Everybody, and welcome to Sidoti's June Small Cap Conference. My name is Brendan McCarthy. I'm an analyst here at Sidoti, and presenting with us today, we have the Real Brokerage. Leading the discussions from the firm will be the company's CFO, Michelle Ressler. Before I hand it over, a quick reminder that the Q&A tab is located at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save some time for Q&A at the end. With that said, Michelle, take it away.
Thank you. Good afternoon. I'm Michelle Ressler, the CFO of The Real Brokerage. Real is a real estate technology company. The company was founded back in 2014, and we have a really compelling growth story in the industry. Our primary business is real estate brokerage, where we provide real estate agents a differentiated platform to grow their businesses, which is centered around our completely proprietary technology stack. In the Q1 ended March 31, we grew revenue by 86%, which compares to a 3% decline in the existing home sales market, and over the prior 12 months, we've generated nearly $800 million in revenue and $12 million in Adjusted EBITDA.
To provide a little bit of background on our industry, there are 1.6 million real estate agents in the United States and around another 160,000 in Canada. The average industry generates around $100 billion in annual revenue, which represents the total amount of commissions paid to these agents. Every agent has to be affiliated with a brokerage, so an agent cannot work completely independently. They have to be affiliated with a company like, you know, you may have heard of Keller Williams, Coldwell Banker, or Real. The market has been dominated by traditional players in the space for many decades, all of whom operate in the same way. So they rely heavily on brick-and-mortar offices, and manual processes, and a lot of them charge agents a lot of money to deliver what we believe is poor value at a high cost.
So even though we've been growing very rapidly, we're still less than 1% of the overall market, and that gives us confidence that we continue to grow rapidly, rapidly as models like ours become more and more prevalent. When we started the company, we saw that there was an opportunity to create a better platform. So we wanted to create a platform that is based on technology while eliminating the need for office space, that delivers agents a better service at a lower cost, and at the same time, to create an operating model for a brokerage that's more sustainable. To provide some perspective on our recent performance, in 2020, we decided to take the company public, which was a very unusual decision for a company at our stage. We were generating around $10 million in annual revenue.
So we were quite small, but we believed that our agents were our partners or are our partners in building this business, and we wanted to create an equity incentive plan for our agents. Initially, we went public on the TSXV in Canada, and then a year later, we listed on Nasdaq. Currently, we are solely listed on Nasdaq. But going back to 2021, so almost overnight, we started growing like crazy. Seemed like we made the right decision. And if you look back, if you compare, you know, Q1 2024 to Q1 2021 numbers, you can see that we grew the company by 20x in those three years. And so also, you know, just to point out, transaction volumes in the housing market had declined by about 30% during that same period, so significant growth.
We've proven that we can grow rapidly despite the severely challenged market conditions, which gives us a lot of confidence in our ability to continue to rapidly grow as the housing market hopefully begins to improve. So you're probably asking: Why do agents join Real? Why are we growing so rapidly when many of our competitors are losing agents and declining in revenue? There are multiple reasons, but I will touch on the four main reasons. We believe that these are the four main reasons why agents join Real. The first one being freedom and flexibility for agents to operate their businesses as they want. I mean, if you think about an agent, they're independent contractors, they're small business owners, and yet they have to be affiliated with a brokerage. That's the regulation. So, as I mentioned earlier, they can't work on their own.
But when they work for a traditional brokerage, for example, let's say RE/MAX, they end up building someone else's brand. You know, there's a broker that sits in the office, they act as basically a manager, and they tell them exactly what to do, how to market themselves, when to come into the office. Essentially, someone else is controlling their business, and when they move over to Real, they have the flexibility to build their own businesses the way they want to, and this is a huge benefit for those agents. So this year, we doubled down on this and launched two new initiatives called Private Label and Pro Teams. And what these do is they allow independent brokerages to keep all of their branding, and, you know, very seamlessly transition over to Real. The second reason that agents join Real is because of the compelling economics.
We have some of the best economics in the industry. What we have is a unique compensation model that provides agents with attractive financial incentives, including high commission splits, revenue sharing, and the ability to earn equity in the company. So the average agent switching to Real will end up paying about half of what they're currently paying at, you know, their traditional brokerage. The majority of brokerages charge commission splits around 70/30, meaning that 70% of the revenue will go to the agent, and the brokerage will keep 30%. On top of that, they charge many different fees like desk fees, monthly fees, and transaction fees. And again, this is because the inefficiency in their model, which forces them to price through to their agent.
But our model is built on an 85/15 split and no monthly fee, which is, as you can probably imagine, very attractive to agents. On top of that, we have a cap, so once an agent pays us $12,000 a year in commission, they get to keep 100% of their commission and only pay us a transaction fee of $350. This is extremely attractive for high-performing agents and high-performing teams, and this is why we're seeing a lot of traction within those segments. The third reason is our technology. So this is, you know, our forte. This is where we excel. We truly view Real as a pure technology company.
Of course, yes, we operate as a brokerage and a mortgage company and a title company, but the technology that we've developed for the agents, and have been building for almost a decade now, is truly what sets us apart. Our technology stack has four main pillars, the first pillar being productivity. This is everything an agent needs to run their business, from a CRM to a transaction management system that allows them to draft contracts, send them for review and e-signature, an education module, a powerful dashboard that shows and provides them visibility into their business, their transactions, and all of their financial metrics, and everything is in the palm of their hands. Again, that freedom and flexibility. We're a mobile-focused company, and everything we develop is for our agent-facing app.
There's also a desktop version, but we believe there's power in, you know, allowing agents to conduct business from anywhere. Second is marketing. You know, we decided well, a long time ago, that we weren't going to brand Real as a consumer-facing brand, and so that's probably why you've heard of the other companies, like RE/MAX or Coldwell Banker, but you haven't heard about Real, and that's because consumers do not use agents based on their brand affiliation. Nobody goes into, you know, a RE/MAX office and says, "Hey, I wanna work with you 'cause I hear RE/MAX is the best brand. So can I have one of, c an I work with one of your agents?" That's just not how it works.
You're going to choose an agent based on referrals, you know, based on knowing that that person is an expert, seeing their yard signs or their social media or their name tied to a listing on a specific property. So we decided it would be more beneficial for us to take those marketing dollars and invest them into making our agents better known within their communities. So part of our marketing portal has or our marketing portal has both an online and offline aspect. The offline aspect is everything an agent needs to order, from business cards, yard signs, brochures, you know, car magnets, listing presentations, whatever it may be, everything can be ordered through our marketing platform.
And then on top of that, every agent receives a personal branded website and a personal branded app, so they can invite their clients to download the app, look at the website, look at their bios, check out their listings, and communicate with them seamlessly all through the app. All of this is free as part of the package that we offer to our agents. Some other companies charge additional fees for marketing services. We do not. The third bucket of technology is community. So, you know, we don't have offices for agents to use, and of course, it's a huge cost saving to us, but you may ask, "How do agents interact?" Well, we recognize the fact that agents want to interact with each other and collaborate and ask questions, and so we have a community feature on our app where agents do exactly that.
It's like a Facebook feed, where agents ask questions, they celebrate successes, schedule in-person meetings, form groups. It's pretty amazing to see all the engagement in the community. You know, sometimes they're even posting, like, motivational quotes. Honestly, it's really cool to see. And the beauty of it is that agents are not confined to a physical office anymore. So, you know, if you have this office that you go into every day, you have the 10 or 20 people around you to lean on, but who goes into the office anymore? So maybe it's, like, three. But with our community feature, they can tap into the knowledge of thousands of successful agents around the country and learn from them, learn from, you know, our 19,000 and growing, instead of just being in interaction with the people in their office.
The fourth segment, and the one that I'm very proud of, is our brokerage operations. When you know, this is probably our strongest competitive advantage to date. When we think about all the tasks that are being handled in the back office of a brokerage, it's things to do with transaction management, reviewing files, reviewing documents, processing payments, supporting the agents, answering all their questions. We took all of that, and we automated it. So instead of walking into an office and asking, you know, the secretary, whoever, like: "Where is that excel? Where is this? Can you email me this?" Everything has been automated, and we are by far the most efficient brokerage in the country. I mean, it essentially operates like a trading floor. So typically, at a brokerage, you would have one employee for every 20 agents.
Our ratio is 1 employee to 115 agents, and that ratio is continuing to grow. We are incredibly efficient. The reason that this is, you know, possible is because we took all of those tasks that consume human time and put software to work. So typically, in a regular brokerage, it would take 2 to 3 hours to review a file, sometimes a week. I mean, sometimes days, up to a week if there are problems with the file, and right now it takes us 2 to 3 minutes. For example, if you look at Compass, we process about half the transactions that Compass processes, and they have 400 transaction specialists. We have 9. We've had those 9 since 2020 when we went public and, you know, we've grown. We've 20X'd the company and have not had to hire an additional person.
So again, huge competitive advantage that we have and nobody else does. And the fourth reason people join Real is because of our culture. Agents want to be in an environment where they can grow, where they can learn from others. You know, they wanna feel like their environment is helping elevate them, and typically at a brokerage, there's a fierce competition. You compete with the person in the desk next to you. But we, we really focused on building a culture of collaboration versus competition, and we're super proud of that. You know, it's amazing to see all of our agents joining together, helping each other achieve their goals, educating one another, and they do this all, you know, organically and naturally through our community, through in-person events.
They really put the work hard, be kind, and the, you know, we are bigger than me, aspects of our culture to work. It resonates through. So I'll spend a moment on the efficiency of our platform, 'cause again, I'm super proud of this. We measure efficiency within the company in a number of ways. So here we show that our fixed cash operating expenses as a percentage of revenue continue to decline year-over-year, as we're able to grow revenues much faster than we're growing our fixed costs, and that's, again, because of the efficiency. Another metric is our headcount efficiency ratio. So typically, at a brokerage, you would have one employee to every 20 agents, and we have around one to 143 currently.
This ratio has improved over time because we built a technology platform that can process transactions without human involvement in the back office. We spent a lot of time talking about our brokerage business, but I think it's worth some time, discussing our ancillary services. In the past few years, we've made 2 acquisitions. We acquired a title company and a mortgage company. The reason why we chose to expand into those businesses is because on the brokerage side, margins are relatively thin, and that's common across the industry. We have gross margins that average between 9% to 10%, but on title, you can generate over 80% gross margins, and on mortgage, we have about 50% gross margins. So these are much higher margin businesses. We're now in the process of scaling those 2 businesses.
When we think about our future and the ability to attract more agents and more transactions, we also think about our ability to monetize transactions in a better way and drive higher attachment of these services. So what this chart illustrates is that if we can attach mortgage and title to the same transaction, we can make anywhere from 6 to 8 times more dollars on a single transaction compared to just offering brokerage services. It's a huge opportunity for us to drive improved profitability. We believe that the home buying process is broken. It's not fun, it's not convenient, and as a buyer, you don't have a lot of control or visibility into the closing process. So we think that technology can dramatically improve that experience while leaving the agents in the center of the transaction.
You know, initially, we set out to streamline the agent side of the business, and now we're focused on building a consumer-facing app that will take home buyers from initial home search until closing in one single place. That includes applying for a mortgage, going to look at homes, scheduling, you know, scheduling listing tours, receiving a mortgage, purchasing the home, you know, securing the title, insurance, everything you need in one single place. It's a huge undertaking nobody has managed to build before and requires integrating three main building blocks of a real estate transaction. Those building blocks are brokerage services, of course, mortgage services, and title services. And so that was the reason for us making these acquisitions, and that is exactly what we're doing. We launched the app in October of last year, and we're continuing to iterate on it.
As it continues to mature, it's a huge opportunity for us to further monetize our mortgage and title business. Another major initiative we have underway is the Real Wallet. So this is an industry-first fintech product for real estate agents. Today, when an agent closes a transaction, we collect that money, and then we transfer their share of that money directly to their bank accounts. But in a few weeks, in the end of this quarter, we'll be launching RealWallet, which is a digital wallet that every agent within Real will have. So basically, when an agent closes a transaction or they get any kind of payment from us, the money will go into their digital wallet, and then in the digital wallet, they will have a debit card.
They'll be able to use the debit card to spend money, or they can, you know, bring it into their own bank account, wire it, whatever. They have the same capabilities they have everywhere else. But if they swipe the debit card, they earn points, and those points help them offset the brokerage fees that we charge them, and then, of course, we earn the interchange fees. But not only that, we saw an opportunity to help agents monetize their business even more and grow their businesses even more, because agents have different financial assets within our company, they build assets on top of our platform. So of course, they have pending transactions, and those are an asset 'cause that will eventually turn into cash.
They have past transactions which enable us to predict the future productivity of the agents, and then they're an equity in the company, which is an asset, and then also revenue share for referring their friends to the company, which is an asset and a monthly income stream. So based on these assets, we're able to underwrite them for a specific or dedicated credit line that will be part of the wallet. And, you know, with that credit line, they receive a credit card, which they can then swipe, and of course, we earn interest. So the wallet and consumer offer two high-margin product launches that are underway. And, you know, two reasons why we're very, very excited about the, about the future outlook for our business, 'cause at the end of the day, we're not only a brokerage.
What we're focused on here is building a financial ecosystem around buying and selling homes and operating agent businesses. In summary, as we look into the balance of 2024, we're very excited that we will continue to deliver exceptional industry-leading growth and sharp improvements in profitability. Even, you know, with the existing home sales market near historical lows, we continue to grow agent count, market share, Adjusted EBITDA, free cash flow, and we expect that to continue. I'll pause there and open it up for Q&A.
Great. Thanks, Michelle. We can now start the Q&A section here. As a reminder, feel free to type in any questions in the Q&A tab at the bottom of the screen. I think a good place to start our Q&A would just be around the regulatory environment. Obviously, the NAR settlement is probably, you know, top-of-mind topic for investors. Just wondering if you can go into detail on the impact of that settlement and maybe your outlook as it relates to the settlement.
Yeah. So I think there was a lot of, a lot of noise around that, a couple of months ago. Essentially, what it just, you know, boils down to is that buy-side agents cannot advertise their commission on the MLS. They can put it anywhere else. They can put it on their head, if they wanted to. They can also put a link to it, somewhere else. So what it leads to is the buyer-broker agreement. We haven't really seen much play out due to it. I think, you know, it took some time for education, et cetera, and it's not necessarily required or it's not required until August, so I don't think we'll really know the full effects until a little bit thereafter.
But, what I can say is that even if commissions do compress, if buyer commissions do compress slightly, and by the way, commissions have been compressing for a number of years, so it's not new. It would only just maybe accelerate the trend. We expect them to land, we've always expected them to land in the 4.5%, which is why we built our business the way that we did. And so whether that speeds up, or not, we still believe that we're very well-positioned because of our model to capture more market share, in that condition. Because smaller businesses, smaller brokerages, one, you know, will need to look for better options for lower-cost models so that they continue running their business.
And then, you know, some of the major, as I mentioned or as we spoke about earlier, legacy brokerages, they have high overhead costs in brick-and-mortar that they're tied to, and so they don't really have the leverage in their operating model to adjust to compress commissions either, and all of their revenue is from commissions. So we believe it's an opportunity for us. You know, I mean, we'll continue to watch what happens, but we're not super worried about it.
Got it. That's helpful, and what's I guess, has there been an impact on the, you know, pipeline of agents or, you know, whether positive or negative from that settlement?
I can't say whether or not it's related to the settlement. I mean, if you look at Q1, that was our highest, highest agent growth period to date. So we added 3,000 agents in Q1, but that trend has actually continued. We're continuing to add around 1,000 agents a month. We just surpassed the 19,000 agent mark. So whether it's related to that or not, I can't say. Maybe in Q1 it was, but we're still seeing the same, the same rapid growth.
Got it, and looking at the revenue model, I think you mentioned the 85/15 split with no, you know, specific fixed fees, but just wondering if you can talk about how that compares to peers. I know you mentioned it's relatively lower, you know, but how does that compare to certain peers, and have you seen other peers, you know, lower their fee structure as well in response?
Yeah. So actually, last year when the market, like, really hit a low, we saw almost every single one of our competitors adjust their fee structures. So they were lowering prices, and we actually increased our fee structure. We didn't see any pushback from that. We didn't lose any agents over it either, by the way, and growth has, you know, even increased from that point in time. We do have fixed fees, so we have a one-time join fee, an annual brokerage fee, and then we have per-transaction fees after you cap. There's also a rev share participation fee. But again, it's still- they're still very, very low compared to that of our competitors.
Got it, and looking at the two acquisitions that you mentioned, for the title business and the mortgage business, can you talk about are those fully integrated, cash flow positive or, you know, what are some of the characteristics of those business segments?
They're still very nascent. We are continuing to invest in scaling those businesses. They represent, you know, sub 2% attachment right now of our overall transaction base, but we expect them to grow rapidly this year, you know, in the hundreds of %, grow rapidly much faster than the brokerage is growing. So they're not quite generating an income. There's opportunity there to get them to profitability, which is what we're working on now.
Great. Great. And just looking at the agent base, can you just talk about the capital intensity of the business, and what the process is like bringing on, you know, new agents and maybe how long that time process is before they're up and running?
Sure. So actually, we spend zero dollar on upfront acquisition of agents. You know, there was a time in the past when we would do, you know, advertise for agents via Google Ads, et cetera, and what we saw was it's just not worth it. So right now, 80% of our agents are referral-based, meaning it's word-of-mouth, agents attracting other agents, agents participating in our revenue share program. It can take anywhere from, you know, a couple of days for a single agent to a couple of months for a large team. I mean, you have to think about the fact that it's difficult, you know, coming to a decision to change your entire business, especially if you're running a team of, like, 100 agents or a small brokerage, will take some time.
So we see, you know, them coming. We are happy to host conversations. We see them coming back, coming to events, coming for more education. But ultimately, I would say it's, it's a pretty quick timeline dependent upon the season.
Got it. That's helpful. Question from the audience here: What are the most significant risks you foresee in real estate? Or I'm sorry, it's actually, what are the most significant risks you see for your company?
For our company? That's a great question. I think that one of the things that is probably a risk is that I don't see that many risks. So if we continue operating just as we are, like there's a, you know, competitor out there, their name is eXp. They started about 5 years before us, and they show a very clear runway to, they have, you know, over, you know, over 80,000 agents. And so they show a very clear runway for us to, let's say, 100,000 agents or 80,000 agents. If we continue going the pace that we are, we will be successful. We are already cash flow positive. We're EBITDA profitable since last year, expect to remain so in the future. And so the brokerage itself is in a very healthy position.
What we see really is an opportunity, and so the consumer app is something that no one has ever built before. And this is, you know, our opportunity to really be that company that changed the way people buy and sell homes, and that's what we're, that's what we're setting out to do. It is, it is a difficult undertaking and will take, you know, many years to iterate. And, you know, also being the company that changed the way real estate brokerages operate, you know, moving from just a traditional real estate brokerage to really being that fintech ecosystem, we're really changing the face of the industry, and it's super exciting for us. But of course, it takes innovation and a number of years to get there.
Got it, got it. That's helpful. And looking at, you know, capital allocation, I know obviously there's a high focus of bringing on new agents as well as, you know, the recent acquisitions, but what do you prioritize from a capital allocation perspective at this point in time?
Sure. So again, we don't spend any money on upfront acquisition of agents, so it costs us nothing to bring on an agent. Currently, we are focused on, you know, things that will be immediately accretive to the business, so we're always looking for M&A opportunities that would be accretive, cash flow generating, you know, interesting improvements to our technology stack. And on top of that, we have a buyback program in place. And currently, those are our two main, main uses of capital.
Got it. Maybe as a last question, we can talk about the macro environment a little bit. What's your outlook on the real estate industry and, you know, just how it might impact the business going forward?
Yeah, it has been a tough couple of year, tough couple of years. We believe that the market has bottomed and that we're in the early stages of recovery. So we expect, you know, probably, I would say, low- to mid-single-digit growth, even though interest rates are still high and in the 7% range. We expect that growth, you know, on, I guess, last year's 4.1 million existing home sales. So we think it's recovering.
Great. Well, Michelle, we really appreciate the overview. Thank you again for your time. If there were any questions we did not get to, feel free to reach out to the Real Brokerage directly, or you can contact Sidoti, and we can relay those questions. Thanks again, Michelle.
Thank you. Take care.
Thanks, everybody. Take care.