Earnings Call Transcript - STC Q3 2024

Operator, Operator

Hello and thank you for joining the Stewart Information Services Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask a question during the question-and-answer session. Instructions will be provided at that time. Please note that today's call is being recorded. It is now my pleasure to turn the conference over to Kath Bass, Director of Investor Relations. Please go ahead.

Kathryn Bass, Director of Investor Relations

Thank you for joining us today for Stewart's third quarter 2024 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release which is available on our website at stewart.com. Let me now turn the call over to Fred.

Frederick Eppinger, CEO

Thank you for joining us today for Stewart's third quarter 2024 earnings conference call. Yesterday, we released financial results for the quarter which David will review with you shortly. I'd like to start the call by sharing our outlook on the overall housing market, followed by an update on the continued progress we've made in each of our core business lines. Before jumping into these discussions, I wanted to take a moment to express our sympathies for the many people affected by Hurricane Helene and Hurricane Milton. Our thoughts are with the many communities impacted by these storms, and we have and will continue to find ways to support these communities in their efforts to rebuild. I am very pleased with the results for the quarter, given the continued contraction of the market. At the end of the quarter, we reached 37 consecutive months of year-over-year reduction in existing home sales. This quarter, we saw existing home sales decrease another 3%. In this environment, we continue to focus on growing our business and improving our operations and our offerings. We feel our performance reflects the efforts we have put in over the past 4 years on our journey. We remain dedicated to positioning ourselves well for the market recovery and feel confident that we will see significant upside in a more normalized market from the actions we have taken to improve the company. This has been an interesting quarter for both the economy at large and housing in the U.S. While inventory has continued to improve over the past several months, the sentiment improved temporarily. The trend of historically low housing volumes lingers with just 2.5% of homes changing hands year-to-date through August, one of the lowest turnover rates we have experienced in the U.S. in decades. Affordability remains a hardship and barrier to entry for many would-be buyers. In September, the Federal Reserve cut interest rates for the first time in 4 years, which resulted in some temporary green shoots in mortgage applications. But we see those leveling back off as mortgage rates have settled around the mid-6% level and typical seasonality plays out. All of this is on top of the upcoming elections, which leads to a continuation of a very choppy market. Our view remains, however, that '25 will be a transitional year, leading to a more normal housing market in '26, which we define as 5 million existing homes sold on an annual basis. Turning to our operations, we remain focused on building an improved competitive position by executing upon a disciplined operating model while also identifying efficiencies to prepare ourselves for the market rebound. We are dedicated to growing share in attractive markets across all our lines of business and have positioned each business to do so. We have made great advancements in improving our customers' experience in all channels through upgrades in our technology capabilities and operations. We have implemented technologies to enhance our title production processes and are working on utilizing technology to improve our data management and access. We continue to focus on attracting and retaining key talent. As we know, Stewart is becoming the best home for industry-leading talent to grow with us as the market improves. We've been diligent in managing our direct operations segment to protect our corner of the market and our margin, as this segment most immediately feels the impact of a suppressed residential housing market. Strategically, our direct operation business remains focused on expansion efforts in targeted markets through both organic and inorganic means. We keep a pulse on the markets we are in as well as those we are not to ensure we are operating to our fullest potential across the country. Choppy housing market conditions have slowed acquisition-related activity in recent history. However, we remain very positive about the future outlook for opportunities and maintain a warm pipeline in preparation for an improved market. Our top priority in this business is to grow our share in attractive markets. Our commercial services business has been a strong performer over the last several quarters as we feel the positive effects of our efforts to grow our share in critical geographies and channels. We have made a lot of investments in talent across our commercial operations to ensure we have the right people in place to maximize our growth potential. We are also investing in upgrading technology to support our business and to provide a better customer experience for our clients. We expect our commercial transaction momentum to continue, but we know near-term commercial market challenges may present themselves, depending on some of the economic variables that we previously mentioned. Our agency team remains focused on driving share gains in attractive agency markets by adding new agent partners as well as growing our share with existing agents. We are focused on improving our position, particularly in 15 target states, and have seen solid progress in a number of these states already. Our improved support services and enhanced abilities around servicing commercial agents allow us to stand out to our agents. We will continue to build on these improvements to differentiate our service and offerings to better serve our agent partners. Our real estate solutions business maintained solid financial results and growth in the third quarter. The real estate solutions team is focused on gaining share with the top lenders and cross-selling our products as we leverage our improved portfolio of services. The current market presents some challenges for our cross-selling initiatives, but overall, we continue to see share gains from both existing clients and new client introductions. We expect continued momentum in this space as the market improves. Across the enterprise, we are thoughtfully managing all lines of business and remain intentional with our investment in expense management. We have experienced an increase in other operating expense percentages, driven by significant growth in two of our businesses: commercial and real estate solutions. In commercial, we account for higher outside data search fees to service our customers. And in real estate solutions, other operating expenses are a higher percentage due to the use of outside services and data. To date, we are pleased with the margins we are achieving from our meaningful growth in agency services, data solutions, and commercial. Overall, we remain prudent in our expense management to ensure we achieve both near- and long-term goals. Our leadership team has an execution-based mindset that we feel will allow us to achieve low double-digit pre-tax margins as we return to a more normal 5 million unit purchase market. We remain very positive about the long-term outlook for the real estate market and are focused on our journey to become the premier title services company. We believe in the strength of the company and are committed to fortifying Stewart for long-term growth and performance. To reiterate this view, in September, we announced an increase in our annual dividend from $1.90 a share to $2 a share. This is the fourth year in a row we have increased our dividend to shareholders. We have and will continue to position ourselves well to be able to capitalize on the opportunities that this housing market will provide. I want to thank our customers and agent partners for their continued trust. We are committed to doing our best to serve you with excellence. Finally, I'd like to end my remarks by extending my thanks to our employees. We would not be where we are today without the dedication of our employees and their commitment to bettering our company. Your efforts have had a tremendous impact on Stewart, and we are pleased to share this quarter that we were named as one of the 2024-'25 Best Companies to Work for by U.S. News & World Report. Thank you for your loyalty and efforts on our journey. David, I'll now turn it over to you to provide the update on our results.

David Hisey, CFO

Good morning, everyone, and thank you, Fred. My deepest sympathies as well to those impacted by the hurricanes. I appreciate the outstanding service of our associates and have been grateful for the continued support of our customers. As Fred noted, the market continues to be challenging; existing home sales struggled, and mortgage rates came down about 50 basis points from mid-August to the end of September but did not have a meaningful impact on volume and subsequently increased. Yesterday, Stewart reported third quarter net income of $30 million or $1.07 per diluted share on total revenues of $668 million. As presented in the Appendix A of our press release, we use adjustments primarily for net realized and annualized gains and losses, acquired intangibles amortization, and other expenses for additional performance measures. On an adjusted basis, third quarter net income was $33 million or $1.17 per diluted share compared to $24 million or $0.86 per diluted share in the third quarter of 2023. In the title segment, total operating revenues improved by $31 million, or 6%, primarily driven by higher revenues from our domestic commercial and agency operations while our non-commercial revenues were comparable to the prior year quarter. Title segment pre-tax income improved by $10 million or 27%, primarily driven by higher revenues. After adjustments for purchase intangible amortization and other items, the title segment's adjusted pre-tax income was $43 million, which was slightly better compared to the prior year quarter, while adjusted pre-tax margins were comparable. On our direct title business, total opened orders in the third quarter improved by 8% while total closed orders were 2% lower, primarily due to lower purchase orders resulting from the slower residential market as previously noted. Our domestic commercial operations generated another good performance with $16 million or 30% higher revenues, primarily due to higher transaction size and volume in the energy and multifamily sectors. Average commercial fee per file improved by 25% to $17,700 compared to $14,200 in the prior year quarter. Domestic residential fee per file improved slightly to $3,000. With our agency operations, gross agency revenues increased by $17 million or 6% while net revenues improved by $2 million, primarily due to a slightly higher average retention rate due to geographic mix. On title losses, total title loss expense decreased by 4%, primarily due to favorable claim experience, which also resulted in a slightly lower title loss ratio for this quarter versus the prior year quarter. For the full year 2024, we expect our title losses to average around 4%. Regarding the real estate solutions segment, pre-tax income improved by $5 million, driven by higher revenues in our credit-related data and valuation services business. Pre-tax margin was 7.7% in the third quarter compared with 3.8% in the prior year quarter. Excluding acquisition intangible, adjusted pre-tax margin in the third quarter was 13.4% compared to 13% last year. On consolidated operating expenses, our employee cost ratio improved to 30% from 31% last year, primarily driven by higher revenues. Our other operating cost ratio increased to 24% compared to 22%, primarily driven by increased credit information and services expenses in our real estate solutions business and higher outside search costs in commercial. Recall that in our real estate businesses, they are very data-dependent, so as their revenues increase, our other operating expenses and ratio do as well. Our financial position continues to be strong in support of our customers and employees in the real estate market. At September 30, 2024, our total cash and investments were approximately $370 million in excess of statutory premium reserve requirements. Additionally, we also have a fully available $200 million line of credit facility. Total stockholders' equity at 9/30/2024 was approximately $1.4 billion with a book value of $51 per share. Our net cash provided by operations in the third quarter was $76 million, which was $17 million higher than the prior year quarter, primarily due to improved net income. Again, thank you to all our customers and associates. We remain confident in our service to the real estate markets. And I'll turn it back to Fred for any questions or comments.

Operator, Operator

We'll take our first question from Bose George with KBW.

Bose George, Analyst

First, just on the commercial fee profile, there's obviously a big increase year-over-year. Is that just larger deals that you're seeing in the market? Or was there any benefit from the New York Title acquisition just in terms of the deal sizes they were doing there?

Frederick Eppinger, CEO

It is just the mix of business, and it's a little bouncy. But this year, we have obviously had outsized growth, and it's kind of broad-based in the categories. The category that's the biggest is our energy as alternative energy deals tend to be larger, right? So that has skewed the average deal size a little bit. But it is a balancing number quarter-to-quarter. Again, based on the closings this quarter, it has a lot to do with the energy segment.

Bose George, Analyst

Okay, great. I noticed that your order count for the other segment increased more significantly compared to the purchase and refinance segments. Could you clarify if there are any geographical factors at play where transactions that would typically go through purchase and refinance are now being categorized in that other segment?

Frederick Eppinger, CEO

Yes. That's driven a little bit by our bulk business, where if you have a big deal, there are some fluctuations in volumes. In this quarter, we had a couple of large transactions, so it's a little bumpy because of those deal locations.

David Hisey, CFO

Yes. So in the single-family rental business, those tend to be larger transactions. So there was a big bulk order that came in.

Operator, Operator

We will take our next question from John Campbell with Stephens Inc.

John Campbell, Analyst

Fred, back to your commentary around the normalized 5 million market. In the past, I think you've discussed a 10% margin target with that type of backdrop. I'm hoping you can revisit that target. Also, could you clarify if that 10% target is on a GAAP basis or adjusted with the add-back of purchase amortization?

Frederick Eppinger, CEO

Yes. Again, it's about 11.5%, I think, John, now. I mentioned particularly the last 4 or 5 quarters, we've implemented some interesting things regarding data management and centralizing some of our search functions. At a normal market, this number is probably 11.5%, and I think about that as a total in GAAP. Leveraging our investments across the entire company and the ability to grow share while improving the efficiency of our overall operating model gets us there. I track our numbers and see that we've grown in a flat to down market. Particularly, existing home sales have declined for 37 months. But in this down market, we've seen revenue grow by 9%, margins increase by 14%, and earnings rise by about 24%. The leverage from growing share helps significantly. As the purchase market recovers, it benefits us the most because we have higher fixed costs tied to our direct operations with numerous locations and distributions. I still believe that's a realistic target, and I am confident we can manage our margins as we grow. However, the geography of that growth does influence our results. If the growth comes from areas with high fixed costs, it's generally more favorable.

John Campbell, Analyst

Yes, very helpful. I saw an update from Redfin this morning stating their pending home sales rose about 3.5% over the last 4-week period year-over-year. That was a little surprising to us, just given the recent spike in rates. I'm curious what you are seeing regarding purchase and refi. Are you seeing notable responses from consumers as rates increase?

Frederick Eppinger, CEO

Yes, that's a great question. We've observed similar trends. However, the difference between pending and closing sales is rather confusing in this market. We've seen many cancellations with rate spikes, which could lead to an improvement in existing home sales next quarter. There was a good sentiment leading up to the recent rate changes, translating into activity. However, it flipped about three weeks ago when the 10-year yield rose again and interest rates increased. We've noticed a little increase in refi orders, but whether that holds is uncertain. Currently, I feel as if we’re bouncing around off the bottom, and we may see slight improvements or regression. We anticipate a more positive commercial environment in the coming period, and I think that trend will continue. There are many moving parts right now.

John Campbell, Analyst

That's a good point. I've noticed that our purchase orders have a lower than average closing ratio. It seems the cancellation rate is embedded there. If I could squeeze in one more question: regarding Bose's question about other orders, if I look at your purchase orders compared to your two top competitors, you've seen down double digits year-over-year on a closed order per day basis, while your top competitors have been relatively flat. Conversely, your other order side shows really good results. Is there a differential there, or maybe a mix shift where some of those were previously categorized as purchase orders that now fall into the other category? Can you provide more commentary on that?

Frederick Eppinger, CEO

Yes, that's a great question. I wouldn't attribute any significant shift, but there has been some differentiation observed, particularly with one competitor noted earlier. We assess share on an MSA-by-MSA basis. From what I've seen, we're holding our ground against specific competitors and the market in every area we operate in. There are a couple of areas where we've seen slight downtrends and a few where we've improved, but overall, we are maintaining our share. Thus, I don’t believe that's translating into a revenue differential. We are experiencing some challenges in direct sales, given the current circumstances. We've initiated several organic initiatives around micro market expansions that are starting to yield results too. I’m confident about our share position despite the recent types of market fluctuations.

Operator, Operator

And there are no further questions at this time. I'll turn the call to Fred for any closing remarks.

Frederick Eppinger, CEO

Yes. I just want to thank everybody for their time this morning and their interest in Stewart. Thank you.

Operator, Operator

Thank you. And this concludes today's program. Thank you for your participation. You may disconnect at any time.