Good day, and thank you for standing by and welcome to the Real Matters third quarter 2021 conference call. I would now like to hand the conference over to Lyne Beauregard, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Real Matters Financial Results conference call for the third quarter ended June 30, 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 results for the three and nine months ended June 30, 2021. The release, accompanying slide presentation, as well as the financial statements and MD&A are posted in 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. 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 detail. 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, 2020, 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 margin, adjusted EBITDA, adjusted EBITDA margin. Non-GAAP measures are described in our MD&A for the three and nine months ended June 30, 2021, where you will also find reconciliations 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 third quarter. 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 posted record revenues and net revenues in our U.S. Appraisal and Canadian segments in the third quarter from net margin share gains, new client launches, as well as a more robust mortgage market on both sides of the border. Consolidated revenues were up 9.6% in the third quarter as the strong performance of our U.S. Appraisal and Canadian segments was offset in part by a decline in U.S. Title revenues, a third of which was related to the continued rationalization of the Diversified Title business.
Turning to slide three, consolidated net revenue decreased 12.1% year-over-year to $38.6 million and adjusted EBITDA decreased to $11.8 million from $20.9 million in the third quarter of fiscal 2020 due to the lower contribution from our U.S. Title segment. After the run-up in the 10-year Treasury in March, 30-year fixed mortgage rates moved marginally lower during the quarter, which resulted in flat refinance activity year-over-year as a robust purchase season got underway. U.S. Appraisal segment revenues increased 17.5% year-over-year to $85.3 million, driven by higher market volumes, net market share gains and new client additions.
Origination-only revenues were up 20.6% year-over-year, which compares to an estimated increase of 17.1% in the addressable market, which takes into account the impact of Department of Veterans Affairs volumes and waivers. In the quarter, we launched three new lenders in U.S. Appraisal. We also continued to rank at the top of lender scorecards, which drove market share gains in the main origination channel year-over-year. Operational excellence continues to be our principal focus as we drive toward achieving our fiscal 2025 objectives and doubling our U.S. Appraisal purchase and refinance market share and achieving net revenue margins of 26%-28% and adjusted EBITDA margins of 65%-70%. In our U.S. Title segment, third quarter revenues were down 28.8% year-over-year.
Centralized Title revenues were down 22.2% compared with an estimated 0.5% decrease in market volumes. As we highlighted in prior periods and during our Investor Day last fall, we have been transitioning our client base in U.S. Title for some time, making capacity for new franchise-type clients like the tier one and tier two lenders we launched earlier this year. To put this into context, let me give you a bit more color around timing of this transition. As title volumes were surging late last year, and with the launch of our first tier one customer on the horizon, we capped volume with some historical customers to ensure we had ample capacity to properly service the tier one and other new tier two lenders.
As the 10-year yield moved up earlier this year, we did not receive as much volume as we would have otherwise received due to the caps we put in place. Performance in the first quarters of a new tier one launch are critical, as was the case in U.S. Appraisal, and we firmly believe that we made the right decisions for the long term. We are very pleased with our performance and the market share progression we have seen thus far with our new U.S. Title clients, and we also launched two new lenders in U.S. Title in the third quarter. We are continuing to look at opportunities to build up share should the rate environment be less favorable in the near term.
We remain confident with our strategy and long-term objectives for this business to triple our market share to 6%-8% by the end of fiscal 2025 and achieve net revenue margins in the 60%-65% range and adjusted EBITDA margins in the 50%-55% range. Diversified T itle revenues were down 69% year-over-year in the third quarter, in line with our strategic plan to rationalize this business and better support the growth of our Centralized Title services. On a year-to-date basis, this represents a revenue decline of $ 12.9 million in our title segment. In our Canadian segment, third quarter revenues were up 149.1% year-over-year. Higher appraisal volumes from market share gains and a stronger mortgage origination market in Canada drove record volumes in the Canadian Appraisal business during the quarter.
We also benefited from foreign exchange. Revenues in our insurance business increased with the relaxation of certain COVID-19 restrictions. Adjusted EBITDA more than doubled to $ 1.3 million from $ 0.6 million in the third quarter of fiscal 2020. 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. Consolidated revenues increased in the third quarter of fiscal 2021 compared to the same quarter last year due to record revenues in our U.S. Appraisal and Canadian segments, which were partially offset by the decline in U.S. Title revenues. In our U.S. Appraisal segment, we serviced higher origination volumes from higher market volumes, net market share gains, and new client additions. Conversely, revenues from home equity and default volumes declined year-over-year due to lower market volumes for these services. Transaction costs in our U.S. Appraisal segment increased 22.5% year-over-year compared to the 17.5% increase in revenues for the same period.
As a result, net revenue was up 2.3% to $18.1 million, while net revenue margins declined 310 basis points to 21.3% than 24.4% we posted in the same period last year. This decline was due in part to the mix of mortgage origination volumes serviced and appraiser onboarding to service higher volumes, partially offset by servicing fewer low-margin home equity volumes. Operating expenses in our U.S. Appraisal segment increased 9.7% to $7.6 million, up from $6.9 million in the third quarter of fiscal 2020 due to an increase in payroll and related costs from higher origination volume serviced. As a result, adjusted EBITDA declined modestly to $10.5 million from $10.8 million in the third quarter of fiscal 2020.
Adjusted EBITDA margins in our U.S. Appraisal segment decreased to 58.2% in the third quarter of fiscal 2021 from the 61% we posted in the same quarter last year due to lower net revenue margins and capacity additions we made to service higher volumes. Turning to our U.S. Title segment, third quarter revenues were down 28.8% year-over-year. Revenues attributable to Centralized T itle services declined $7.1 million to $24.7 million, and our average revenue per transaction was largely unchanged from the prior quarter comparative. Diversified revenues totaled $1.6 million, representing a decline of $3.6 million from the third quarter of fiscal 2020.
The decrease in diversified revenues was due to lower Commercial, Search, and Capital Markets revenue attributed to lower market volumes and our strategic decision to reallocate internal resources to support Centralized Title services. The decline in other revenues was due to lower market activity for home equity services. Transaction costs decreased 33.5% and net revenue margins expanded to 67.2%, up from the 64.9% we posted in the third quarter of 2020. The expansion in net revenue margins was due to the flow of volumes in the third quarter, which saw us close a higher proportion of transactions relative to new orders received. Operating expenses in our U.S. Title segment increased $2.4 million to $14.4 million in the third quarter of fiscal 2021.
The year-over-year increase in operating expenses is due to the capacity you've seen us building for several quarters now to service higher volumes and to support our first tier one client launch. Adjusted EBITDA decreased to $ 4.3 million in the third quarter of fiscal 2021, down from the $ 13.3 million we posted in the same quarter last year. Adjusted EBITDA margins contracted to 22.8% from the 52.7% we posted in the prior year period owing to the impact of lower volumes relative to the existing cost base in the business.
As we've done in the past, we will continue to be prudent in managing costs to scale with volumes, ensuring that we make the right decisions to support our long-term objectives. We remain confident in our ability to achieve adjusted EBITDA margins of 50%-55% by the end of fiscal 2025 based on the achievement of our market share objectives. In Canada, revenues increased 149.1% on a year-over-year basis to $ 16.3 million, while net revenue margins contracted by 280 basis points due to the mix of mortgage origination volume serviced. Canadian segment operating expenses were $ 0.5 million in the third quarter, up from $ 0.4 million in the third quarter of fiscal 2020.
Adjusted EBITDA margins increased to 70.6% from 59.8% in the same quarter last year as we leveraged our appraisal operation in a higher overall volume environment. In total, third quarter consolidated net revenue was down 12.1% to $ 38.6 million from the $ 43.9 million reported in the third quarter of fiscal 2020 from the lower contribution of our U.S. Title segment, partially offset by higher net revenue margins recognized in this segment due to the flow of transaction volumes in the quarter. Consolidated net revenue margins decreased to 29.8% in the third quarter of fiscal 2021, down from 37.2% in the third quarter of fiscal 2020 due to 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 $ 11.8 million in the third quarter of fiscal 2021, down from $ 20.9 million in the same quarter last year. Consolidated adjusted EBITDA margins decreased to 30.5% in the third quarter of fiscal 2021 versus the 47.6% we posted in the third quarter of fiscal 2020 due to the capacity additions we made in our U.S. Title and U.S. Appraisal segments. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $ 79.3 million, down from $ 19.2 million at March 31, 2021. We purchased 4.4 million shares in the third quarter under our NCIB at a cost of $ 59.2 million.
In fiscal 2021, we have allocated more than $86 million year-to-date to share purchases under our NCIB, buying 6.2 million shares in support of our view of the company's intrinsic value. Post quarter end, we purchased an additional 335,000 shares under our NCIB. With that, I'll turn it back over to Brian. Brian?
Thanks, Bill. In summary, our U.S. Appraisal and Canadian segments posted great results in the third quarter, setting new record highs. While we are in a transitionary phase in U.S. Title, we are very pleased with our performance and progression with our newly launched clients. We are also confident in our ability to grow the business with the right clients over the long term. As Bill indicated in his remarks, we will continue to be prudent and manage our cost base to scale with volume while ensuring we make decisions that support our long-term growth objectives. We are focused on continuing to build a great business for the long term. With that, operator, we'd like to open it up for questions now.
Thank you. Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Your line is now open.
Hi, good morning. Brian, just going back to your comment about reallocating resources to focus on the ramp of larger lenders in Title, maybe can you drill in a bit on that? I mean, you know, why was there a constraint there? Why couldn't you have just maybe hired more people to continue supporting the smaller customers while also ramping large ones? Or, you know, is it really sort of the bottleneck in terms of just, you know, skilled, experienced resources that you wanna make sure that, you know, you're focusing on those large ramps? What was the issue there?
Yeah. Morning, Thanos. I think it lines up a little bit more with the second observation that you made. Again, if we play back to the end of last year, the volumes were surging. We had 50 to 70 basis point type rates, and there was a tremendous amount of volume coming in. At the same time, we had a tier one and a big tier two in our line of sight. Both of these, of course, would be those longer term franchise customers we talk about. We needed to ensure that we had ample capacity. In order to do that, we had to cap some of the volume of historic customers.
As you know, the 10-year moved up, even this past quarter, we got up over 170 basis points. Thanos, we simply had less volume than we'd anticipated. Back a year ago, we anticipated significant volume at those rates and slightly less volume. At the same time, we also made that decision to rationalize the Diversified Title business into Centralized Title. We've sort of discussed that since the start of the year where we shut down Commercial on this quarter, we shut down Capital Markets. That had 1/3 of the impact on Title shortfall was from the diversified work. Listen, I mean, we're very confident in the runway. We are performing well with the tier one and tier two that we launched.
We needed that capacity at the time to make sure first impressions count with these players. We can continue to be very focused on our long-term targets of tripling market share with the volume, the margins that we've shared.
Okay. Just to clarify in terms of the tier one and the tier two, as far as those ramps, are they progressing as you would've expected initially? I mean, volumes might be lower because of the rate environment, just in terms of from a market share perspective, is that progressing as you thought?
Yeah. Thanks, Thanos. Yeah, they are. I've talked historically and shared our goals of getting tier ones to 5%-10% in the first year, and we are very well on track to do that. We're only in the second quarter, it looks very good progress there. In the case of the tier two , we've even accelerated some of that timeline in the third quarter with them. On both accounts, we feel very strong on our progression from a market share standpoint.
Okay. Finally, I mean, rates have obviously backed off. There was also the program by the GSEs to promote refis among lower income borrowers. In terms of just, you know, what you're seeing in the business as of today, are you seeing any kind of a pickup on the back of those things? Or is it maybe typically more of a delayed reaction in terms of rates versus refis picking up again?
Yeah. Well, so I mean, it you know, the refis, it's the 10-year Treasury is what it is. This past year, Thanos, we've definitely seen some peaks and valleys in the 10-year. I think the 10-year will be what it is. When we reflect back on the last quarter, from a refinance standpoint, it was, you know, the volume was marginally negative based on the rates. I think a lot of it we're gonna have to see what the rates look like going forward, and see whether there's much of an impact. I think that will drive more of an impact than some of the elements you outlined that have been happening sort of within the industry.
I guess I'm saying just from a real-time basis, like over the last couple of weeks with rates having had a big move, has there been an uptick?
Sorry.
Comment on that?
Apologies. Just in the last couple weeks. You know, we've seen a little bit of a move and what we've generally, I think what's interesting right now, Thanos, is we've got this 12.5 million homeowner group in the U.S. that all are in a position to save over 50 basis points on their mortgages. Frankly, we haven't seen necessarily the movement there that we would've expected. I think that's actually part of, I think the interesting elements of human psychology is what's going on right now with the U.S. homeowner and will they start taking advantage of the fact that rates are very good and that they could save a fair bit of money on their mortgages.
I think that will be an interesting driver with rates where they are right now.
Well, thanks, Brian. I'll pass the line.
Thanks, Thanos.
Your next question comes from the line of Daniel Chan from TD Securities. Your line is now open.
Hi, good morning. Just wondering how your discussions with the other tier ones are going on getting onto the Title and closing business.
Yeah, Dan, the pipeline continues to move. As we've talked about in the past, we've talked about having a majority of the tier ones in conversations on title. That continues. I think there's, on the one hand, a little bit of wait and see as we've launched these first two. As we've talked about, performance is incredibly important. I think part of the reason we are confident about our market share with the first two is because we are performing incredibly well and top of scorecards. We're feeling really confident there. I think, as I say, there's a bit of a wait and see with the other tier ones and twos, but conversations continue to progress well.
Thanks. That's helpful. Any update on the proportion of appraisals that are getting waived?
Which is Q2. I'm assuming that's answered Dan's questions.
Thank you. Your next question comes to the line of Martin Toner from ATB Capital Markets. Your line is now open.
Hey, guys. Thanks a lot for taking the question. Can you tell us, I'm assuming that based on the results in title this quarter that you now have excess capacity in title. Can you kind of tell us like what that is and based on your market share goals, if you'll be able to ramp at a necessary rate going forward?
Sure. Let's go back to the commentary around ensuring we have ample capacity, Martin. That is a critical item for us when we are looking at these tier ones, tier two s, these longer term franchise customers. You need to make sure that you've got that ample capacity. I had mentioned over the last couple of quarters that we were building that capacity, both at a network level, as well as making sure that we had the resources to do that. I think we've done a fantastic job of building the network. We're feeling incredibly bold about where our network is on the Title side. Now it's a matter of going forward managing volumes and costs. I think we'll be very thoughtful about that.
As I say, you need to make sure you're continuing to keep that ample capacity with the expectations of tier ones and tier twos in the future, as well as managing against the volumes that you have now. That will be the balance that we manage over the next couple of quarters as we, as we make this transitional move from our historic tier threes, tier twos into the more tier one, tier two base.
Thanks. Is there a certain, like, amount of capacity you think you can add each and every year? Like right now you're at, say, 2.5% share of U.S. Title, something in that range. Like, is there a maximum amount you can add? Is it 1%? Just wondering if you can give us a feel there.
Martin, I missed the first part. I think the question was around market share ramp to our expectations of tripling market share. Is that the question?
No, it was on capacity, like.
Oh, capacity.
Is there a certain amount of capacity you're able to add, say, per year? Like, is it 1%? Or I'm just trying to get my head around, will this capacity issue happen again?
If the question is can we ramp capacity when we need to, if you've seen from this past year, we have ramped up significantly our capacity from where it was over a year ago. We can. As you know, the big sort of focus for us longer term, Martin, is the scale of the business. I mean, that's really a big chunk of the value of the franchise is the ability for this business to scale. In a more mature business, like if you take a look at our Canadian business, you'll see that expenses went up very minimally this past quarter, whereas volume was up almost 150%. We're able to scale up in a mature environment incredibly well and then scale down as need be.
Where we are with U.S. Title, again, it's this transitional crossing the chasm, where we need to make sure that we've got enough capacity for the new customers that we are out in conversations with, while making sure, of course, that we deliver the right type of economics on the current business that we have now. We can flex up and down as required, but of course, where we're moving towards is starting to get some of the leverage off of the scale of our business longer term.
How much share did the customers that you lost share with this quarter represent?
Martin, I don't have a track on that particular number. We capped this a fair bit of time ago. When we take a look at how their volume ramps versus our tier ones and tier twos, it's driven by the market. It's driven by us winning market share with some customers, and/or some of them maintaining that cap volume that we have. I apologize. I don't have an easy answer for that question.
Yeah, no problem. The customers that you lost share with, did you lose any of them entirely? If not, what's your level of confidence that you'll bring it back over time?
Yeah. Listen, I think where we're focused, again, I think the confidence in the new customers we're bringing on, focusing on those longer term franchise customers, the ones that are interested and focused on performance, on quality, on speed, Martin, those are the ones that we will continue to grow, that we're focused on increasing market share with, and we feel very confident that we are performing right now and that we will continue to increase market share with them. That's really where the team's focused. Market share increase with tier ones and twos, market share increase with the right customers within our historical base, as well as bringing in more new customers. We mentioned we brought in two this past quarter. We will definitely be bringing in more than two this upcoming quarter.
That's really where the focus is.
Okay. I appreciate that. Okay. Thanks for taking my questions.
All right. Thanks, Martin.
Brian, before we move on to the next question, when the question came up about the update on appraisal waivers, it wasn't audible to certain participants on the call. If you could maybe repeat the answer to, what is our update on the appraisal waivers right now? Thank you.
For sure. Lean in, Lyne, if it does cut out. On appraisal waivers. In Q2, we talk about the impact on the addressable market. In Q2, when we reflect back, the waivers had a 31% impact on the market. When we look at Q3, that impact is 22%. A fairly decent drop in the impact of waivers on the addressable market. A good chunk of that is the mix that we've talked about in the past, which is the proportion of purchase transactions versus cash out and versus rate refi. With cash outs coming up, with rate refi being flat or slightly negative, and with purchase up, sort of in the 30% range. We've definitely seen a move in that mix.
You also pair that with, our estimates that the GSEs are a slightly smaller proportion of the overall market, you take those two together and you see a fairly decent drop in the impact of waivers.
Your next question comes to the line of Richard Tse from National Bank Financial. Your line is now open.
Hi, this is Mihir calling in for Richard. Just wanted to ask on the data side, is there any update on that?
Mihir, we continue the conversations and the work that we're doing on our data strategy. We've Our corporate development team has been very busy this past quarter, and we've continued to evolve, I think, our view on the verticals, and we've interacted with the right type of customers in that space. I think we're feeling like that strategy is definitely moving moving forward.
Okay. Just on inflation, I was just wondering if you guys are seeing any impact to the business regarding that.
No, I don't think right now, at least in the past quarter, Mihir, we haven't seen any of the inflationary discussion really having an impact. I mean, as you probably are aware, It's much more based on the macro dynamics of the mortgage market. We've seen purchases up fairly significantly. We've seen the refinance market, as we've talked about, relatively flat, minus 0.5%. That's really I think the drivers.
Okay. Just one last one. Obviously you guys have been pretty aggressive with the share buybacks. Just wondering how we should think about that moving forward.
Sure. We work very closely with our board around the share buyback and you can see by our activity, $60 million spend in the last quarter, 4.4 million shares. The board really believes in the long-term intrinsic value of the business. We definitely leaned in this past quarter. This is our biggest quarterly investment to date as no doubt, Mihir, you're aware. Going forward, we're gonna continue to work with the board. It's a very disciplined approach and we will evaluate as part of our overall capital allocation strategy and consider it both against other strategic elements we're looking at as well as growth opportunities going forward.
Okay. Thanks. Thank you for taking my questions. I'll pass the call.
All right. Thanks, Mihir.
Your next question comes to the line of Parth Shah from Canaccord Genuity. Your line is now open.
Hi, this is Robert Young on for Parth. I'm. First question from me would be related to the 1/3 of the shortfall related to the Diversified Title. The remaining 2/3, is there a way to parse that out and give an indication of how much was related to the accounts that you'd capped off late last year? Maybe just to get a sense of how much of that shortfall is related to strategic decisions that you're making as a management team versus market related.
Sure, Rob. I mean, a good portion would be related to our decisions around capping historical customers. I say that the tier ones and tier twos, tier one, tier two we launched this year, as we've discussed, have been progressing from a market share standpoint. Definitely a decent proportion is the capping that we thought made tremendous sense back in a very different market at the end of the last year.
Okay, great. I mean, just to continue on, I think that Martin Toner asked a question on the permanence of the decision there. What about the diversified industry or the diversified parts? Are those permanent decisions that you're moving away from those businesses, or is that a temporary resource allocation that you might, you know, go back into those markets?
Rob, we've talked about Diversified Title over the years. It's a, as you know, it's a lumpy business. It's very project-based, and it's not built in like our scaled networked platform model. We started making those comments last year around looking at at rationalizing it. We made the comment earlier in the year around Commercial where we shut that down. We shut down Cap Markets. That's pretty well most of the diversified business, Rob, that's now shut down. We're gonna rationalize that into the growth on Centralized Title. That's our scaled business. That's the long-term business. That's, I think, the way we're looking at Diversified Title.
Great. Okay. Then maybe last question. You'd said just a couple minutes ago that you're seeing an uptick in new client wins subsequent to the quarter. Is there any other color you can provide around that, whether it's tier two or smaller or maybe any additional color would be helpful, then I'll pass the line.
Yeah, no, I think the comment around we launched a couple last, and I feel confident that we'll launch more of that this quarter because the sales pipelines and the focus from our sales team on new customers has been quite strong. It's gonna be a mix. We'll have to see, Rob, which ones land, but we've got a very good mix. You know our focus on tier ones and twos and then of course we are just as focused on the right types of customers in the tier two, three , four category. As I say, it just depends on how they launch and how they land, and I will definitely comment on that next quarter.
Thanks.
Again, as a reminder, to ask a question, please press star one. Again, that is star one to ask a question. Your next question comes from the line of Martin Toner from ATB Capital Markets. Your line is now open.
Hey, guys. Thanks. Two quick follow-ups. number one, was Decentralized Title lower margin? Number two, will the removal of the Adverse Market Refinance Fee, will that give refinance markets a boost?
Let me address your second question, Martin, and then I'll have Bill address the margin question on DT. The adverse fee, Listen, when the adverse fee came in late last year, when the adverse fee came in, our commentary around that, Martin, was that we thought there was a very good chance that the banks would take that into the spread and the margin on the business, which is what we generally saw. Our view right now is that we don't think that will have a big impact on the business. It is 50 basis points. It is 0.125%, depending on the loan size. We think it probably won't have a significant impact.
I think it's, you know, the conversation in the market, we'll see in August, of course, when it hits, but the conversation from a market standpoint with a bunch of the lenders is that it very well either may not be enacted too much or may not have too much of an impact on their customer base.
Great. How about Decentralized Title margin profile relative to centralized?
Yeah. Bill?
Yeah. Can you hear me all right?
Yep.
Excellent. Martin, even though the diversified revenue stream was project-based, a little bit lumpy, it actually shared a very similar net revenue margin profile to Centralized Title. Think in that 60%-65% range on a blend of the basis across all of the service offerings that constituted a diversified service revenue stream. Very similar is the short answer to CT.
Gotcha. Thanks very much.
Okay. Thanks, Martin.
Thank you. We have no further questions in the queue. This concludes the Real Matters third quarter 2021 conference call. Thank you for participating. You may now disconnect.
Okay. Thank you.