The Real Brokerage Inc. (NASDAQ:REAX) Q4 2023 Earnings Call Transcript March 7, 2024
The Real Brokerage Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, 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 we will open the floor for your questions-and-comments after the presentation. I will now turn the call over to Ravi Jani, Vice President of Investor Relations and 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 fourth quarter and full year ended December 31, 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 published an earnings release, including results for the fourth quarter and full year ended December 31, 2023. Real expects to file in March, 2024, audited consolidated financial statements and related notes for the period ended December 31, 2023 and 2022, the related MD&A for the year ended December 31, 2023 and its annual information form for the year ended December 31, 2023 with the U.S. SEC and its annual report on form 40-F on EDGAR and with the Canadian securities regulators on SEDAR.
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. Our actual results may differ materially from those 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 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 actions we are taking to drive agent growth and improve agent experience, and Michelle, will provide a more in-depth discussion of our financial results in the quarter. I’ll then provide a few closing remarks before opening up the call for Q&A. To begin, Real is a real estate technology company that is differentiated in our industry. Unlike traditional real estate brokerage firms, we provide real estate agents with an unmatched combination of financial incentives, a proprietary software-based technology platform, which eliminates the need for physical office space and a collaborative culture we believe is unique in our industry.
Our vision is to simplify life’s most complex transaction, that is a purchase or 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 homebuyers and sellers. In the short-term, this vision includes the rollout of our One Real consumer-facing mobile app, which streamlines the client experience and enhances attachment of our higher margin ancillary services. In the long-term, we expect our platform to encompass a holistic ecosystem of financial technology products, payments and investment planning tools, providing agents with an avenue to build generational wealth. Ultimately, as the platform matures, we believe homebuyers and sellers could also benefit from the breadth of our service offering.
Our goal is to redefine the role of real estate brokerage in the lives of our agents and in the broader housing industry. Importantly, 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 we reported record fourth quarter results with revenue in the fourth quarter of 2023 increasing by 89% versus the prior year to $181 million, driven by an 82% increase in the number of transactions closed combined with a 4% increase in average revenue per transaction. For the full year, revenue grew to a record $689 million, an increase of 81% versus $382 million in 2022, which compares favorably to the nearly 20% decline in existing home sales.
We ended December with 13,650 agents, up 66% versus the prior year and up 12% sequentially from the end of the third quarter of 2023. As Sharran will discuss, we’re pleased that this momentum has continued and even accelerated so far in 2024. Adjusted EBITDA in the fourth quarter of 2023 was $8.5 million or $2.3 million excluding the impact of non-recurring balance sheet adjustments that was recorded in the quarter. This was a significant improvement from a negative $0.1 million of adjusted EBITDA in the fourth quarter of 2022 and marked our third straight quarter of positive adjusted EBITDA. The improvement versus the prior year reflects robust revenue and gross profit growth, which outpaced growth in our operating expenses and demonstrates the scalability of our platform combined with the benefits of actions taken earlier in the year to improve margins and optimize discretionary spans.
Full year 2023 adjusted EBITDA was $13.9 million or $7.6 million excluding the balance sheet adjustment, a significant improvement from the negative $700,000 in the full year 2022. As we look ahead to 2024, there is a clear sense of excitement within Real about the housing market nascent recovery. This optimism is bolstered by the momentum we’re seeing in our pipeline, highlighted by both the surge in new agents joining our platform and the significant uptick in open transaction volume. That said, the rate environment remains volatile and warrants close monitoring. Nevertheless, although we are not providing explicit financial guidance for 2024 at this time, I am confident in our ability to deliver another year of significant revenue and adjusted EBITDA growth regardless of how the end market recovers.
Moreover, we remain enthusiastic about the outlook for our Mortgage Brokerage and Title business lines. We expect both businesses to grow at a pace faster than our core Brokerage business in 2024, aided by the rollout of the One Real consumer facing app combined with growth initiatives we have undertaken to drive increased attachment of these high margin ancillary services. We also remain on track for the Q2 2024 launch of our first fintech product known as The Real Wallet, a digital debit and credit card platform specifically designed for Real agents. As a reminder, The Real Wallet will enable agents to consolidate all commission income, revenue share payments and equity earned through Real into one digital platform with the ability to access these funds through a Real branded debit or credit card.
Utilizing The Real card will allow agents to accumulate points that can then be applied towards reducing their brokerage and transaction fees, further enhancing the value proposition for agents who join our platform. This innovation highlights our dedication to improving the agent experience by providing unique tools and services that bolster their business operations and financial flexibility while positioning Real squarely at the forefront of merging fintech with real estate. With that, I’ll turn it over to Sharran for an update on our growth initiative.
Sharran Srivatsaa: Thank you Tamir. In the fourth quarter, our agent count rose to a record of 13,650 agents up 66% versus the fourth quarter of 2022. I’m thrilled that this momentum has accelerated since the start of the year and today Real now supports 16,000 agents across the U.S. and Canada. This surge in growth has been in part fueled by our recently announced Private Label and ProTeams programs initiatives designed to make it easier for independent brokerages and team leaders to align with Real while maintaining their unique brands and compensation structures. The Private Label program allows independent brokerages to leverage Real’s technology and leading transaction management platform while maintaining their local brand identity which often comes with a strong customer base and deep emotional attachment.
This initiative has already proven to be a game changer for brokerages like Global RED, enabling them to join Real without losing the brand equity they’ve worked so hard to build. Similarly, our ProTeams program offers unprecedented flexibility for team leaders to customize financial models for their individual team members ensuring that the structure that has fueled their success at other firms can continue under The Real umbrella. This level of customization and support represents a significant advancement in how we support the growth and profitability of our agents and teams. These programs along with our continuous focus on agent-centric benefits such as access to healthcare, revenue sharing, and The Real retirement program highlight our dedication to not just growing our agent count but ensuring that each Real agent has the support and resources that they need to succeed.
We’re often asked by investors why do agents choose Real? And it’s clear there’s no singular reason but a combination that sets us apart. First, our approach starts with freedom and flexibility, recognizing agents are entrepreneurs who know their science and businesses best. We empower them with the tools and economy to operate as they see fit. Financially, Real stands out with an extremely compelling economic model. Our agents enjoy industry-leading commission splits, a low annual cap, revenue sharing and equity opportunities making Real a platform for significant wealth generation. Many agents who join Real find themselves retaining substantially more of their commission dollars when compared to other brokerages. The backbone of our advantage is our technology.
Real is unique in the industry for our proprietary reZEN software used daily by our agents. This not only enhances efficiency but also ensures that we maintain full control over our operations and support services without relying on numerous disparate third-party systems. Culture is another important pillar of our identity. Our Work Hard, Be Kind philosophy fosters a culture of collaboration over competition. Maintaining this culture is a responsibility that we do not take lightly and we will continue to nurture it in order to create a community that agents are so proud to be a part of. Lastly, Real represents a platform of opportunity. We are a forward-looking organization in a rapidly evolving industry where we are attracting agents who want to be at the forefront of change.
The recent influx of top producers and teams from both cloud-based and traditional brokerages further validates our approach. As we look ahead, our focus remains on enhancing our offerings and continuing to build a community where our agents can thrive. I’m incredibly proud of what we’ve accomplished together and even more excited about the future. With that, I’ll turn it over to Michelle.
Michelle Ressler: Thank you, Sharran, and thank you everyone for joining us. Before diving into our results for the fourth quarter, I want to highlight the remarkable year performance across our business. We closed over 66,000 transactions in 2023, an increase of 78% in 2022, while the total value of transactions closed to reach a new record of $25.9 billion, up 80% from 2022. These results would be impressive in any market, but are even more so when considering the nearly 20% decline in the existing home sales market in 2023. Full year 2023 revenue of $689 million increased 81% from $382 million in 2022, while gross profit of $63 million grew even faster, up 97%, compared to $32 million in 2022. Importantly, gross and gross profit outpaced growth in our cash operating expenses and resulted in our first ever full year of positive annual adjusted EBITDA, which was $13.9 million for the full year 2023 and $7.6 million for the full year 2023, excluding the impact of a $6.2 million non-recurring balance sheet adjustment related to stock-based compensation expenses recorded within cost of goods sold.
This marked a significant increase from the negative $700,000 adjusted EBITDA in 2022. For the full year, we generated $19.9 million of cash flow from operations and allocated $2.9 million to share repurchases, including $1.1 million in the fourth quarter of 2023. As Tamir mentioned in his remarks, we’re not providing formal guidance for 2024 at this time. However, given the strong growth in agent count throughout 2023 and thus far in 2024, we do expect to deliver continued year-over-year improvement in revenue, gross profit and adjusted EBITDA in 2024. Moving on to the quarter. Revenue in the fourth quarter of 2023 rose to $181 million, an increase of 89% versus the fourth quarter of 2022. Growth was driven by an 89% increase in commission revenue, which benefited from an 82% increase in transaction closed and reached approximately 17,760 in the quarter, combined with a 4% increase in Brokerage revenue per transaction.
Recall our primary economic unit is an individual transaction, as we recognize revenue at the time a transaction closes. Title and Mortgage revenue totaled $900,000 in the fourth quarter of 2023, an increase of 86% versus the fourth quarter of 2022. Given we closed on the acquisition of One Real Mortgage in December 2022, the prior year fourth quarter only reflected a partial contribution from the acquisition. Gross profit in the fourth quarter of 2023 was $15.5 million, up 89% from $8.2 million in the fourth quarter of 2022. Gross margin of 8.6% was approximately flat in the fourth quarter of 2023 relative to the prior year and down slightly sequentially from 8.7% in the third quarter of 2023. As a reminder, our cost of goods sold includes 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. While we had anticipated a modest and quintal improvement in gross margin relative to the third quarter of 2023, we saw some margin pressure in the fourth quarter primarily from revenue mix. As commission revenue was much stronger than expected, a high cost problem, while revenue from our higher margin ancillary services lines was lower. For the full year 2023, gross margin was 9.1%, an increase of 75 basis points versus 2022, reflecting both the benefit of actions taken to increase margins and a higher contribution from our ancillary business lines.
While quarterly gross margins can fluctuate based on mix and natural seasonality in our business, we remain focused on continually driving year-over-year gross margin improvements, particularly as our higher margin ancillary business lines continue to scale. Total operating expenses, which include general and administrative, marketing and R&D, were $26.8 million or 14.8% of revenue in the fourth quarter of 2023. This reflects a roughly 100-basis-point improvement from the fourth quarter of 2022. Notably, operating expenses this quarter include a $5.1 million out-of-period adjustment in stock-based compensation expense that was recorded in the fourth quarter. Excluding this catch-up, total operating expenses as a percent of revenue would have improved by approximately 400 basis points year-over-year, demonstrating the operating leverage in our platforms.
Revenue share expense was $6.8 million in the fourth quarter of 2023, up from $4 million in the prior year period and improved as a percentage of sales to 3.8%, down 40 basis points from 4.2% in the prior year period. This cost is entirely variable and reflects Real commission shares paid to agents for recruiting new agents to the Brokerage. Revenue shares categorized as a marketing expense as our sponsorship structure aids in attracting and retaining new agents, while also enhancing productivity across our platforms. Adjusted operating expense, which reflects total operating expenses, less revenue share, stock-based compensation, depreciation and other unique or non-cash items totaled $11.2 million in the fourth quarter of 2023 or 6.2% of revenue, a roughly 180-basis-point improvement from 8% in the prior year, further illustrating the scalability of our business model.
Adjusted operating expense is a metric provided in our press release to help investors better understand the composition of our non-variable ongoing fixed cash operating expenses. Real’s net loss was $12 million in the fourth quarter of 2023, compared to a loss of $6.8 million in the fourth quarter of 2022. Adjusted EBITDA was $8.5 million in the quarter, however, this amount reflects the non-repairing balance sheet adjustment described earlier. Excluding the impact of this adjustment, adjusted EBITDA improved to $2.3 million in the fourth quarter of 2023, a significant improvement from the negative $100,000 in the fourth quarter of 2022. The increase was driven by higher revenue and growth profit, which outpaced growth in our cash operating expenses.
Turning to our balance sheet and cash flow, we ended the year with unrestricted cash and investments of approximately $29 million, an increase of $10.2 million from the end of 2022. Our cash balance consists of $14.7 million of unrestricted cash and $14.2 million in short-term investments. We remain well capitalized and believe we have ample liquidity to fund our continued growth while continuing to return capital to shareholders. We will remain opportunistic with respect to M&A, with a focus on maximizing long-term shareholder value. To close, I’ll recap a few KPIs we are commonly asked about. The total value of homes transacted over our platform increased to $6.8 billion in the fourth quarter of 2023, a 92% year-over-year increase. The median sale price of properties sold by our agents was $355,000 in the fourth quarter of 2023, which represents a 2% increase compared to the fourth quarter of 2022.
Total operating expense per transaction, excluding revenue share, was $1,124 in the fourth quarter of 2023, a 2% year-over-year improvement. However, adjusted operating expense per transaction of $632 in the fourth quarter of 2023 improved by 20% compared to the fourth quarter of 2022, a testament to the efficiencies enabled by our technology platform. As of the end of the fourth quarter of 2023, 10% of agents had exceeded their annual commission cap, up from 9% during the fourth quarter of 2022. This cohort represented approximately 43% of commission revenue during the quarter. Canada accounted for 18% of commission revenue in the fourth quarter of 2023, compared to 14% in the fourth quarter of 2022. Our headcount efficiency ratio, which we define as full-time employees excluding Real Title and One Real Mortgage employee, divided by the number of agents that are on our platform, was 1 to 116 at the end of the fourth quarter.
This compares to 1 to 98 at the end of the fourth quarter of 2022. This concludes my financial remarks. More details on our results and key operating metrics can be found in the earnings press release and investor presentations that accompany this call. I will now turn it back to Tamir.
Tamir Poleg: Thank you, Michelle. Reflecting on the entirety of 2023, it’s clear that Real has not only navigated, but excelled in what has been an extremely challenging market environment, one in which the market for existing home sales declined by nearly 20%. Our success is a powerful endorsement of our differentiated business model, the unparalleled value we offer to our agents, the cutting-edge technology that underpins our operations, and most importantly, the collaborative culture we’ve nurtured since our inception. These pillars have not only sustained us but have propelled us forward, even when the industry at large faces headwinds. Before going to Q&A, I want to take a moment to talk about our proprietary software-based technology platform known as reZEN.
Now, technology is a common buzzword in our industry, but I believe what distinguishes reZEN from other platforms is its universal adoption across our agent base. Unlike other brokerages, where maybe 10% or 20% of agents use the in-house technology offering, at Real, every agent leverages reZEN. This 100% utilization rate reflects our philosophy that technology should be integral to a Brokerage, not optional. The power of reZEN lies in its ability to leverage software to automate what are traditionally human-intensive processes on the back end of a real estate transaction, enabling us to close a transaction in minutes, something that could take hours, if not days, at traditional brokerages. This automation allows agents to spend less time on paperwork and administrative tasks and more time on what they do best, selling real estate.
Meanwhile, the benefits to Real are evident in the fact that our transaction processing team headcount has remained flat at just nine employees for the past two years, while our annual transaction count has effectively quadrupled from 17,000 in 2021 to over 66,000 in 2023. Importantly, reZEN isn’t just a transaction management tool. It’s a comprehensive real estate agent operating system, a hub for accessing marketing tools, training materials, collaborating with other agents, as well as managing day-to-day brokerage operations. With The Real Wallet on the horizon, reZEN will evolve even further into a wealth-building fintech platform, something that is truly unprecedented in the real estate space. With all of our transaction data housed on one single system, our in-house AI assistant, Leo, becomes smarter with every transaction, anticipating steps that must be taken, recommending appropriate action and extracting key data insights to help agents run their businesses more efficiently.
With Leo, we believe Real is one of, if not the only, major real estate brokerage, utilizing AI to improve transaction efficiencies and we are still just scratching the surface of its potential. With that, I want to express my deepest gratitude to our agents, employees and industry partners who have supported Real both in 2023 and throughout our journey. Your unwavering commitment and belief in our vision have been instrumental and continue to be the cornerstone of our success. Now, let’s move to the Q&A session.
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Q&A Session
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Operator: Certainly. [Operator Instructions] Your first question is coming from Darren Aftahi from ROTH MKM. Your line is live.
Darren Aftahi: Hi, guys. Good morning. Thanks for taking my questions. Nice job on the results. Tamir, I think, you mentioned in your prepared remarks a comment about acceleration of agents into 2024. I’m curious if you could kind of dovetail those comments next to the launch of ProTeams and Private Label, and how much of an impact that initiative is kind of having on that acceleration.
Tamir Poleg: Hi, Darren. Thank you. Yeah. We have felt an acceleration since the beginning of the year. We added more than 1,000 agents in January, more than 1,000 agents in February. We expect onboarding more than 1,000 agents in March and we have about 2,000 agents who signed ICAs but have not onboarded yet. So we have a strong pipeline of agents waiting to join. I think that the ProTeams and Private Label discussions are probably still not fully reflected in the growth yet. So those are discussions that we started towards the end of 2023 and the beginning of 2024. Those are large teams and independent brokerages that do not make the switch overnight. We do have a very strong pipeline of candidates of ProTeams and Private Labels that are looking to join in the next few months. So I think that despite the fact that growth has been extremely strong, it might be even stronger when the full effect of ProTeams and Private Labels kicks in over the next few weeks.
Darren Aftahi: Great. Another one if I may. Could you maybe list out your top two or three strategic priorities for the team in 2004? Maybe not financial per se but just strategic priorities.
Tamir Poleg: Sure. I would say three main things. One, continuing to — four. One continuing to improve efficiency. This has been a focus of the company since we actually started. Our ability to process transactions very efficiently, quickly and without any human labor involved is key for us and we continue to evolve and improve on that. Second, obviously, growth. We expect to bring a large number of agents on board this year and that puts a lot of pressure on our onboarding team and overall operation and support team. The third is The Real Wallet. There is a lot of excitement internally around the wallet and how the wallet can evolve. So, obviously, we are starting alpha testing within a couple of weeks with a small group of agents and then we will roll it out to the entire agent population.
So that’s a huge focus for the company. And obviously, the consumer-facing app, the One Real app, which now we are building the building blocks in the background. We’re also back to the drawing board when it comes to the user interface and just planning the additional steps and evolution of the One Real app. So all of those four would be the main focus for 2024.
Darren Aftahi: Great. If I could just sneak one last one in. Your comments about reZEN, I’m curious, would you ever license out that technology or is that something you’d want to keep in-house?
Tamir Poleg: This is something that we would want to keep in-house. This is a huge competitive advantage that we have built and continue to build. I think that if you think about potential M&As, if in the past you had seen brokerages acquiring tech companies in order to maybe integrate their technology within their operation, I think that with reZEN, we can actually flip that picture. So as a tech company that has built a very robust operating system for a brokerage and operating system for agent businesses that can instill efficiency both in our operation, in the agent’s operation and also monetize transactions in a better way, I think, that that allows us to leverage that technology in order to potentially acquire transactions and when I say acquire transactions, I mean acquiring other brokerages in order to leverage their transactions and leverage our technology in their operation.
Darren Aftahi: Great. Thank you. Appreciate it.
Tamir Poleg: Thank you.
Operator: Thank you. Your next question is coming from Stephen Sheldon from William Blair. Your line is live.
Stephen Sheldon: Hey. Thanks for taking my questions and great job all around here. First one, just generally wanted to ask how much visibility you have into the agent recruiting pipeline and how do you monitor or track the recruiting efforts of your existing team — agents and teams, like, you have to bring others to Real? It sounds like you have maybe some more visibility given these new initiatives that are bringing over bigger teams, but do you also get visibility into, yeah, smaller maybe agent teams that are working to add an agent or two? We’d just love any detail on the visibility you get?
Tamir Poleg: Sure. Thanks, Stephen. So, yeah, as you distinguish between large teams and maybe solo agents or small teams, this is probably the same for us. We don’t have a CRM that organizes the data from all of the agents. I think that at this point, growth, especially when we’re talking about solo agents, is pretty predictable for us, just because we can look at patterns, we can look at seasonality, we can quite accurately estimate what will be the number of solo agents or small teams that will be joining us. I think that what we’re seeing is that more and more large teams are joining in independent brokerages. So, for example, last year, a team or a brokerage of 100, 150 agents would be a large team for us to onboard.
