Good morning, ladies and gentlemen, and welcome to The Real Brokerage Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we'll open the floor for your questions and comments after the presentation. I will now turn the call over to Jason Lee, Vice President of Capital Markets and Investor Relations at The Real Brokerage. Sir, the floor is yours.

Good morning, everyone, and thank you for joining us today for Real's fourth quarter and full-year 2022 earnings call. With me on the call today are Tamir Poleg, our Chairman and Chief Executive Officer; and Michelle Ressler, our Chief Financial Officer. This morning, Real filed its financial statements and Management Discussion and Analysis for the fourth quarter and full-year ended December 31, 2022, on SEDAR and EDGAR. These documents, along with the accompanying earnings press release can be found on both SEDAR and EDGAR. Before I turn the call over to Tamir, I'd like to remind everyone that the company will be making statements about its future results and other forward-looking statements during this call. 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. Now, with that, I'd like to turn the call over to Chairman and Chief Executive Officer, Tamir Poleg. Tamir, please proceed.

Good morning, and thank you, Jason. 2022 was a challenging year for the housing market, with Q4 as the weakest quarter across the industry. A key driver was the title policy implemented by the Federal Reserve in response to the persistent inflationary pressures, which resulted in seven increases to the policy interest rate during the year, pushing average 30-year mortgage rates above 6% for the first time since 2008. The corresponding hit to buy affordability and seller incentive to give up their lower existing mortgage rates resulted in a significant downturn, particularly to transaction volumes. In 2022, U.S. existing home sales declined 18% compared to 2021, although the average home price still rose 10%. In Q4 alone, home sale volume in the U.S. decreased 36% year-over-year, albeit with moderate price declines. Despite the residential real estate market headwinds, we are optimistic that we have witnessed the bottom in Q4, given the strength in what we have witnessed so far in this quarter. Our growth remains strong and we continue to accelerate our market share gain. Our growth in agent share resulted in a 90% year-over-year rise in revenue and a 100% year-over-year increase in gross profit in Q4 despite the drop in transaction volume in the broader market over that period. Most companies in our industry have reported year-over-year decline in revenue against this challenging backdrop, and many have seen their agent bases shrink as agents leave the industry. Although, we are not immune to these market forces, we continue to offer an amazing value proposition for agents and as a result have been able to grow our agent base significantly. We entered 2022 with 3,850 agents at Real and ended the year with over 8,200, a 113% increase. Subsequent to the end of the quarter, we announced in February,…

Thank you, Tamir, and thank you, everyone for joining us. I'll start by reviewing some of our key financial results for the full-year and fourth quarter. As Tamir touched on, it was a particularly challenging second half of 2022 for our industry, but our significant growth on a year-over-year basis more than offset the market headwinds. For the full-year 2022, the total volume of homes sold was $14.4 billion, which represents a 226% increase compared to 2021. The total number of transactions on our platform during the year increased to over 37,500, a 181% increase. In Q4 alone, despite the drop in market volumes, Real completed 9,745 transactions, an 85% year-over-year increase. This corresponds to a total value of homes sold in Q4 of $3.5 billion, a 109% year-over-year increase. Meanwhile, the median sale price of properties sold by our agents declined 3.3% quarter-over-quarter to 348,000, roughly in line with the 4.3% decline in the average price of existing home sales in the U.S. between September and December. For the full-year 2022, revenue increased to $382 million, a 214% increase compared to 2021. Meanwhile, gross profit increased 188% year-over-year to $32 million. Fourth quarter revenue was $96.1 million a 90% year-over-year increase, while fourth quarter gross profit increased 100% year-over-year to $8.2 million. Our gross margin expanded to 8.6% up from 8.1% in Q4 2021. The increase from prior period is driven by the slowdown in the market that resulted in fewer agents exceeding their respective commission caps. As of December 31, 8.9% of our agents had exceeded their caps versus 12.4% at the end of Q3, as the lower market transaction volume made reaching the caps more difficult. 8.5% of our U.S. agents ended the quarter with capped status down from 11.4% in Q3, while 14.1% of our Canadian…

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]. Your first question is coming from Darren Aftahi from ROTH MKM. Your line is live.

Hi guys. Good morning. Thanks for taking my questions. There's a lot to unpack here on some of the comments you said particular, Michelle, I'm just trying to make heads and tails. So it sounds like you're seeing improved traction sort of year-to-date in your business. I guess you didn't give guidance, but you mentioned that $480 million to $490 million revenue scenario, like what gives you kind of confidence in that? And I guess as we think about your commentary around adjusted EBITDA beyond the $5 million benefit this year, is there any underlying assumption about ancillary services benefiting your business?

Yes. Hi Dan, thank you. So those assumptions rely mainly on the brokerage business. We think that this year there will be somewhat of a modest contribution by the ancillary businesses that that we own. What we've seen since the beginning of the year or the first week of January is just a very significant uptick in activity and new contract signs. So we have a pretty good visibility into the next two months. And what we're seeing is extremely encouraging. March so far is shaping up to be probably our best month ever. And also the backlog moving forward is looking very promising. So the figures that Michelle mentioned of $480 million to $490 million in top-line revenue this is what we need in order to get to adjusted EBITDA positive in the second half of the year. I mean, this -- those numbers are for the full-year, and we are very confident that we are going to do much better than this. So at this point, we have good visibility. We are much more optimistic than we were three months ago about the market. And we have a very significant backlog to rely on.

That's helpful. Thanks, Tamir. And then just as we think about 2023, so you guys had really nice growth in agents and a lot of this stuff is just attracting people to your platform. Like how do we think about maybe inorganic or whether you consider it organic attraction of agents and I guess big picture like what is your general view in terms of your theoretical ceiling for agents on this platform long-term? Is it 50,000, 100,000?

Sure. We believe that if you build value then people will be attracted to this value. And this is what we've been focused since day one of the company. We were trying to build the most amazing platform for agents, and we are now starting to see the signs of agents actually joining because of that value that we offer. So we don't really see any glass ceiling at this point. We think that there's a long runway for us as a company. I mean we are very confident that we will get to tens of thousands of agents within a couple of years. And I also believe that we will get to six digits. I think that the question here is not only about the number of agents, it's about how do you build something meaningful that will differentiate our agents compared to other agents in the industry, and how do we equip them with a way to serve their clients in a different way? Because I believe that buyers and sellers are demanding a different kind of service, and this is what we're trying to build. So at the end of the day, it's not only about the number of agents, it's also about the value that you're creating for the agents and their clients, and how do you monetize all of those transactions that are generated by those agents. And this is what we're now focusing on. We are heavily focusing on monetization through technology. And I think that in the next couple of years, we will see the effect of that on our financial statements.

And I guess just last one for me, your productivity per agent on a transaction basis is very impressive. I'm just curious if you scale to tens of thousands, if not hundreds of thousands can that metric stay at that level or do we assume at some point it starts to get diluted?

Well, I believe that this is sustainable. At the end of the day, it's about the focus of the company. So as a company, we're not focused on the vanity number of -- the number of agents on the platform. We want to focus on production, and we want to help agents that are serious about practicing real estate. So at the end of the day, we're not trying to attract only any agent. We're trying to attract the agents that want to succeed and want to close transactions and want to focus on real estate. And I think that this is why we're seeing such impressive per agent productivity numbers. And I believe that we will continue to attract those agents that are more focused on production rather than other things. So I believe that this is sustainable.

Yes. And I also think we should highlight that this is a challenging market. So we expect that those metrics will only go up from here.

That's helpful. Thanks, Michelle.

Thank you. Your next question is coming from Tom White from D.A. Davidson. Your line is live.

Hey, this is Wyatt Swanson on for Tom. Thanks for taking our questions. I've got a few here. My first one is just kind of on the changes to the agent fee structure. Could you talk a little bit more about what the rationale was for implementing those changes now? And then how does your current revenue share offering differ versus some of the other similar models in the space?

Sure. The changes fee in fees has been a collaborative process and effort with our agents. At the end of the day, our agents are shareholders in the company. So they're both the clients of the company, but they also own an equity stake in the company. So they want to see the company succeed and grow and become profitable. So we had very long discussions with groups of agents. We explained the situation and our cost went up because of inflation, but our model is such that it's capped at some point. So when agents close more deals, they pay us the same because there is we stop participating in the commission split with them. So when we explained all of this and we thought about how to minimize the impact, the negative impact to the average agent, we came up with all of those different fees. So the joining fee for agents who want to join it really doesn't make a big difference if they pay $149 or $249. This is why we increased this fee. We implemented a very modest transaction fee of $30. We wanted to stay competitive compared to other brokerages out there. But at the end of the day, we wanted to make sure that our agents would be as slightly impacted as possible. And I think that we came to a solution that everybody was somewhat happy with. Regarding revenue share, we -- different revenue share in the fact that -- our revenue share is very generous; let's say, again the average agent. So we are generous on the first year. We believe that most agents will be attracting one, two, three, four, five agents to the company versus those agents that attract hundreds of agents into the company. So we wanted to…

That's great. Thank you. And then could you share your current expectations as it relates to gross margins for this year? Given some of the moving pieces there with fewer agents capping, but the fee structure changes and so on.

Sure. And Michelle can touch more on that as -- again, we're not providing guidance, but I think that given the new fees and also the market conditions, I think that the margins this year will be more favorable than last year. Michelle, if you have anything to add please do.

Yes. I mean, as Tamir mentioned, we're not providing guidance, but we are optimistic about 2023. And I think that you can see the early effects of the fact that within our business model, we planned for downturn in the market. So our business model only strengthens in a challenging environment. And should 2023 continue to be difficult, this will only further benefit the company.

Thank you. Your next question is coming from Chris Sakai from Singular Research. Your line is live.

Hi, I'm in for Dave Marsh. Can you provide an update on Title company operations? How many states is it operating in and what is the plan to roll out in additional states?

Sure. Hi, Chris. So currently Title is focused on two main states Texas and Florida. And we also have an operation in Georgia as well. We are licensed in many more states, but we are now expanding into Colorado, Nevada, Arizona, and California. In February, we had a record month in terms of revenue in Title Company. We've communicated before that we created JVs. So we are now inviting our agents to become owners in the Title companies that we own, and this way they can actually make money out of Title services, not only out of commissions. And what we're seeing in those JVs, we have two main JVs. One is targeted at capers, so agents that are more productive, one is targeted at non-capers. We have about 65 agents in the capers, JV in Texas and Florida, and about 120 in the non-capers. What we're seeing in terms of attach rates on those JVs is north of 70% of capturable transactions are going to those JVs. So this is encouraging in terms of attach rates, and now we are expanding the JVs to additional states. So this is still very early stages but again, we've seen some record month and I think that we got it right with the JVs. So we're seeing a lot of engagement from our agents.

Okay. Sounds good. And then the same questions for acquired mortgage operations. How many states is it operating in and what is the plan for additional rollout?

LemonBrew is licensed as a mortgage brokerage in 20 states and is operating in 20 states. And as a mortgage lender in 12 states, we currently operate only as a mortgage broker. We concluded the acquisition just a couple of months ago. We are now immersing LemonBrew into our business. They're doing a lot of work with our agents, so it'll take a little bit of a ramp up time to get meaningful revenue from them. But we are working on a few very interesting offerings to our agents. Aside from everything that we're building on the consumer facing gap, we are working on a concept that will enable LemonBrew to guarantee closing and guarantee the date of closing within 14 days of loan application for our agent's clients. So we believe that with the -- with this program, we will see much more engagement from our agents and their clients. But again, it takes a little bit of time to ramp up ancillary services revenue.

Okay. Thanks. And last, what's your general tenor of the real estate market with rising rates and especially with recent bank sellers?

I think what we've witnessed in the past nine months is the fastest space of increasing interest rates in history and at the same time, the most leverage economy ever. So debt to GDP is at all-time high. And what we're now starting to see is that things are starting to break what we've witnessed with the banking industry in the past week or 10 days. I believe that there's a chance that lending standards will tighten because of everything that's going on. On the other hand, we are seeing very robust job market and very solid demand for housing. So I think that there are a lot of conflicting trends right now within market. We are very optimistic about housing. I can tell you that at the beginning of this year, we've seen the same type of phenomenon that, that we have seen in the first half of 2022, meaning bidding wars and people who bidding over asking price on homes. And when rates went again above 6.5%, that subsided a little bit, but we are seeing, and we are hearing our agents reporting a lot of activity with buyers. So I think that as long as the economy will not break drastically, we are very optimistic about the real estate market. And regardless of that, I think that us as a company, we are definitely an outlier just because of our fast growth and the fact that we are adding agents so rapidly our performance is not going to be very connected to the market performance. We are going to do much, much, much better.

Thank you. [Operator Instructions]. Your next question is coming from Brian Kinstlinger from Alliance Global Partners. Your line is live.

Great. Thanks. Two questions. First is a follow-up from the bank crisis question. I just want to understand from your answer, your goal of $480 million to $490 million in revenue that does not include a negative impact from the bank crisis on volumes. Is that how I read that answer?

Hi Brian, not exactly, what we said is that our assumptions for the year is that transaction volume will drop 15% to 20% and home prices will drop 7% to 12%. And even with those assumptions that are quite severe we expect to be adjusted EBITDA positive in the second half of the year. And in order to achieve that, we need to have about $480 million to $490 million in top-line revenue, which we believe we will do much, much better than those figures, so I think that's -- yes.

And then my follow-up is, can you touch on and maybe I missed it, your M&A plans. I know the goal long-term is to add ancillary services, and you've got a few to your business, so maybe talk about that given they'll probably have higher contribution margins.

Sure. What we're seeing on the Title side is that gross margins are in the range of 80% to 85%. On the mortgage side, we're seeing gross margins of about 60%, 65%. We have a short-term strategy on Title, which is again creating those JVs and inviting our agents to participate in those JVs. And this is how we secure those transactions that our agents are processing because they have an incentive to send them to the JV. Long-term, again, we want to embed Title into the consumer experience on the app, and it'll be part of the seamless experience that we're building for our agents clients. On the mortgage side, what we are now doing is just introducing our mortgage business to our agents, having a lot of events, a lot of interactions with the agents, asking them to try the services, highlighting the success stories. As I mentioned, we are working on a -- an offering that will allow our agents clients to close within 14 days with a 100% certainty that the loan will close. So this is something that doesn't really exist in the industry. So we're trying a lot of things. But it takes time, as I mentioned, to ramp up ancillary services revenue. I believe that this year we will start seeing more meaningful revenue coming from Title, and probably towards the back half of the year, we will see more significant revenue coming from mortgage. But at the end of the day, long-term if we think five years ahead, 10 years ahead, everything lies in the consumer experience that, that we're building. And again, Title mortgage services will be embedded into that experience.

Thank you very much. Mr. Lee, there appears to be no further questions.

Thank you. And if you have any additional questions for today's earnings release, please feel free to contact me directly. Operator, would you please give the conference call replay instructions once again, thanks.

Absolutely. In order to access the replay, you need to call 877-481-4010 with a confirmation code of 47478. Once again, the replay phone number is 877-481-4010 and the confirmation code 47478. The replay will be available today at 2:00 PM Eastern. Ladies and gentlemen, this does conclude the conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.