]. And we focus on the end game, and then we work backwards. And it really focuses you on what markets matter, where is their margin that matters, and then what are your core differentiators. And so we then build out our technology and product roadmap there. It's significant. And so we're going to stay on those things that keep making us better at network management. We're going to stay at capacity management. We're going to stay at logistics management through the platform. We're going to stay at more interim KPIs that can drive reductions and [it tails] and exceptions, which matter so much to lenders, to improved quality control capabilities and scoring mechanisms. So I think that's been well-thought out. I think in this environment, we're just staying on it, and we have not deviated from that product roadmap. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- That is all the questions that we have. -------------------------------------------------------------------------------- Lyne Beauregard Fisher, Real Matters Inc. - VP of IR & Marketing [52] -------------------------------------------------------------------------------- Well, thank you, Operator. I think that wraps things up for today, and thank you for joining our call. Please stay safe. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- This concludes today's conference call. Thank you for your participation. You may now disconnect.