Good day, and thank you for standing by. Welcome to the Real Matters first quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Lyne Beauregard. Thank you. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Real Matters financial results conference call for the first quarter ended December 31st, 2021. With me today are Real Matters Chief Executive Officer, Brian Lang, and Chief Financial Officer, Bill Herman. This morning before market opened, we issued a news release announcing our Q1 results for the three months ended December 31st, 2021. The release accompanying slides as well as the financial statements of MD&A are posted in the investors 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. However, there are a number of risks, uncertainties and other factors that could cause results to differ materially from our expectations.
Please see the slide entitled Caution Note regarding forward-looking information in the accompanying slide presentation for more details. You can also find additional information about these risks in the Risk Factors section of the company's annual information form for the year ended September 30th, 2021, which is available on SEDAR and in the investor relations section of 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 margins. Non-GAAP measures are described in our MD&A for the three months ended December 31st, 2021, where you will also find reconciliation to the nearest IFRS measures. With that, I'll now turn the call over to Brian.
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 first quarter and some of the key drivers behind our numbers. Bill will then take a deeper dive into our segment financials, and I'll wrap up the call with some brief remarks prior to taking questions. Turning to slide three, we reported consolidated revenues of CAD 107.8 million as strong growth in our U.S. appraisal and Canadian segments was offset by a decline in U.S. title. We grew share with our clients and delivered record first quarter net revenue in U.S. appraisal. Our U.S. title operations continue to perform well, delivering against our Tier 1 lender scorecard in the quarter and landing us atop our Tier 2 clients' scorecards.
With plenty of movement in the 10-year Treasury yield, the U.S. mortgage rate environment was dynamic, with significantly higher rates presenting a market headwind for our business in the first quarter. First quarter mortgage market volumes were also more in line with the seasonality we typically see in the October to December timeframe, with a slowdown in activity due to the holidays. That said, our first quarter U.S. appraisal mortgage origination revenues, which includes purchase and refinance, increased 13.9% year-over-year compared to an estimated 1.5% decline in total origination market volumes. The increase in U.S. appraisal revenues was principally driven by the mix of volume serviced, net market share gains and new client additions. In the quarter, we launched four new lenders in U.S. appraisal and one new channel with an existing top 100 client.
U.S. appraisal purchase revenues were down 0.8% compared to an estimated market decline of 9.3%. It's worth noting that the purchase market in the prior year quarter was exceptionally robust. It was the highest first quarter purchase market volume we have seen since going public, making it a tough year-over-year comparable. U.S. appraisal refinance revenues were up 23.3% compared to an estimated market increase of 10.8% in the addressable refinance market. Our market estimate includes a year-over-year decline in the use of GSE waivers, which helped increase the size of the addressable refinance market for appraisal and offset the 31.2% total market decline for refinance market activity. In our U.S. title segment, first quarter centralized title revenues declined 60.6% year- over- year against an estimated market decline of 31.2%.
Outside of market movements, we continue to focus on performance as the main driver of growth in our title business. We continue to perform at the top of our Tier 2 lender scorecards, and as a direct result, we continue to win market share. In addition, we expect that our performance on the Tier 1 lender scorecard will set the stage for further market share growth and the expansion of channels with this lender. The performance equity we are building today will also help support the sales cycle with prospective clients. We launched one new top 100 lender in title in the quarter, and subsequent to quarter end, we launched an additional top 100 client. We continue to move our pipeline forward and remain focused on bringing on new lenders throughout the year.
In our Canadian segment, first quarter revenues were up 13.2% year-over-year from increasing market share with certain Canadian clients and increased revenues from insurance inspection services. With that, I'll hand it over to Bill. Bill?
Thank you, Brian, and good morning, everyone. Turning to slides four and five for a closer look at our financial results. U.S. appraisal segment revenues increased 14.1% year-over-year to $79.3 million due to the mix of volume serviced, net share gains with existing clients, and new client additions, which were offset in part by lower estimated addressable market volumes. Transaction costs in our U.S. appraisal segment increased 16.9% year-over-year, and net revenue increased 4.2% to $16.4 million, while net revenue margins declined 200 basis points to 20.6% compared to the same period last year. The decline in net revenue margins was due in part to the mix of mortgage origination volume serviced, which included complex properties with higher appraisal fees.
That said, as Brian mentioned earlier, we delivered record first quarter U.S. appraisal net revenue this quarter. Operating expenses in this segment increased 14.7% to $7.9 million in the first quarter of fiscal 2022 due to higher capacity levels in the quarter and the mix of volume serviced. Adjusted EBITDA in U.S. appraisal decreased modestly to $8.6 million from $8.8 million in the first quarter of fiscal 2021, and adjusted EBITDA margins contracted to 51.9% on lower net revenue margins and higher payroll costs due to higher capacity levels in the quarter and the mix of volume serviced. Turning to our U.S. title segment, revenues declined 59.4% year-over-year on lower estimated refinance volumes of 31.2%.
Diversified revenues totaled CAD 0.5 million, representing a decline of CAD 1.9 million from the first quarter of fiscal 2021 as a result of rationalizing this service offering last year. Transaction costs in our U.S. title segment decreased 58.9%, while net revenue margins were strong at 66.4%. The modest contraction in net revenue margins against the same quarter last year was due to the flow of volumes between comparative quarters, partially offset by higher net revenue margins from diversified title and other title revenues. Operating expenses in this segment decreased $4.8 million- $10.3 million in the first quarter of fiscal 2022 due to lower volume serviced.
Adjusted EBITDA was CAD 0.4 million in the first quarter of fiscal 2022, down from the CAD 11.6 million we posted in the same quarter last year, and adjusted EBITDA margins contracted to 4.1% owing to the impact of lower volumes. As we've done in the past, we'll continue to manage operating expenses relative to volume serviced while ensuring that we make the right decisions to support our long-term objectives. In Canada, revenues increased 13.2% on a year-over-year basis to CAD 12.2 million, while net revenue margins contracted by 180 basis points due to the mix of appraisal services supplied and appraiser onboarding.
Canadian segment operating expenses were CAD 0.7 million in the first quarter, up from CAD 0.4 million in the first quarter of fiscal 2021, and adjusted EBITDA margins decreased to 57.7% from 73.7% in the same quarter last year due to an increase in operating expenses attributable to higher payroll and related costs, other expense, and FX. Last year, we redeployed certain Canadian staff to service the title business. With the resumption of more normal operations in Canada following the removal of certain COVID restrictions, these employees have returned to the Canadian segment. In total, first quarter consolidated net revenue was CAD 28.8 million, compared to the CAD 44 million we reported in the first quarter of fiscal 2021 due to lower revenues in our U.S. title segment.
Consolidated net revenue margins were 26.7% in the first quarter of fiscal 2022, down from the 36.6% we posted in the first quarter of fiscal 2021, reflecting lower margins in our U.S. appraisal and Canadian segments and lower net revenue generated by our U.S. title segment. Consolidated adjusted EBITDA was CAD 5.9 million in the first quarter of fiscal 2022, down from CAD 17.4 million in the same quarter last year. Consolidated adjusted EBITDA margins decreased to 20.6% due primarily to lower volume serviced in our U.S. t itle segment. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of CAD 73.3 million at December 31st, 2021.
In the quarter, we directed 100% of the free cash flow we generated this quarter to share purchases under our NCIB, purchasing approximately 700,000 shares at a cost of CAD 5.1 million. At the end of the quarter, we still have three million shares remaining under our current NCIB, and we intend to continue to be active in the NCIB, which we will balance with other strategic opportunities as they present themselves. With that, I'll turn the call back over to Brian. Brian?
Thanks, Bill. Overall, we're feeling good about the business as we continue to focus on operational performance, managing scale, launching new customers and driving market share growth. The long-term potential for our business has not changed, and we remain confident that we will achieve our fiscal 2025 objectives. As Bill mentioned earlier, our view is that the current trading price of our shares is not reflective of the value of our business, which presents an opportunity to return value to shareholders through share purchases under our current NCIB. With that, operator, we'd like to open it up for questions now.
As a reminder, to ask a question, you will need to press star one on your telephone. Again, to ask a question, it's star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Daniel Chan of TD Securities. Your line is open.
Hi, good morning, guys. Brian, last quarter you talked about how some Tier 1 customers were coming back into play. Just wondering how that pipeline has progressed over the last quarter, and whether you have some visibility on the timing of those customers potentially coming on board to the platform?
Got it. Daniel, I know that's specifically a title question, and I think one of the benefits we continue to see is that our performance on appraisal with all of our Tier 1 continues to be incredibly robust, and we keep hitting the top of the scorecard with them. As I've discussed in the past, we use that performance equity to drive our conversations on the title side. I think with the Tier 1 that we currently have on the title platform, performance incredibly strong in the first quarter. We will continue to work on driving that. I've mentioned the majority of Tier 1 right now are in conversations around title. We will continue to play that off with some market dynamics that are going on. Our team will continue to lean in, though, and drive for more Tier 1 coming onto the platform in the future.
Okay, thanks. Bill, what are your thoughts on the size of your operations on the title and closing side, as we move through the rest of the year? Give me your view of how the market may shape up. Do you think you need to restructure that business at all?
A great question, Dan. When I think about the title business and OpEx in particular, I think, you know, we've said it before and I'll say it again, that it really is balancing that market dynamic against, you know, costs in the business. We also have to be mindful of what we expect, you know, to present itself in the back half of the year. I think we're going to be prudent managers of our OpEx spend, in the coming quarters, in particular. Then again, we've always got to satisfy with that long-term view of, you know, what's coming next. Super hopeful that we've got some additional volumes coming our way from channel expansion with our current installed base and title, and that'll help support the current spend level.
Okay, that's helpful. Brian, one last one for me. At your Investor Day, you did present a data analytics play, and you did mention that you may acquire into that. Just wondering how you're thinking about that strategy, balancing the volatility in the market against declining valuations in the space, and whether acquiring into the space is still in the playbook. Thank you.
Great. Thanks, Dan. I mean, long term, Dan, as you mentioned, data is a very important third leg of the stool of the strategy. We will continue to work on developing our strategic plan around data. That being said, as you mentioned, with the market dynamics as they are right now, I don't foresee in the very near future us doing anything from an acquisition standpoint from data, but we will continue to progress our strategy.
Great. Thank you.
Our next question comes from the line of Richard Tse of National Bank Financial. Your line is now open.
Yes, thank you. You know, Brian, you guys had some pretty great numbers on the appraisal side, given, you know, the backdrop in the market here. Just wondering if you can kind of give us a sense of the share gains and appraisals, with respect to your Tier 1 lender clients.
Sure. Morning, Richard. Yeah, so on appraisal, as you mentioned, the performance continues to be incredibly strong, Richard. We actually, as of the new year, we had reviews with two of our Tier 1s, and we are again number one on both of those scorecards. As we've talked about with performance and operational excellence, we continue to move market share. We're seeing that come through with the performance that we've got in the business. You know, across the Tier 1, we continue to be at the top of the scorecard and continue to move market share. Frankly, Richard, not just with those lenders, but we also are seeing it across our Tier 2 and Tier 3.
Okay. If you sort of, I guess, relate to that question, if you look at sort of your other Tier 1 that may not be sort of at their max in terms of allocations to Real Matters, like can you give us some context of how much room is left there?
Yeah. Richard, we talked to our biggest Tier 1 where we have significant market share, and they've made it incredibly clear to us that there is no ceiling with them. We continue to drive towards that long-term view of 50% for the lenders that we talk about that are on the front of the train, so those that are in the high 30s, low 40s. Of course, the ones that are at the back, we continue to see progression there as we try and move them to the high 20s and into the 30s. Frankly, we're seeing that entire train move, Richard, as we expect it to.
Okay. Just the last one for me. With respect to the waivers, as we were going through your filing here, and you're still sort of pointing to, you know, 2025 when we kinda see a meaningful impact of sort of those waivers coming off. Like, has the environment changed at all? Obviously, you know, if you look at the volumes in the market and the backdrop, you would think that we would actually see that sooner. Maybe kinda give us a bit of color or update there.
Sure. I mean, if we look back at least quarter-over-quarter, Richard, we see last year we were up in the 30%+ range. This year our expectation is that we'll be down in the lower 20% range. We're definitely seeing the progress that we had looked for with declines in the waiver rates. As we look out, Richard, I mean, unfortunately it's difficult to comment on what's gonna happen with the 10-year over the next couple of quarters and other dynamics in the market. Our view again continues to be that long-term, that waiver rate will continue to come down.
You're gonna get it no matter what in our view over the next few quarters if refi continues to come down, rate refi and we see cash out coming back up. If I reflect back to 2018, 80% when we saw the rates moving up, 80% of the refinance volume was cash out volume. With, you know, over $9.1 trillion of value in homeowners' homes, and from what we can see from research, a fair bit of appetite for home renovations and those sorts of things, we have a feeling there will still be a pretty decent refi market as we go forward. Therefore that mix of what's in the waivers will definitely, I think, continue to drive that waiver rate down.
Okay, great. Thank you.
Thanks, Richard.
Our next question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Your line is now open.
Hi, good morning. Brian, can you speak to just given all the volatility in the market, is that having any impact on customer behavior in terms of how the lenders are thinking about how they allocate share? With respect to your title discussions in terms of how they're thinking about bringing on, a new supplier?
Yeah. Thanos, I was fortunate enough to spend some time last quarter with our Tier 1 in the title space with the leader of that group. What they shared with me is as they looked out over the year within their customer base, they felt they had 40% of their customers that were still refinanceable up to 4%. Still a significant target within their own customer base. As they were looking at capacity planning for the year, frankly, they were looking at keeping it quite steady. I think the dynamic that we'll see play through the sort of back part of this quarter and usually launches with Super Bowl where one of the bigger players in the market does a lot of advertising around Super Bowl.
We then see a more aggressive advertising plan, generally across the board. We'll see how that plays through, and therefore generally what type of volume that, along with of course the 10-year, sort of plays through in the market. That's, I mean, I think generally we're seeing our lenders be quite thoughtful about what they think the opportunity is this year. They still think there's a strong market for refi. They're definitely willing to dig into their customer base in order to encourage some of that refi activity.
You know, Black Knight continues to put out a report that says somewhere around seven million North American homeowners are in the black to actually mortgage their homes to make a refinance. We'll just have to see how that all flows through, I think, Thanos. For us, as you know, market share is really driven by performance. With our operations team and title continuing to move the needle up on the scorecards, we expect that we will continue to win market share with our customers.
Great. The FHA last fall had talked about ramping up the use of desktop appraisals. I guess first, have you started to see that? Secondly, you know, has that resulted in any sort of change in your business in terms of share or, you know, revenue per transaction or anything?
Yeah. Thanks, Thanos. I mean, interestingly, we still don't have the specifics around the desktop announcement. Unfortunately, you know, months after that announcement, we still don't have the requirements around what needs to be done around desktops. That being said, right now anyways, Dennis, the way we're looking at some of those non usual appraisals is frankly for us right now, the margin in that business is still very complementary to the margin in our business. We of course can do desktops if required, but we are not seeing a real increase in that business right now. We're still seeing the 1004 and the work that we generally do as playing by far the vast majority of appraisal orders.
Great. Thanks. I've got one.
All right. Thanks, Thanos.
Our next question comes from Rob Young of Canaccord Genuity. Your line is now open.
Good morning. I just wanted to get more context around something that you said earlier in the call, and you said that you wanted to be mindful of what you thought might present itself in the back half of the year around volumes. Is that just the market returning to normal seasonality and your expectations that things will get busy in the April time period? Or is it the channel expansion? Maybe if you put some more context around that if that was just a title comment or just a general comment.
Sure. Well, I mean, interesting you bring that up, Rob. I mean, that would impact both of our businesses. I think the original comment was a little bit more around title, but as you know, seasonality really starts kicking in around March, April. So on the appraisal side of the business, we should see some robust growth there just because we assume that purchase will be a strong part of the program for Q3 and Q4. I think that comment when it was made earlier was more around title and our view that with market share, we assume to continually gain market share with the performance that we're seeing against the Tier 1 and Tier 2.
Beyond that, we talked about channel expansion, and so our view is that in Q3 and Q4, we should see some of that channel expansion with both the Tier 1 and the Tier 2 that we launched last year. I think that's more specifically what that comment would be about, Rob.
Okay. Then I wanted to just maybe in a very simple way understand better the you said that there was share gain in title, but the title revenue decline is quite a bit higher than the estimated market decline that you gave. I'm trying to put those two statements into context. How are you gaining share against, you know, the steeper decline relative to the market?
I mean, our focus as you know, Rob, has been on freeing up capacity in our system to make sure that we are very focused on performing and driving operational excellence with the Tier 1 and Tier 2 that we have on the platform today. That performance we know drives market share. We see the benefit in market share growth with those customers. That's why we are focused in the second half of the year on continuing to grow market share with those customers and expand our share with those customers. Sometimes that comes with some challenges with the Tier 3 and Tier 4 , but as you know, we are wholly focused on driving Tier 1 and Tier 2 performance and market share.
Okay. I guess the other thing that could be a driver is the emphasis of the tier three and tier four earlier in the year. Is that still something that's in place, or have you started to reengage with some of those customers yet? Do you emphasize to provide more capacity?
Yeah, we've been fortunate there, Rob. We have had some win backs, but as I say, I mean, the real focus long term for the 2025 targets is to make sure that we continue to move the Tier 1 and Tier 2 in the right direction.
Okay. Okay, thanks for taking the question.
Thanks, Rob.
Our next question comes from the line of Gavin Fairweather of Cormark. Your line is now open.
Oh, hey, good morning. I thought we could start on U.S. title and focus on your Tier 1. I think it's been three quarters that it's been live now, and I think initially you'd said that you were targeting 5%-10% share over the course of the first year. Maybe you can provide us with an update on how you're tracking against that target and any thoughts on, you know, where your share with that client could move over the second year of going live.
Thanks, Gavin. Yeah. We, I think we shared at the end of last year that we'd had a very good year with the Tier 1. To your point, we talk about getting to 5%-10% in the first year. After the first couple of quarters, we were very fortunate to have got ourselves into the double digits. We continue to focus on ramping that share, Gavin, and we will continue to focus on ramping that share. I think, one of the unique opportunities there is beyond driving just the share with the business we have today is to expand the channels with that customer. As I say, I think we're very optimistic, barring market movements, et cetera.
We're very focused on bringing that channel up live in the second half of this year. That's really, I think, where we're going with Tier 1s, continue to perform, continue to win market share in the core business, and then diversify into another channel.
That's great. Just secondly for me, in U.S. appraisal, the net revenue margins have been kind of hovering just over 20% in recent quarters, given kind of the shift in mix towards more complex jobs. I guess I'm wondering if that's a good run rate for now. Do you see a pathway to maybe back towards the 23% or 24% level, you know, perhaps by passing on some of the increased costs that you're seeing onto the lenders?
It's a good question, Gavin. I'm gonna ask Bill to take that question. Bill?
Sure. Thanks, Brian, and great question, Gavin. I think in the short term, Gavin, I would say to you there's still elevated levels of refinance activity. So as a consequence, I think we're still sitting firmly in the more complex camp at least in the near term. You know, from a run rate perspective, I would think somewhere in the neighborhood of what you saw in this first quarter of the year would probably be fair for at least the next couple. But certainly longer term, once the refinance market starts to you know, settle and cool down a bit, then we fully expect margin expansion easily up into the 23%-24%. Which is where we were pre-COVID, and then secondarily, I think we've still got, as you know, you know, lots of room to expand into the 26%-28% range by 2025.
Great. That's it for me. Thank you.
Our next question comes from the line of Martin Toner of ATB Capital Markets. Your line is now open.
Hi. Thanks, guys, for taking my question. You've lost share in title for three quarters now. Can you guys talk a little bit about the pace of increase at the Tier 1 and when those market share losses might turn around?
Yeah. Martin, I think when we take a look at the title business, we've looked back as you know and communicated that we made some decisions around our tier three, tier four portfolio in order to open up the capacity to take on the Tier 1 and Tier 2. Our view is, I think you should see that market share ramp start moving in the right direction in the second half of this year, aligned with market share growth with our current customers, as well as that channel expansion piece. Layer on top of that, new customers, as we mentioned. We brought in sort of during the quarter and just subsequent to the quarter, we brought in two more top 100 customers. I think you'll start seeing that momentum continue into the second half, and you should see that market share start tracking in the positive trajectory.
That's great. Thanks. Now with some of the estimates out there for the refinance market, even with share gains, it might be tough to not lose more volume. What might that mean for EBITDA in title?
I think that question is around how we manage our costs, our cost base, Martin, depending on the volumes in the market. I think there's two ways we look at that. The first one is we are very focused on execution and operating the business appropriately. With volumes, if there is significant movement in volumes, then we manage OpEx to that. We have to balance that with the fact that we have aspirations out to 2025, which includes bringing on new customers, expanding our share with the customers we have.
That performance that we've got with our Tier 1 and Tier 2, that of course is paramount for us, that we continue to drive the types of results that we're seeing on their scorecards. I think that's the balance that we have, Martin, as we look forward. We look forward to some of the short-term headwinds that we're experiencing. I think we've demonstrated in the past that we are quite agile in managing our OpEx around that. But we also need to ensure that we keep some OpEx capacity for our expected expansions in market and our market expansions as well as our new customers that we're expecting in the second half of the year.
Great. Thank you very much. If I can ask one more. In the MD&A, it references timing of orders as a reason for lower margins in title. I mean, that sounds like share gains are kinda kicking in. I believe you said the same thing last year at this time, and it translated into adding your first Tier 1. Can you give us any more color on new customers?
Yeah, I can, Martin. When we talk about flow, the reason we address that is because that is very relevant for our net revenue margin in title. Flow for us simply means that from the start of a title order, it takes us somewhere around 45 days until we see the revenue, and there's some expenses that we need to take upfront. When you see very strong margins, as you saw this past quarter, it often means that we are delivering more in that quarter. Therefore, we're realizing more revenue than we are necessarily spending on orders. And again, a chunk of that has to do with the 10-year Treasury, the trajectory that we've seen on that moving up, and potential impacts, headwind impacts from volume as we look forward. That's really the dynamic that plays there.
It's not relative to just a particular launch of one or another, but really the dynamics between how the market is moving, and therefore how we are closing and opening orders within that particular quarter.
Got it. Okay. Thank you. That's all for me.
Great. Thanks.
There are no further questions coming in at this time. Please continue.
Okay. Well, thank you, operator. That I think then wraps things up for today. Appreciate all of you joining the call and please take care. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.