The Real Brokerage Inc. (NASDAQ:REAX) Q3 2023 Earnings Call Transcript November 11, 2023
Operator: Good morning, ladies and gentlemen, and welcome to The Real Brokerage Third Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Ravi Jani, Vice President of Investor Relations, Financial Planning and Analysis, at The Real Brokerage. Sir, the floor is yours.
Ravi Jani: Thanks, and good morning. Thank you for standing by, and welcome to The Real Brokerage Conference Call and Webcast for the Third Quarter Ended September 30, 2023. We appreciate everyone joining us today. With me on the call today are Tamir Poleg, our Chairman and Chief Executive Officer; Sharran Srivatsaa, President; and Michelle Ressler, our Chief Financial Officer. This morning, Real filed its financial statements and management discussion and analysis for the third quarter. These documents, along with the accompanying earnings press release, can be found on both SEDAR and EDGAR. Before we get started, I’d like to remind everyone that statements made in this conference call that are not historical facts, including statements about future time periods, may be deemed to constitute forward-looking statements.
Aerial view of a neighborhood with houses and a real estate brokerage office.
Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our Canadian continuous disclosure documents and SEC reports. Real disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law. With that, I’d like to turn the call over to our Chairman and Chief Executive Officer, Tamir Poleg. Tamir, please proceed.
Tamir Poleg: Good morning, and thank you, Ravi. I will start with an overview of our strategy and some recent business highlights. Sharran will provide an update on our brokerage operations and actions we are taking to drive further agent growth and retention, and Michelle will provide a more in-depth discussion on our financial results in the quarter. I’ll then provide a few closing remarks before opening up the call for Q&A. So to begin, Real is a real estate experience company that is differentiated in our industry. Unlike traditional brokerage model, we provide real estate agents with an unmatched combination of attractive financial incentives, a proprietary software-based technology platform that eliminates the need for expensive physical office space and a collaborative culture that we believe is unique in our industry.
Our vision is to simplify life’s most complex transaction, that is, a purchase or a sale of a home, by providing agents with the tools, technology and resources they need to grow both their businesses and as individuals, all while delivering a seamless experience for clients. In the short term, this includes the rollout of our consumer-facing mobile app, which will streamline the client experience and ultimately improve attachment of our higher-margin ancillary services. In the long term, we expect our platform to provide holistic ecosystem encompassing financial services, payments and investment planning tools, providing agents with an avenue to build generational wealth. Ultimately, as the platform matures, we believe clients and consumers could benefit from the depth of our service offering.
Our goal is to redefine the role of the real estate brokerage in the lives of our agents and in the broader housing industry. Just like our institutional investors, agents are owners of our business, and that is why everything we do is with the intent to grow long-term shareholder value. Turning to the quarter. This morning, Real reported record third quarter results, with revenue in the third quarter of 2023 increasing 92% versus the prior year to $215 million driven by an 82% increase in the number of transactions closed, which topped 20,000 in the quarter, and a 5% increase in average commission revenue per transaction. We ended the quarter with a record 12,175 agents, an 81% increase versus the prior year and a 6% sequential increase from the end of the second quarter.
Adjusted EBITDA in the third quarter was positive $3.5 million, a $3 million improvement from the third quarter of 2022 and our second consecutive quarter of positive adjusted EBITDA. The improvement reflects our robust revenue and gross profit growth, which outpaced growth in operating expenses, and demonstrates the scalability of our platform, combined with the benefits of actions taken earlier this year to improve margins and optimize discretionary spend. Based on the strength of our performance year-to-date, we expect that we will be adjusted EBITDA profitable for the full year 2023. While our performance this quarter would be phenomenal in any market environment, it is particularly notable given the current housing backdrop in which 30-year mortgage rates are at a multi-decade high and existing home sales are down mid-teens versus last year and nearly minus 35% from 2 years ago.
As such, our results this quarter are a testament to the strength of our business model, our unique agent value proposition, the advanced capabilities of our technology platform and the culture we’ve built over the past decade, all of which have enabled us to thrive during this challenging time for the industry. Perhaps nowhere was this more apparent than our second annual RISE 2023 Agent Conference in San Diego last month where over 1,300 Real agents gathered both to celebrate our achievements from the past year and to learn about innovative products, tools and technologies we’re building to further strengthen their businesses in the years ahead. One of the significant highlights from RISE was the official launch of our One Real mobile app.
This consumer-facing portal equips agents with the ability to invite clients to be preapproved for a home mortgage from the palm of their hands. Once preapproved, a consumer can confidently shop for a home and easily complete the mortgage application process within a matter of minutes directly from the app. The One Real app also allows the consumer to communicate directly with a loan officer, provide necessary documents and track the progress of their loan application from start to close. Through the app, any eligible consumer in 1 of the 20 states in which One Real mortgage operates can be approved and clear to close on a home loan in as little as 14 days. The launch of One Real marks an important milestone in our vision to create a simple solution that combines every touch point in the home buying and selling process into a single seamless experience.
The capabilities of One Real app will continue to improve in subsequent updates, but we are excited to now have it in the hands of agents and consumers and we invite you all to download the app from App Store for iOS and Google Play Store for Android and try it out. At RISE, we also unveiled an exciting new product called the Real Wallet, a first-of-its-kind fintech product designed specifically for Real agents. The Real Wallet centralizes the functionality of a debit card, credit card, reward points and an array of perks to provide agents a new way of unlocking financial sources that were not previously available to them. The Real Wallet represents a significant step towards our vision of a future where agents enjoy a transparent, reliable and predictive way to manage a substantial portion of their finances.
We believe, over time, the Real Wallet could be a game changer for the company by putting us at the intersection of fintech and real estate and by opening up exciting opportunities for Real in the payment space. Initial testing for the Real Wallet is scheduled for the first half of 2024, and we will provide additional details as we approach the launch date. On the technology front, we rolled out a major update to our first-to-market AI-powered virtual concierge called Leo 2.0. Beyond its existing capability to provide real-time responses using our vast proprietary data, Leo now boasts predictive functionalities. It can anticipate agents’ questions based on historical interactions and even anticipate future questions by analyzing patterns across our entire agent network.
In essence, Leo has evolved into a proactive assistant adept at foreseeing questions and addressing issues before agents even think to ask them. Currently, Leo answers over 700 agent questions a day, reducing the needs for 3 additional full-time support staff. We are excited about Leo’s potential to significantly enhance our agent productivity by saving them valuable time and allowing them to focus on what they do best: serving their clients and growing their businesses. With regard to our ancillary Title and Mortgage businesses, we are actively working to increase attachments. While we continue to outperform the broader market, these businesses remain subscale and we are making necessary adjustments to our business model in order to accelerate their growth.
We also welcomed Christian Wallace as Chief of Integrated Home Services last month to lead this important endeavor. Christian brings a wealth of experience to Real, joining us from Rocket Mortgage, where she was responsible for a number of initiatives designed to improve the customer experience, and her expertise will be instrumental in scaling these businesses. We are excited by the opportunity to expand our Title and Mortgage businesses, given these business lines typically command gross margins that are 6x to 8x higher than our traditional brokerage margin. This represents a significant opportunity to enhance our overall margin structure in the future. As always, we will be thoughtful in how we integrate and expand these operations into our existing platform.
Lastly, we announced that as of October 2023, Real is now operational in all 50 states as well as 4 Canadian provinces. While this marks an important achievement in our company’s history, we still represent less than 1% of the entire real estate agent population in North America, and we see ample opportunity to further expand our share in each state and province. With that, I’ll turn it over to Sharran for an introduction and update on our exciting agent initiatives. Sharran?
Sharran Srivatsaa: Thank you, Tamir. For those of you on the call who don’t know me, I joined Real as President last year. Although, most recently, I was a principal for a private investment firm and spent my earlier career at Goldman Sachs and Credit Suisse, I am an entrepreneur at heart, having built, scaled and exited numerous businesses across the real estate and technology sectors over the past two decades. My journey has been driven by a quest for innovation and the desire to create robust platforms that empower companies and professionals to achieve their utmost potential. As Real’s President, I’m responsible for all aspects of Real’s growth, including agent attraction, training and education, retention and also as the sales leader for firm-wide sales performance, meaning it’s my job to whip our agents into shape to sell a lot more homes.
I’m excited to contribute to Real’s efforts to revolutionize the real estate brokerage industry, and I firmly believe that we’ve built a business that is truly differentiated, and we’re just getting started. As highlighted by Tamir, in the third quarter, our agent count rose to a record 12,175 agents, up 81% versus the third quarter of 2022. This growth underscores the significant investments we have made in our business, technology, culture and agent resources in order to establish Real as the destination brokerage for all real estate agents. We know that if we can provide an unparalleled value proposition and a deep sense of community, we can become a brokerage that agents will never want to leave. During the RISE conference in October, we introduced a slate of new tools to enhance agents’ marketing and lead generation efforts.
This includes our end-to-end agent listing toolkit, a suite of listing presentation tools, digital and video marketing assets and a step-by-step coaching resource. Furthermore, we launched our digital asset management system, a centralized hub for all of Real’s creative materials, facilitating easy discovery and distribution of content while preserving brand consistency. Additionally, we have developed a new relationship with Luxury Presence as a preferred vendor to assist our agents in developing AI-enhanced websites optimized for lead generation. All of these were designed for agents to run a smooth and profitable business, all from their phones, in the palm of their hands. Also at RISE, we introduced several new initiatives designed to provide agents even more opportunities to generate income, build wealth and support their families.
First, we made a significant adjustment to our revenue sharing model, reducing the threshold for unlocking the second tier of revenue share, from 10 to 5 agents attracted to Real, allowing more agents to participate in additional tiers of revenue sharing much sooner. Second, we announced that all Real agents will have access to health care benefits consultation resources, allowing Real agents to benefit from our large group purchasing power. We were also proud to announce the creation of Real Retirement, a program allowing agents the ability to continue earning income even after stepping back from actively selling real estate. Under the program, beginning January 1, 2024, agents who have been producing with Real for at least the last 3 years will be eligible to continue to collect their monthly revenue share payments after they’re no longer actively representing clients, provided they maintain an active real estate license with Real.
Extending our support of agents’ financial stability and long-term wealth generation, we introduced a new suite of tools that we call the Wealth Plan, emphasizing education, planning and accountability, Wealth Plan helps agents design and realize their wealth goals and allows them to share their wealth plan with team leaders, coaches and advisers, ensuring that there is a support system to monitor progress and help them maintain accountability towards achieving their goals. Wealth Plan embodies our belief in a collaborative growth, providing the necessary resources and community support to navigate their financial journey. Lastly, last month, we also announced the One Real Impact Fund designed to provide tax-free financial assistance to agents during times of hardship.
In closing, the advancements and innovative programs we’ve rolled out underscore our dedication to fostering a supportive environment for our agents at Real. Our journey is more than transactions. It’s about building a community where agents can thrive, where selling real estate is not about counting transactions, but is actually a rewarding career. The growth, the tools and the financial security initiatives we’ve introduced our all-in at fostering such an environment for our agents. I’m honored to be part of the team, excited for the future and look forward to engaging with many of you as we continue this journey together. With that, I’ll turn it over to Michelle.
Michelle Ressler: Thank you, Sharran, and thank you, everyone, for joining us. I’ll start by reviewing some of our key financial results for the third quarter. More details on our results and key operating metrics can be found in the earnings press release and investor presentation that accompany this call. Revenue in the September 2023 quarter was $215 million, an increase of 92% versus the prior year and a 16% increase sequentially. Growth was driven by a 91% increase in commission revenue, which benefited from an 82% increase in transactions closed, which grew to 20,400 in the quarter, combined with a 5% increase in commission revenue per transaction. Recall, our primary economic unit is an individual transaction as we recognize revenue at the time the transaction closes.
Fee income and other revenue totaled $3.1 million during the quarter, an increase of approximately 245% versus the prior year, reflecting increased agent and transaction count as well as adjustments to our fee structure implemented earlier this year. Title and mortgage revenue was $1.3 million in the quarter, an increase of 173% versus the prior year. Excluding the contribution from One Real Mortgage, which we did not own in the prior year period, organic growth for these ancillary services would have been approximately 100%. Gross profit in the quarter was $18.8 million, a 119% increase versus the prior year third quarter. Gross margin at 8.7% increased approximately 100 basis points versus the prior year, with the increase driven primarily by higher fee and other revenue, which effectively drops through to the bottom line.
On a sequential basis, gross margin declined from 9.5% in the second quarter as expected due to the seasonality in our business given the higher percentage of agents typically reach their commission caps in the third quarter. As a reminder, our cost of goods sold include stock-based compensation related to our agent stock purchase program. This program allows agents to receive a portion of their commissions in the form of Real equity, subject to certain vesting requirements. This amount is excluded from adjusted EBITDA in the stock-based compensation line. Total operating expenses for the quarter were $22.7 million or 10.6% of revenue. This reflects a roughly 100 basis point improvement, both year-over-year and sequentially. The improvement is attributed to operating leverage, with our fixed costs growing at a slower rate than both revenue and gross profit.
Revenue share expense, which is our largest operating expense, was $7.9 million or 3.7% of revenue, up from $3.9 million or 3.5% of revenue in the prior year period. This cost is entirely variable and reflects Real’s commission share paid to agents for recruiting new agents to the brokerage. We categorize revenue share as a marketing expense as our sponsorship structure aids in attracting and retaining new agents while enhancing productivity across our platform. This quarter, we introduced a new non-IFRS financial measure called adjusted operating expense. This metric reflects total operating expenses minus revenue share, stock-based compensation, depreciation and other unique or noncash items. It is designed to help investors better understand the composition of our non-variable ongoing cash operating expenses.
This quarter, our adjusted operating expense totaled $11.4 million or 5.3% of revenue, marking an 80 basis point improvement from 6.1% and further illustrating the scalability of our business model. Real’s net loss for the quarter narrowed to $3.9 million compared to a $5.2 million net loss in the third quarter of 2022. This translates to a loss per share of $0.02 compared to a loss per share of $0.03 in the comparable prior year period. Adjusted EBITDA improved to $3.5 million compared to $0.5 million for the third quarter of 2022, with the increase driven by higher revenue and gross profit, which outpaced growth in operating expenses. As Tamir stated at the top, although the fourth quarter is always seasonally lighter than the third quarter, we are on track to be adjusted EBITDA profitable for the full year 2023 and expect to remain profitable on a full year basis going forward.
Turning to our balance sheet and cash flow. Although cash flow from operations was an outflow of $8 million in the quarter, this was primarily due to a $13 million reduction in customer deposits, which are reflected as restricted cash on the asset side of our balance sheet, and consist of cash held in escrow on behalf of real estate buyers. The sequential reduction from the second quarter reflects typical seasonality in our business. Importantly, our unrestricted cash and investments balance increased approximately $5 million to $33 million as of September 30, up from $28.1 million as of June 30. This consists of $19 million of unrestricted cash and $14 million in short-term investments. We remain well capitalized and believe we have ample liquidity, both to fund our business while continuing to invest in high-returning growth opportunities such as Real Wallet and One Real mobile app.
To close, I’ll recap the few KPIs we are commonly asked about before turning it back to Tamir. The total value of homes transacted over our platform increased to $8.1 billion in the third quarter, a 91% year-over-year increase. The median sale price of properties sold by our agents was roughly unchanged from last quarter at $370,000, which represents a 2.8% increase compared to the same quarter in 2022 and is in line with the broader market trend. Total operating expense per transaction, excluding revenue share, continued its downward trajectory and was $725 in the quarter, a 10% year-over-year improvement. As of the end of the third quarter, 12.5% of our agents had exceeded their commission cap, up from 10.2% at the end of the second quarter and essentially in line with the end of the third quarter in 2022.
This cohort represented approximately 51% of commission revenue during the quarter. Canada accounted for 21% of commission revenue in the third quarter compared to 20% in the prior year period. Our head count efficiency ratio, which we define as full-time employees, excluding Real Title and One Real Mortgage employees, divided by the number of agents that are on our platform, was 1:101 at the end of the quarter. This compares to 1:77 at the end of the third quarter of 2022. This concludes my financial remarks. I will now turn it back to Tamir.
Tamir Poleg: Thank you, Michelle. Before opening up the line for Q&A, I want to address a few topics of investor interest. First, on the market environment. Although we take great pride in this quarter’s results, we recognize the extremely difficult landscape that our agents and the industry at large are navigating amidst the current housing downturn. During the third quarter, the annualized rate for existing home sales dipped below $4 million for the first time since 2010 as both potential buyers and sellers grapple with the impact of mortgage rates that are now around 8%. We expect the current combination of higher rates, affordability challenges and scarce inventory to persist for the next several quarters, if not longer.
While we believe our business is uniquely positioned relative to peers in this type of environment, we do expect less productive agents will leave the industry and that weaker competitors will find it difficult to sustain, which brings me to the second topic, agent churn. As it’s typical during periods of housing market weakness, we did see a number of agents churn this past quarter, with the vast majority due to agents who let their real estate licenses expire or who left the industry altogether. Importantly, revenue churn, which we define as revenue generated by churn agents over the last 2 quarters, was only 4.5% in the third quarter, relatively consistent with the first half of the year. This suggests that the agent churn is predominantly driven by those agents with low or no production, whereas our more prolific agent remains dedicated to our platform.
Lastly, regarding the current class action legal matters in our sector, we’d like to clarify that we have not been identified as a defendant in any of these cases, and it’s not our place to comment. Our approach has always been rooted in transparency and we’ve taken measures to ensure our agents engage with clients in a clear, consistent and transparent matter. We firmly believe in the vital role that real estate agents play in transactions, both for sellers and buyers. Should we envision a scenario where an increasing number of various agents are paid directly by their clients, we hold a strong belief that: one, our long-standing investment in consumer-facing platform positions Real agents to provide an exceptional experience that stands to set them apart from the competition; two, in such market evolution, large brokerages like ours are likely to benefit disproportionately as our scale and resources afford the ability to offer a comprehensive suite of buyer solutions that smaller players may not be able to match; and lastly, we will stand in a favorable position when compared to many of our peers.
Given our industry-leading commission splits and low-cost structure, we believe we face less potential economic risk should the overall commission pool diminish. Nevertheless, we hope for a balanced resolution so that our entire industry can move forward, and we can continuously provide value to our agents and their clients. In closing, let me emphasize our unwavering commitment to navigating the obstacles and the opportunities before us. While the housing landscape is undoubtedly challenging, we have proven that our model strives even in the most adverse conditions. Our innovative tools and technology, robust financial performance and dedication to our agents are the cornerstone of our resilience. Together, we will weather the storm and emerge stronger, ready to shape the future of real estate.
Thank you for your continued support, and I look forward to our journey ahead. Now let’s move to the Q&A session.
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