Morning, ladies and gentlemen, and welcome to the Real Matters Third Quarter 2022 Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Thursday, the 28th of July, 2022. I would now like to turn the conference over to Lyne Beauregard. Please go ahead, Lyne.
Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results conference call for the third quarter ended June 30, 2022. With me today are Real Matters Chief Executive Officer, Brian Lang, and Chief Financial Officer, Bill Herman. This morning before market open, we issued a news release announcing our Q3 results for the three months ended June 30, 2022. The release accompanying slide presentation as well as financial statements, MD&A, are posted in the investor 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 in the industry in which we operate. However, there are a number of risks, uncertainties and other factors that could cause our results to differ materially from our expectations.
Please see the slide entitled Cautionary 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 30, 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 margin. Non-GAAP measures are described in our MD&A for the three and nine months ended June 30, 2022, where you will also find reconciliation to the nearest IFRS measures. With that, I'll turn the call over to Brian. 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 third 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. We reported consolidated net revenue of CAD 18.1 million and consolidated adjusted EBITDA of CAD 0.1 million in the third quarter. The business delivered solid market share gains and strong operational performance as we continued to weather very challenging mortgage market headwinds.
We ranked at the top of scorecards in U.S. Appraisal, which resulted in market share gains with some of our largest clients, and we also expanded our net revenue margins in U.S. Appraisal by 130 basis points. In U.S. Title, we continue to perform at the top of our tier one and two clients' scorecards and expanded our year-over-year share with a key tier two client. In today's lower volume environment, lenders have begun to reduce the number of vendors they use, and top performers like us stand to benefit from vendor consolidation as a result. Mortgage rates rose further in the third quarter, reaching the highest level since 2008 at nearly 6%.
The purchase market showed tepid demand in the early part of the spring buying season, while rate refi demand has declined significantly with little rate incentive remaining at today's 30-year mortgage rate. Over the past 60+ years, the 10-year treasury yield has never risen more than five quarters sequentially, and of the five times it has, in four of those occasions, the rise in the 10-year treasury yield was followed by a similar fall in the four quarters that followed. The rapid rise in home prices and mortgage rates has caused affordability metrics to reach levels never seen before, even during the housing bubble in 2003 to 2007. In particular, the median mortgage payment relative to median incomes now exceeds 27% compared to the historical high of 25% in 2006.
Home prices relative to median incomes recently hit 4.9x, exceeding the record high of 4.2x seen in 2005. We estimate the U.S. mortgage origination market volumes were down 50.6% in the third quarter, with purchase transactions down an estimated 17% and refinance transactions down an estimated 76.2%. U.S. Appraisal mortgage origination revenues, which includes purchase and refinance, were down 38.7% year-over-year compared to an estimated 39.5% of all origination market volumes. Market share gains and new client additions helped soften the impact of the market decline. We increased market share with five of our largest clients year-over-year, and we launched two new lenders in U.S. Appraisal.
Our market estimate includes a year-over-year decline in the use of GSE waivers, which is due in large part to the significant decline in rate refinance activity. As we discussed during our second quarter call, Americans have more equity in their homes than ever before, and we are working with our clients and leveraging our platform to help consumers take advantage of their tappable equity. We saw the early stages of this trend in our third quarter results as other revenues in our U.S. appraisal segment increased 53% year-over-year to $8.3 million, principally due to higher home equity volume serviced. In our U.S. title segment, third quarter centralized title revenues declined 83% year-over-year against an estimated market decline of 76.2%.
Performance remains the key driver of growth in our U.S. Title business as we continue to advance the sales cycle with more franchise-type clients and convert the pipeline to new client launches. We launched two new title clients in the third quarter. In our Canadian segment, third quarter revenues were down 3.3% year-over-year due to FX and lower market volumes for appraisal services, which were partially offset by increasing market share with a number of our large Canadian bank clients and modestly higher 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 decreased 32.9% year-over-year to $57.3 million due to lower addressable market volumes, which was partially offset by market share gains with existing clients and new client additions. Transaction costs in our U.S. Appraisal segment decreased 34% year-over-year, leading to a 130 basis point margins to 22.6% and delivering net revenues of $12.9 million. The expansion of net revenue margins was due in part to the mix of mortgage origination volume serviced and leveraging our field professional network in a lower market volume environment. This was partially offset by an increase in lower margin home equity volume service.
Operating expenses in this segment decreased 9.8% to $6.8 million due to lower payroll and related costs and lower office, computer, and communication expenses. Adjusted EBITDA in our U.S. Appraisal segment declined to $6.1 million from $10.5 million in the third quarter of fiscal 2021, and adjusted EBITDA margins contracted, owing in large part to lower addressable market volumes. Turning to our U.S. Title segment, revenues declined 79.8% year-over-year on lower estimated refinance market volumes. Diversified revenues totaled $0.3 million and represented a decline of $1.3 million from the third quarter of fiscal 2021 due to rationalizing this service offering last year.
Transaction costs in our U.S. Title segment decreased 74.8%, and net revenue margins declined to 59.2% from 67.2% in the third quarter of fiscal 2021. The contraction in net revenue margins was due to servicing a higher proportion of lower margin home equity volumes and servicing a lower proportion of incoming origination orders, order volumes that closed. Operating expenses in U.S. Title decreased 53.1% to $6.7 million from $14.4 million in the third quarter last year due to lower volume service. As we navigate through this part of the mortgage cycle, we've been aligning our cost structure to a lower market volume operating environment, which allows us to benefit from upside margin gains on the upside.
It also affords us the opportunity to scale down our cost structure in times like these. We posted an adjusted EBITDA loss of CAD 3.4 million in the third quarter of fiscal 2022, down from the CAD 4.3 million we generated in the same quarter last year, owing to the impact of lower refinance volumes. In Canada, revenues decreased 3.3% on a year-over-year basis to CAD 15.8 million, while net revenue margins expanded by 80 basis points due to the mix of appraisal services supplied, leveraging our field professional network in a lower market volume environment and higher net revenue margins from insurance inspection services. Canadian segment operating expenses were CAD 0.6 million in the third quarter, up from CAD 0.5 million in the third quarter of fiscal 2021.
Adjusted EBITDA margins decreased to 69.6% from 70.6% in the same quarter last year due to modestly higher operating expenses. In total, third quarter consolidated net revenue was CAD 18.1 million compared to CAD 38.6 million reported in the third quarter of fiscal 2021 on lower revenues generated by our U.S. appraisal and U.S. title segments, which was due in large part to lower addressable market volumes. Consolidated net revenue margins were 23.1% in the third quarter, down from the 29.8% we posted in the third quarter of fiscal 2021, reflecting lower proportional net revenues generated by our U.S. Title segment and lower net revenue margins in the segment due to servicing a higher proportion of lower margin home equity volumes and a lower proportion of incoming order volumes that closed.
Consolidated adjusted EBITDA was CAD 0.1 million in the third quarter of fiscal 2022, down from CAD 11.8 million in the same quarter last year. Consolidated adjusted EBITDA margins decreased to 0.4% due primarily to the performance of our U.S. Title segment and lower market volumes. In the quarter, we purchased 5 million shares at a cost of CAD 20.6 million. Since going public in 2017, we have purchased 24% of our outstanding shares. We ended the quarter with cash and cash equivalents of CAD 53 million at June 30, 2022. We are very comfortable with our existing cash and cash equivalents balance, which we believe is more than sufficient to weather the downside of the current mortgage market cycle.
We will continue to be thoughtful about capital allocation going forward, being opportunistic with our current NCIB while maintaining a strong balance sheet. With that, I'll turn it back to Brian. Brian?
Thanks, Bill. While today's mortgage market environment presents some challenges, Real Matters is on solid ground. We have a healthy balance sheet and the fundamentals of our business continue to win market share based on our performance, and we are focused on managing our margins and costs as we navigate through these market headwinds. Our sales team is laser-focused on leveraging the home equity and our channels with existing clients and to win new title business. Our business was built on the fundamental principle that scale, network management, and performance would allow us to weather the peaks and valleys of the mortgage origination market. As Bill said earlier, it's what allows us to generate strong incremental margins in higher volume environments.
In these environments, it's to adapt to lower volume environments while still winning market share and taking advantage of market disruptions to win new business. We are steadfast in our commitment to these fundamental principles as we manage the business through this part of the cycle and remain focused on the long-term earnings capacity of our franchise. We remain confident in our fiscal 2025 objectives. With that, operator, we'd like to open it up for questions now.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by for your first question. Your first question comes from Daniel Chan of TD Securities. Please go ahead, sir.
Hi, good morning. There seems to be downsizing across the entire industry, and you guys have been downsizing as well. Just what are your plans for capacity going forward? Are you done with the downsizing or is there more to come? Just any color on how to think about margins, how you manage margins would be helpful.
Sure. Morning, Dan, and thanks for the question. Yeah, listen, as we discussed, we've got a very flexible cost structure that we can scale up and down to weather the peaks and valleys. That will very much depend on where the market goes, as we head into the next few quarters. We have this quarter been laser-focused on keeping the business EBITDA neutral. Depending on the volume, over the next upcoming quarters, we will continue to keep that type of operational execution, and focus on keeping the OpEx or our operating costs in line with the volume.
Okay, thanks. That's helpful. Then on the share repurchases, you did say you'd be opportunistic with the NCIB. Just wondering whether there's a cash level that you'd like to keep on your balance sheet.
Yeah. In the past we've talked, Dan, and very much today is the case that because of the tier one type base of customers that we've got, we've always felt that between somewhere between CAD 25 million and CAD 50 million was the right amount of cash for us to have on hand. As you know, of course, we've got no debt. We closed the quarter at CAD 53 million in cash. I think on the NCIB, as you know, we have been, I think, very thoughtful working with our board. This past quarter, we took the outstanding shares that we've bought since IPO. We've taken that up to 24%. As we look forward, I think we'll be very thoughtful about the NCIB.
We did meet with the board yesterday, and so we'll continue to be active, but I think you'll see it at much lower rates. We will be active but definitely with lower engagement, lower numbers.
Okay. Just one last one. Obviously a very challenging market. When you look at the opportunities in the market, what's the bigger opportunity? Is it winning new clients or is it winning share at existing clients? You did talk about the opportunity to consolidate. Just wondering how your go-to market is being adjusted just given the dynamics there. Thank you.
Great. Well, I think, Daniel, you almost answered the question with the three elements that you threw in there. I think the first element for us is we will continue to focus on our performance, which, as I mentioned, we had a very solid quarter from a performance and therefore market share allocation. We were top of scorecards with our tier ones on the appraisal side, and therefore we were granted market share with five of our top 10 this past quarter. I think solid performance there. On the title side, we're top of the scorecard with our tier one and tier twos, and so we were allocated some share with our tier two in the quarter.
That you know that fundamental principle that drives the business that our networks can outperform the others, Dan, we'll continue to focus on that even as the volume is lower. Our expectation is that there's market share gains there. The second piece is consolidation. We've actually seen some of that this past quarter, at least on the appraisal side of the business, where we've seen our lenders take a look at the portfolio of providers that they have and narrowed those down. Because of where we stand on the performance scorecard, not surprisingly, we end up picking up share when they do downsize their vendor group.
It also opens up opportunity on the title side of our business to actually insert some of the sales conversations that we're having in the refi space, Dan, to leverage all that good work we are doing on appraisal to insert ourselves when they are thinking about that on the title side. The third piece is around home equity. You saw that in our numbers on the appraisal side of our business this past quarter with revenue, and that's mostly home equity. The team has done, I think, an excellent job ensuring that we are prepared for what we assume will be a continuing uptick in home equity volume.
The real focus on home equity for us is we want to. That opens up another avenue of conversation on the title side of the business, where we win home equity, we get into the home equity space. Our view is that allows us the opportunity to move in to all of the title space, including refi. Those are really the three big drivers, from a sales and an opportunity standpoint, Daniel, going into Q4.
Thanks, Brian. That's helpful.
Thanks, Dan.
Your next question comes from Richard Tse of National Bank Financial. Please go ahead, sir.
Yes, thank you. Brian, I was wondering if you maybe elaborate a little bit in terms of the share gains on the appraisal side. Can you maybe sort of point to or give us a bit of color on who you're taking that share away from most?
Yeah, Richard. Morning, Richard. I think the story pretty well remains the same over the refi boom and the increase in volume. Some of our tier ones added more sort of regional players, so that they could service some high volumes in certain parts of the U.S. I think when you see the volume start to come down, which of course it did not just on refi this quarter, but also on purchase, they take a look at their vendor base, and usually they stick to their national players. That's where they focus their attention and therefore remove some of the more regional players. I think that's one piece that we are definitely seeing starting to play through. It's that consolidation piece.
The other piece, of course, is just the performance of our networks being able to deliver better performance. As I said, across the board this last quarter, we were number one with all of our big Tier 1s. We are taking share from, frankly, the big national competitors that we have, you know, generally across the board. I mentioned five of 10. That's a piece of it. It's consolidation, a piece of it is just overperformance.
Great. With respect to Title and C lose, what are the tier ones in terms of their expanding into that side of the business here?
Yeah. I think the conversations, as you can imagine right now, Richard, are somewhat challenged simply by the market dynamics and what's going on in the market. A lot of lenders are very internally and inward-focused right now. They're figuring out capacity. Some of the big tier ones that actually exited home equity are now thinking about getting back into home equity. You know, they've got strategic and operational priorities that they're managing through. The RFPs remain open, so we've reconfirmed that with the big tier ones that we're in discussions with. I assume those will move forward, but they may move forward at a slower pace, of course, than we'd like. The two opportunities, I think number one is with the tier one that we have.
There's an opportunity in the upcoming quarters to open up a second channel with them. There's two channels that they have, a direct and a retail channel. We're in one of the two channels, and it's been made clear to us that there's an opportunity in the second channel once they are technically capable. I think that's one opportunity. The second one, of course, is around home equity and the conversations we've had around that. Our sales team is very focused on making sure we're having a robust conversation with the targets that we have, not only around title refi, but also being able to support them as the home equity volume, as we assume, will continue to increase over the upcoming quarters.
Just the last one for me. You know, obviously you're doing a good job at sort of creating the business in this sort of difficult backdrop. When it comes to things like the data strategy you talked about years back, do you kind of see that, let's say, as being kind of put on the back burner a little bit? Are you still sort of pursuing that in terms of, you know, where you wanna go a few years out from now?
Yeah. We spent the day with our board yesterday reviewing our strategic plan, which we do every year. The discussion of course was around 2025 and the different pillars that we have, and we talked about the three legs of the stool, so took them through appraisal title and the data strategy. I think where we sit right now, Dan, I think the data strategy, although there's things that we can do within organically within the business, the real focus will be you know an acquisition longer term. Where things sit right now from a price standpoint and just a market standpoint, I would definitely say that it is it's on the back burner.
The focus remains right now on the targets that we set in 2025, which we again feel very confident about around market share and the margins. In the short term, operational execution is definitely center stage.
Okay, great. Thank you.
Thanks, Richard.
Your next question comes from Thanos of BMO Capital Markets. Please go ahead.
Hi, good morning. Brian, regarding the waiver usage, you mentioned how it's come down because of the purchase and refi mix. Although looking at the industry data, it seems that waiver usage just among refis has also come down. Any color for that, why that would be the case?
Morning, Thanasis. Yeah, I mean, I think if we play back the reel about a year ago, maybe even a year and a half ago when the waiver rates did go up, our view at the time was that that was the right thing to do with the tremendous surge in demand that came into the market. The function of the GSEs is to help provide liquidity and stability to the market. I think them raising the waiver rates made sense, and I think what we said was we assumed that over time, that would start coming down to, you know, sort of pre-pandemic rates. I think that's what you're seeing, Thanasis.
You're seeing what I would call a pre-pandemic positioning, with the rates dropping down as you saw this quarter, down sort of around the 10%, from the 19.9% that we had last quarter. I think it's just the way the GSEs function. I think they step in and get quite involved when they need to. In this particular market, I think they're taking a step back, and that's why we see them looking a lot more like they did from a pre-pandemic standpoint.
Maybe sort of a related question. Late last year, the GSEs announced a push to use more desktop appraisals. What are you seeing in that regard?
Yeah. They did announce that, and we've seen, at least in our business, very little movement on that right now, Thanasis. You know, we'll see what happens over time. To date, you know, our desktop volume really hasn't moved in any way that we would assume that it would move. We really haven't seen too much of any progress really in moving in that moving forward in the market.
Great. Thanks. I'll pass the line.
All right. Thanks, Thanos.
Your next question comes from Martin Toner of ATB Capital Markets. Please go ahead. Mr. Toner, your line is open.
Hey. Thank you. Can you guys hear me?
Yes.
In the past, you've mentioned a number of reasons that kind of create a floor for refinance volumes, even in interest rate environments like this. Where would you say the market is right now relative to where you think the floor could be? I mean, can it like dive below that floor for a time, especially times like this when there's you know a bit of a shock? Just kind of trying to get my head around what that market could look like even with far fewer people in the money to refinance.
Morning, Martin. You're putting me on the hot seat as usual to forecast what's gonna happen from a rates and market standpoint, which I appreciate. I think what we're looking at is we're looking right now at refi starting to come down to its really historically low levels. If, again, if you take a look at our 2025 strategy that we laid out at Investor Day in 2020, we assumed that the market would be bottom bouncing and that we would be looking at a $2 billion TAM on the refinance side by 2025. I mean, that's the way we looked at bottom bouncing. I don't think we're that far off of that from a bottom bounce.
In the next quarter or two, assume that we'll be in and around that area. To your comment around could we go well below it, the market would have to tell us that. As we've said, there's some conditions in there, Martin, things like people need to refinance their mortgage every year. I mean, mortgages come due every year. We sort of look at a 4% of renewals need to happen each year, and there's going to be some refi in the market. You've also got not just rate refi, but you've got cash outs in the mix. It just very much, of course, depends on rates. We'll have to see what happens with rates over the next little while.
We're prepared on that side, but if rates do continue to tick up, as we've mentioned, our assumption is that home equity will potentially become a larger player. On that front, we've been delivering home equity for years, and we will continue to use that as a lever, depending on the volume that comes in around home equity on the title side of our business to continue to make inroads on the refi side. I'd say that's the way we're looking at the refinance market over the next couple of quarters.
Great. Thank you. Cash out and home equity, home equity is helping you in appraisal. Are you seeing that in cash out? Are you seeing that help for both cash out and home equity in title?
Are we seeing the same type of help from cash out? The cash out rate is below market, below, Martin. Below where we generally historically it's been, and that's because usually the way an American consumer looks at tapping into their equity in their home is one of two ways. They either decide they're gonna do cash out or they're gonna do home equity. So as I say, it's very sort of rate dependent on which avenue they go down. As we mentioned, we've seen the home equity increase on the appraisal side of the business. We haven't seen as much of that home equity increase yet on the title business.
The assumption, Martin, is that one of those two will come into play and we will respond and manage the volume depending on whether it's a cash out or it's home equity.
Great. Thanks. The Tier 2 new lender you mentioned, was that in title or appraisal?
The Tier 2 lender that we gained market share with was in our title business. As you know, we've got a couple of Tier 2s, and we've got a Tier 1, Martin. One of the Tier 2s was the one that we gained market share with in title in the quarter.
All right. Fantastic. That's all for me. I'll pass it on.
Thanks, Martin.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one now. Your next question comes from Robert Young of Canaccord. Please go ahead.
Hi, good morning. I think you said earlier in the call that the RFP process on title was expected to be a little bit slower. I was curious if you just talk about maybe some of the catalysts that, you know, we could watch for that might be a sign that some of the tier ones might get more open to this. I know in the past, the suggestion that if business were a little bit slower, that might give them more time to consider newer vendors in title. I guess now they're distracted with other things. I was just curious if you think for what might be something that you would look at that might be a sign for a catalyst for more RFP there.
Thank you, Robert. Morning. I think from a macro view, Robert, if the market would settle itself and some of the big moving pieces would settle, I think it would probably really turbocharge, frankly, the sales effort. I think because of the moving pieces that are currently going on in the market with the rate movement, with everything from that to affordability to inventory, there's a lot of things I think the lenders are working through right now and considering. We've mentioned the flex into home equity for those that are out of home equity to potentially get back into home equity. There's sort of some of those big decisions that are being made within lenders and of course, looking at what's going on with the Fed, as happened yesterday, what's the impact on the overall rates?
If that became a little more settled, Rob, I think that would make for a much easier conversation with some of the lenders that we have, and it would move things along a fair bit. I think the area that we've been focused on is pivoting and trying another area of advancement with those lenders, which is around the home equity space. It's something we've put a little bit more on the front burner where it may have been a little more on the back burner in the past from a sales perspective.
Because we think there is home equity volume that's gonna come in, and as some of those players get back into home equity, I think it's an excellent opportunity for us to make inroads there and use that as a launch pad over into the refinance side on title.
Okay. I imagine some of the factors would be similar, but on decentralized title, the step into that business. Should we think about that similar to M&A? Is that something that might be, you know, delayed, or is that something you might look at more seriously now in a different type of a market?
No, we'll continue to look at it. Rob, it continues to be something that we've got some of the team working on. I think, as I say, in this market, doing things incredibly differently, dynamically, more uniquely, being really innovative with lenders, it's tough to get bandwidth from them to really focus on doing some things a little differently. As you know through our conversations in the past around purchase title, our focus is to definitely do things in a different way than they're being done today. We think that's the real opportunity. I think lenders are very focused on operations and on strategy in certain areas.
Our team is, as I mentioned, really focused, Rob, on operational execution in the very near term, to make sure that we're running the business in line with what's going on in the market.
Okay. Maybe two other smaller ones. The consolidation opportunity with some of the lenders, is that early? Is there a lot of opportunity there? I think you said that Nationwide, a lot of the Nationwide lenders have, you know, providers that are not Nationwide. Is there a big opportunity for consolidation there yet to go?
Yes. I would say the answer to that is yes. We think there is a real opportunity around consolidation. As I say, they're probably a little bit focused in very short term, OpEx type work. You've seen some of the challenges that those players have had from a people standpoint. I think now they're starting to look at their vendor bases, and I think there's reviews. I know, I mean, of course, we're involved in some of them. We think there is definitely a good opportunity to continue to find market share gains through consolidation over the next few quarters.
Last one from me is around the net revenue margins in lower volumes. Is there an opportunity to retain more of the economics relative to what you pay out to the appraiser or the notary or whatever the field agent may be?
Yeah, I mean, that was back to the operational execution and the focus on that, Rob. That, of course, has been a significant focus on both sides of the border this past quarter, and I think we've seen that in the results. You saw both the US up 100 basis points and Canada up 80 basis points. Very strong performance from both of them, I think, around managing the net revenue margins and taking advantage of the network. As we've always said, this is the real long-term market value in the network, that we can scale up and down. When the volume does start to come down, we can then manage the cost structure of it in line with those volumes and definitely drive stronger net revenue margins.
Again, this is for me anyways, and I think for the board when we took them through this is what the expectation is. I think when we look out to 2025 and the margin targets that we've set, we think we're now definitely continue to be on path to hit those targets.
Okay, thanks. Thanks for taking the questions.
Thanks, Rob.
Ladies and gentlemen, there are no more questions from the phone lines, so this will conclude your conference call for this morning. We would like to thank everyone for participating and ask that you please disconnect your.