Real Brokerage Inc Q4 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to The Real Brokerage Fourth Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Carbonara. Sir, the floor is yours.

Thank you. And once again, welcome to Real's fourth quarter 2021 earnings call. With me on the call are Tamir Poleg, Chief Executive Officer; and Michelle Ressler, Chief Financial Officer. This morning, Real filed its financial results and management discussion and analysis for its fourth quarter ended December 31, 2021. These documents, along with the accompanying news release, can be found on SEDAR. I'd now like to review the company's abbreviated Safe Harbor statement. I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial positions, markets, economic conditions, product releases, partnerships, and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which may involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. Non-GAAP and non-IFRS results will also be discussed on the call. The company believes the presentation of non-GAAP and non-IFRS information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. Additionally, all references in this call reflect currency in U.S. dollars. Now, I'd like to turn the call over to Tamir Poleg, Chief Executive Officer of Real. Tamir, please proceed.

Thanks, James. And thanks everyone for joining today. I would like to start by thanking the hundreds of agents and large teams who joined Real in the past few months and to our community of agents, who have contributed to the growth we are experiencing. I will now continue by highlighting some top-level financial results. Then, I will provide some operational updates before turning it over to our Chief Financial Officer, Michelle Ressler, to dive deeper into our financials. Let's start with the fourth quarter financial results. Q4 revenue was $50.5 million, an increase of 612% year-over-year. Driving that growth was a 161% increase in real estate agents joining Real, along with a 173% increase in the revenue per agent to $13.11 thousand. Now, turning to operating highlights. In terms of geographic expansion, during the fourth quarter, we announced Real’s expansion into Iowa, Michigan, Idaho, Kentucky, and Wyoming. In Canada, we launched in Ontario. After the quarter ended, we announced expansion into New Mexico and Oregon, bringing our tally to 42 states, the District of Columbia, and Canada. We look forward to growing our business in Canada and in each of the operating states. Our focus in 2022 will remain on North America and we will grow deeper and wider in the states we're currently serving. Moving to agent referrals, this continues to be an important part of our growth. We believe we attract agents by providing the best tools, incentives, culture, and working environment. Just as an example, this is what attracted Red Rock Real Estate Group, and over 275 agents into Real Broker in October. They saw an opportunity unavailable at any of the brokerages they had searched. Red Rock was attracted to our tech platform and a model that enables agents to earn stock in Real. We are proud to say that Red Rock is now a part of the Real team and we look forward to having them play an important role in our operation. Moving to retention, the equity incentive not only attracts groups like Red Rock, but also helps us retain agents. The majority of agents continue to opt into our equity incentive plan. It has allowed us to attract top-tier talent into our management team. As many recall, during the quarter, we announced that Katharine Mobley will be joining our management team as the Chief Marketing Officer. Kat led global marketing at First Advantage. Prior to her role at First Advantage, she served as the Chief Marketing Officer at several technology firms and managed a range of global brands with accounts at several Fortune 500 companies. Also in Q4, we announced Raj Naik joined our management team as Chief Operating Officer. Raj joins Real from Workrise, previously known as RigUp. Raj also held senior leadership positions at Uber. He brings an entrepreneurial spirit, having founded his first company with his friends while he was studying at the University of North Carolina at Chapel Hill, later sold to Oracle. Now turning to product focus. I’ll start with Instant Payments, which we launched last October. You may remember our intent with Instant Payments is to change the way agents are paid in the real estate industry. With the first-of-its-kind model, agents will have the option to be paid at the time a transaction is executed rather than at its closing. There's no program that’s disrupting the industry by assisting agents, new and experienced, to build and grow their business by getting paid faster. We are constantly expanding the offering of Instant Payments to more and more agents and more scenarios. We invest an increasing amount of resources in the buildout of our consumer-facing experience based on a combination of software solutions providing convenience, transparency, control, and speed on one hand, and a human agent who will be able to assist to guide the client and understand their needs and emotional journey. I want to reinforce our belief that by creating a digital experience that keeps agents in the middle of a transaction, we can considerably enhance the way people buy and sell homes. In this way, we are evolving beyond traditional brokerage, and rather into a large online real estate company that aims to change the way people buy and sell homes and fix the broken combined process. Shifting gears to M&A, after the quarter ended, we announced the acquisition of Expetitle, Inc. The result is creating an enhanced technology-driven experience from search to close for realtors and their customers. Expetitle has developed technology that simplifies the paper-intensive and time-intensive title and escrow process, reducing errors and saving time. Agents can navigate the entire closing experience in a few clicks using Expetitle's mobile app. I'm excited to welcome Sean and the Expetitle team to The Real family. Expetitle is now called The Real Title, and its innovative approach to title and closing is synergetic with Real’s mission to improve both the agent and consumer experience in the real estate industry. Joining forces will allow us to expedite our efforts towards creating a more convenient, transparent, and faster home-buying experience for our agents' clients. Finally, moving on to the efficiency of our team, we continue to grow headcount and real estate transactions efficiently. In fact, on December 31, 2021, our efficiency ratio, which is full-time employees divided by the number of agents that are currently on our team, remains high at around 1:62. We believe that this is a big competitive advantage. To conclude, we are committed to growth through geographical expansion, agent referral, retention, product development, and the efficiency of our team. We're unwavering in our mission of having a positive impact on as many real estate agents and homebuyers as possible. I'd like to reiterate as well that moving ahead we're focused on adding ancillary services and building consumer-facing technology that further improves the home-buying experience. Doing so will also add additional streams of revenue and grow our total available addressable market as we expand into the online real estate industry. We also intend to grow sustainably, boasting a solid balance sheet and we are operating as cash flow positive. At this point, I will now turn it to Michelle for a more in-depth view of our financials. Michelle?

Thank you, Tamir. And thank you everyone for joining us. I'll start by assessing some of our key financial results for the fourth quarter and full year 2021. We experienced another quarter and full year of phenomenal growth. Our Q4 revenues grew 612% year-over-year to $50.5 million and 635% for the full year 2021 to $122 million compared to the same period last year. This increase was mostly driven by agent growth, which was up 161%, and revenue per agent, which grew as well. This growth is further supported by proprietary technology platforms which allow us to continue expanding our agent count and geographic footprint at an accelerated pace. If we look at gross profit, our gross profit grew 449% to $4.1 million in Q4 2021 and 415% to $11.1 million for the full year 2021 in comparison to last year. Our margins are affected by the increase in the number of agency caps and the increase in volume and rising unit prices, resulting in downward pressure, as we continue to attract high-producing agents. We expect to offset this pressure and increase margins through the introduction of financial services, such as our newly launched Instant Payments program that Tamir touched on previously, and by adding ancillary services. We have now added our first ancillary service with the acquisition of Expetitle, now called Real Title, and can expect to see the early contributions to our top-line revenue and margins take effect towards the second half of this year. Our net operating loss for the quarter was $3.8 million in Q4, compared to $1.3 million in Q4 of 2020. Net operating loss was $11.7 million in 2021 compared to $3.6 million in 2020. This change was primarily the result of investments in building our team of agents, key management, employee personnel, as well as our technology infrastructure. As a percentage of revenue, total losses were 10% in 2021 versus 22% in 2020, demonstrating our efforts to monitor spending and our cautious approach to managing resources. We place great importance on our management team and on hiring top talent across the board and look forward to the enormous value Kat, Raj, and the rest of those who have joined us this quarter will add. We view each and every one of these hires along with investments in our technology infrastructure as key contributors to our growth and necessary to support this accelerated pace. Adjusted EBITDA loss for the quarter was recorded at $2.9 million in comparison to $400,000 for the prior year. Adjusted EBITDA loss for the year was $5.1 million in 2021, compared to $1.8 million in 2020. Management believes that adjusted EBITDA provides useful information about our financial performance and also helps identify underlying trends in our business that otherwise could be masked by the effective expenses that we exclude in adjusted EBITDA. In particular, we believe the exclusion of stock-based compensation expenses provides a useful supplemental measure in evaluating the performance of our operations and also provides better transparency into our results of operations. Overall, our operating expenses were $7.9 million in Q4, compared to $2.1 million in Q4 of last year. On an annual basis, operating expenses were $22.3 million in 2021, compared to $5 million in 2020. On an adjusted EBITDA basis, operating expenses were approximately $15.5 million and that's compared to $3 million last year. The change is primarily due to increases in headcount, improvements in technology, infrastructure, stock-based compensation expenses, and other one-time expenses, such as those related to our listing on NASDAQ capital markets. The growth in our number of full-time employees is attributable to Real’s commitment to better service agents and to further expansion of the company. These investments in key management and employee personnel allow us to offer best-in-class service to our agents and our agents' customers. With year-over-year revenue growth at 635%, we believe we have proven our ability to do so in a highly efficient manner with minimal impact on operational costs. As Tamir mentioned, Real's full-time employee to agent ratio as of December 31, 2021 is 1:62 compared to 1:59 in December 2020, thus demonstrating increased efficiency, even as we begin to ramp. General and administrative costs were $3.4 million in Q4 in comparison to $1.7 million in Q4 of last year. On an annual basis, general and administrative costs were $10.6 million in 2021 as compared to $3.7 million in 2020. That increase is mostly driven by the costs related to being a public company and increases in headcount that further support our growth. G&A expenses are expected to increase going forward as we continue to scale rapidly. However, as mentioned, we actively monitor spending and the impact on our bottom line. Marketing costs grew to $3.8 million in Q4 from $300,000 in Q4 of last year. That change is primarily due to revenue share paid to agents as well as stock-based compensation related to the agent equity program. Agents earn revenue share for new agents that they personally refer to Real and are eligible for the equity incentive program based on certain attractive performance criteria. We expect to see the costs associated with our agent incentive programs to translate into significant year-over-year growth and also believe they will be fruitful contributors to the long-term goals and success of the company. Research and development costs were $700,000 in Q4 in comparison to $76,000 in Q4 of last year. On an annual basis, research and development costs grew to $4 million in 2021 in comparison to $400,000 in 2020. The increase was primarily due to the increase in full-time employees and the addition of an offshore development team, all supporting our focus on building a robust and consumer-facing agent product. We have developed a technology for the full automation of the real estate transaction through an agent mobile app, and are now beginning to build the consumer journey. As a percentage of revenue, sales, general and administrative costs were 15% this year, compared to 28% last year. This is highly representative of our level of efficiency and ability to scale. As mentioned, we have a technology infrastructure that's able to support us on the path forward to 100,000 agents with minimal impact on our operational costs. We ended Q4 with our balance sheet strong, holding $38 million in cash and investments, a significant increase from the total cash balance of $21 million in the prior year. Cash flows from operations increased by 311% in comparison to Q4 last year, and the company holds no debt. During the year, the company repurchased 4.9 million common shares for a total of $12,000,644 pursuant to the terms of its normal course issuer bid. The company continues to strengthen its balance sheet and industry footprint, as well as demonstrates significant year-over-year growth. This acceleration continues as we ramp and expand our focus from not only our agents but the consumer journey as well. This concludes my financial remarks. I will now ask the operator to open up lines for Q&A. Operator, can you please pull for questions?

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question today is from Darren Aftahi. Please announce your affiliation and then ask your question.

I'm with ROTH Capital Partners. Nice work on the quarter. A couple if I may. Could you give the transactions in the fourth quarter and then what transactions per agent were for 4Q? And then I've got two follow-ups.

Michelle, do you have that number?

I'm sorry. My connection got disconnected. Can you repeat the question?

Yes, I'm inquiring about the fourth quarter transactions and the number of transactions per agent during that period.

Sure. Transactions per agent were 13,000 for the year, in the implied transaction per agent. I'm sorry?

So the number of total transactions in Q4 was around 5,400. We ended the quarter with 3,850 agents. So that's roughly 1.5 transactions per agent for the quarter.

Sorry, Tamir you said 3Q. Did you mean 4Q of 5,400?

4Q.

Yes.

Yes, got it. Okay, perfect. And then for the year, I think you were at a little over 6 transactions per agent. I'm just curious with the rapid expansion of your agent base, as you go into 2022, like what are your general thoughts about that 6.1 number on an annualized basis? Is that a number we could see sort of be neutral in 2022, get better, perhaps get worse? Just any color around that?

Sure. What we've seen is that we have a constant improvement in the per – or transactions per agent throughout 2021. We continue to see that trend continuing. I do not think that we will experience the same increase in per transaction or per agents per transactions. So I believe that in 2022 the number will be 7 to 8 transactions per agent for the entire year.

Great. And then if I could squeeze one last one, and I know, Michelle talked about, I guess it's now called Real Title will be contributory in the second half of the year. Can you just kind of walk through just the integration efforts? Are those done? When are those going to be done? And then just general thoughts around what initial attach rates could look like early on and then maybe as we get through 2022? Thanks.

Sure. And thank you, Darren. So we look at the integration of Expetitle as a two-step process. There's the immediate process where we welcome their employees. We integrate the technology. We make sure that we understand fully how the business works. And then we go the traditional way of pitching it to our agents and asking them to actually funnel their transactions through The Real Title Company, which is now operating in three states: Texas, Georgia, and Florida. We think that this will be somewhat of a slow ramp up as you can experience in other brokerages. At the same time, we are building some solutions both on the tech side and on the business offering that will drive our agents to drive more and more transactions into The Real Title. I will just mention two things: One, creating JVs with agents where high performing teams can actually become partners in LLCs that operate title operations, that's one thing. And on the technology side, as we are building the consumer experience, part of the experience itself would be to automatically attach transactions into our own title company. So we think that in 2022, for the first half of the year, we will see kind of a slow ramp up. The Real Title is currently contributing around $120,000 on a monthly basis to the revenue. As we start the second half, we will probably see an acceleration of the attach rates.

Great. I’ll ask one more question. When you discuss having a verticalization and consumer experience, particularly regarding the joint venture title compared to what seems like an updated consumer app, are you envisioning something similar to DoorDash or Uber Eats where users can order food and also add on services like picking up items from a convenience store? Is that the direction for the user interface of Real going forward?

Buying a home is definitely more complex than ordering food, but we want to simplify the process as much as we can. Most home buyers and sellers don’t have a strong preference for which title company to use. Our goal is to integrate our title company into every transaction in a way that benefits the consumer, ensuring they either pay the same or less while enjoying a smoother experience. You can think of it like the convenience you get when you use services like DoorDash or Uber Eats. However, buying a home has its intricacies, and we aim to enhance convenience, speed, and transparency for home buyers through a digital platform. We see title as somewhat of a commodity, and consumers generally do not care which company is handling it. By integrating this into the digital experience, when a consumer downloads our app and provides their personal and financial information for a mortgage, they will simply need to check a box to indicate they want to use The Real Title company. This will give them greater transparency, clarity on the process, and help them close faster with less friction.

Your next question for today is coming from Tom White. Please announce your affiliation, then pose your question.

Thank you. D.A. Davidson. I appreciate the opportunity to ask a few questions. First, I'd like to follow up on the discussion regarding the consumer-facing technology tools you're developing. How do you plan to encourage home buyers and sellers to download or utilize these tools? Is there a potential for making their use a requirement when working with a Real agent? Additionally, are you considering incentivizing these users with discounts on brokerage commissions to promote higher engagement with your more profitable transaction offerings? I have another question after this.

Thanks, Tom. First, we need to recognize that the current home buying process is fundamentally flawed. It is not user-friendly or convenient for buyers, leading to significant anxiety and a lack of transparency. Buyers have to interact with multiple parties such as lenders, title companies, agents, appraisers, and inspectors. Consequently, when a buyer begins this journey, they often lack assurance about whether they will successfully purchase their desired home. Even if they do, they are typically reliant on the lender, who controls the timing of the closing and the amount of money needed, which can change at the last minute. We see this situation as an opportunity to offer a drastically different experience, one that returns control to buyers while also enhancing convenience, transparency, and speed for a significantly improved overall experience. Our goal is to add value through the experience and service provided rather than just focusing on financial outcomes. Our approach involves thousands of agents who will eventually connect with tens of thousands, and potentially hundreds of thousands, of homebuyers, thereby building trust and relationships. Once a consumer starts working with one of our agents, they will be encouraged to download our app, which will navigate them through various steps to understand their preferences for a future home and their financial situation, guiding them from that point onward. The interaction with our technology, specifically the app, will begin through our agents who will prompt them to download it.

Okay. That’s helpful. On agent attraction, obviously, you guys are attracting a ton of agents. Curious whether in your view, there's like one part of the overall value proposition that you guys provide that is maybe like a disproportionate driver of what's attracting agents to the platform. Is it the splits? Is that the revenue share program? Is it the tools? And then also, I'm curious also, like, now that models like yours are more understood by the market, by agents out there, curious whether like there's a dynamic where people want to kind of like get in early on what is clearly a growing platform and a model that isn't maybe viewed as risky, as it may have been five years ago or whatever, by agents broadly?

I want to address your point about the influx of agents. While we are indeed seeing significant growth and interest from agents, it's important to recognize that each agent has their own individual needs and goals. Instead of just seeing them as a large group, we should focus on the unique aspects of each. I've been having daily conversations with numerous high-performing teams and agents, and it's clear that beyond technology and financial incentives, what's drawing them to us is our culture. Agents are inherently social and gravitate towards those who share similar values. We've cultivated an environment that emphasizes hard work, kindness, and collaboration, which appeals to many agents. They not only recognize the financial opportunity but also feel a sense of belonging to a community that aligns with their beliefs. Additionally, regarding your question about the growing awareness of our model, I believe people are realizing this is the direction of the future and are eager to engage early. They want to contribute to the company's growth and influence decision-making, understanding that joining now can provide them significant benefits both financially and in shaping the direction of the company. There's certainly an appealing element for agents considering whether to make that transition.

Great, thanks. I guess maybe I also like to try and put one last one if I could. Curious if you'd be willing to weigh in on maybe what you think agent count maybe could be by the end of this year? And also if the market kind of cools off a bit relative to the last 12 to 18 months, how do you think that, that impacts kind of agent attraction? Thanks.

Yes, that's a good question. While we are not providing specific estimates or guidance, we started the year with around 4,000 agents and we currently have 4,500. We have seen consistent growth in our agent count over the past year, at about 150% to 165% year-over-year. This trend allows for an estimation of where we might end the year. Currently, the real estate market is experiencing tight inventory, which affects everyone involved. This morning, the February home sales numbers were released, and I believe the market should cool down a bit as there is considerable strain on buyers. However, as the market stabilizes, we will be in a strong position to attract more agents. If we consider a scenario where transactions drop by 20% in a specific timeframe, agents will still need to earn enough to support their families. Consequently, they will be seeking alternatives. When they explore Real, they will see that the cost to value ratio is exceptional. Therefore, when there is a downward shift in the market, we are well-positioned to welcome agents seeking alternatives to their current situations.

I see no further questions at this time. Thank you everyone for joining. This concludes today's call. You may now disconnect your lines.