Stewart Information Services Corp (STC) 2021 Q4 法說會逐字稿

Hello, and thank you for joining the Stewart Information Services Fourth Quarter and Full Year 2021 Earnings Call. (Operator Instructions) Please note, this call is being recorded. (Operator Instructions) It is now my pleasure to turn today's program over to Nat Otis, Head of Investor Relations. Please go ahead.

Thanks, Emma. Morning. Thank you for joining us today for Stewart's Fourth Quarter 2021 Earnings Conference Call. We will be discussing results of our release 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.

I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected.

The risks and uncertainties with forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release published yesterday evening and in the statement regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC.

Let me now turn the call over to Fred.

Thank you for joining us today for Stewart's Fourth Quarter 2021 Earnings Conference Call. David will take you through the quarter's financial results in a minute. But before then, I would like to touch on Stewart's 2021 results and what we see in front of us for 2022 and beyond. We are now 2 full years into what we call the journey to become the premier title services company.

'20 and '21 were 2 of the best as well as the most challenging years in the title industry as a whole, given tremendous changes in the market, historically low rates and an ongoing impact and uncertainty caused by COVID. For Stewart specifically, it has been a period filled with significant change and increased focus, a focus on significant structural improvement with enhanced operating discipline and a renewed commitment to the customer experience.

More remains to be done in our journey, but we are encouraged by our progress as we have materially improved from 2019 to '21. We have significantly improved in every aspect of our business and have demonstrated our ability to materially improve our margins while significantly growing our business. We are pleased with the results in all our lines this quarter across residential and commercial, where we are building a strategy to take advantage of what looks like a very positive commercial market that lies ahead.

We have enhanced our core business by leveraging added scale in targeted geographies while also placing a greater focus on managing more effectively and efficiently. We have built scale and target services, and we continue to benefit from an influx of industry talent that see Stewart as a destination for forward-thinking leaders, offering a significant long-term opportunity.

In the area of technology, we understand that the real estate transaction will continue to evolve, becoming less paper-intensive, more remote and more digital. As we have done with many of our recent transactions, we will continue to invest, when appropriate, in technologies and services that help facilitate this change, and therefore, improving the customer ease of use and experience.

Though we are proud of our accomplishments to date, we recognize there is more to be done in the face of higher interest rate environment and a further evolution of the market. The long-term outlook for the residential real estate market remains encouraging as purchase segment trends are projected to continue to be strong and demographic realities such as first-time millennial home buying, add to the opportunity of an increasing favorable mix shift.

That said, our industry and our company will likely need to navigate a near-term horizon of greater interest rate uncertainty as the Fed acts more aggressively to curb inflation by taking actions that may lead to a further pullback of the refinancing activity. At Stewart, we have been preparing for this market transition by reconstructing a title company that is better able to sustain the ups and downs of a full real estate cycle.

A key part of building the resilient foundation is the work we continue to do to gain adequate local scale in priority markets. As part of this process, we continue to opportunistically add new title agencies and teams for our Stewart family, increasing talent and leadership in those market segments along the way.

Historically, Stewart has been less weighted to refinancing volumes. And as we have grown, we have looked to acquire companies and talent that align with our view of future mix. We continue to reconstruct Stewart to be resilient under all conditions by focusing on our business mix, deeper agency relationships, additional commercial opportunities and investing in technology and operating model improvements to deliver the enhanced customer experience.

Let me finish by thanking our associates for all their hard work, and customers for their continued support. We are on a journey together to make the company more successful and resilient.

David will now update everyone on our results.

Thank you, Fred, and good morning. Let me also thank our associates for their amazing service and our customers for their steadfast support. Although we are in a seasonally slower residential period and the market is adjusting to Fed commentary and rising rates, the residential purchase market remains active, driven by demand. Commercial real estate continues to recover, particularly in the industrial and multifamily segments. Office is increasingly active and energy is poised to benefit from continued economic recovery and environmental focus.

There are several watch items that could impact future business performance, including Fed and government policy in action, improving yet historically high mortgage delinquency and forbearance, consumer pullback, a lingering virus and uncertain jobs environment, rising inflation and slow supply chains.

Consistent with our strategy, we are focused on the areas that will have the most meaningful and durable impact on our long-term operating performance, gaining scale in attractive direct markets, improving scale and geographic focus in our agency and commercial operations, broadening our lender services offerings and, throughout our business, improving service and digital capabilities to provide seamless end-to-end user experience.

During the quarter, we added Great American, Greater Illinois, Devon, Homeland, Las Cruces and Rainier to key direct operations markets. Our lender services and data businesses added informative research and provider credit data and PropStream will provide real estate data. Credit and property data provide the business generation and improvement information so critical to our customers in a transitioning market. We are excited about these businesses, their possibilities and their teams and welcome them to Stewart.

For the fourth quarter of 2021, Stewart yesterday reported net income of $85.5 million and diluted earnings per share of $3.12 on operating revenues of $951 million. On an adjusted basis, fourth quarter net income was $80.5 million, an improvement of $24 million or 43% compared to last year's quarter. The adjustments to our quarter net income were primarily due to net unrealized gains on equity securities investments.

Compared to last year's quarter, total title revenues increased $178 million or 26% due to strong results from our residential agency and commercial operations. The Title segment generated pretax income of $118 million, which is $23 million or 25% higher as a result of increased revenues and continued management focus.

Pretax margin for the segment was comparable to last year. With respect to our direct title business, domestic residential revenues increased $43 million or 18% due to higher purchase transactions and improving scale. Residential fee per file for the fourth quarter was approximately $2,700, which was 38% better than last year's quarter due to higher purchase mix.

Domestic commercial revenues improved $35 million, driven by increased volume and average fee per file of $19,400. Total international revenues improved $4 million or 10% compared to last year's quarter due to increased transaction volumes in our Canadian operation. Total open and closed orders in the fourth quarter decreased 22% and 14%, respectively, primarily due to lower refinancing transaction as expected with the market trend.

Our commercial and purchase closed orders increased 7% and 3%, respectively, compared to last year's quarter. Similar to our direct title operations, our agency operations generated a solid quarter with revenues of $445 million or 27% higher than last year. The average agency remittance rate during the quarter was 18%, roughly in line with last year's quarter.

On title losses, total title loss expense decreased $13 million or 28% due to favorable claims experience. As a percentage of title revenues, title loss expense in the fourth quarter was 4% compared to 7% in last year's quarter, while for the year, it was 4% in 2021 compared to 5% in 2020.

In regard to operating expenses, which consist of employee and other operating costs, total operating expenses increased primarily due to higher employee count, increased variable costs tied to higher revenues, state sales tax assessments and office consolidation costs.

Employee costs as a percentage of operating revenues improved to 23% or 25% last year, while other operating expenses increased to 22% from 18% last year, primarily due to the increased size of our ancillary and other real estate services operations.

On other matters, we completed our $450 million senior notes offering and used the proceeds to repay outstanding credit facility borrowings and for acquisitions. To maintain liquidity flexibility, we obtained a $200 million unsecured revolving line of credit, which is fully available for future drawings.

Our financial position remains on a solid foundation to support our customers, employees in the real estate market. Our total cash and investments on the balance sheet are approximately $620 million over regulatory requirements, and we have the new available line of credit facility. Stockholders' equity attributable to Stewart increased to $1.3 billion. Our book value per share was approximately $48, an increase of 27% from last year.

Lastly, net cash provided by operations for 2021 was $390 million compared to net cash provided by operations of $276 million last year. We are grateful for and inspired by our customers and associates, advocates for everyone's improved safety and prosperity, confident in our support of real estate markets. And now I'll turn it back to the operator for questions.

(Operator Instructions) And our first question is coming from Bose George with KBW.

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contribution to the earnings this quarter after the deal closed? And just how should we think about accretion next year?

We missed the beginning, Bose. Could you do that again? I just missed the...

Yes, sure. Yes. Just on the PropStream acquisition. I just wanted to -- how we should think about accretion from that?

So do you want to repeat what he...

Yes. Bose, it's David here. So on PropStream, we've been thinking about that. That is about a $40 million run rate revenue business at 40% pretax margins.

Okay. Perfect. That's helpful. And then actually switching over to commercial. Obviously, there was a big jump in the commercial premium this quarter. Anything unusual to call out there or just reflecting a very strong commercial market?

Yes, I kind of gave a little bit of that in my remarks, Bose. I mean, I think we've seen both on the product side, multifamily, industrial, office coming back a little and then also a number of the geographies, particularly in the Northeast. Boston, New York, really started to pick up. So yes, I think just sort of across the board product and geographies were much better.

So we're pleased. We have a bullish outlook of commercial, like I think others do as well. It's always lumpy for us, if you have a few big ones, but we're very confident this is a strong commercial market right now. And you saw we also have been making some investments internationally, and we've had some opportunity, I think, there too, we look forward.

Our next question comes from John Campbell from Stephens Inc.

Congrats on a great quarter and a great year. Yes, I wanted to see if we could maybe dive in the M&A side of things for just a second. So David, I guess, first, if you could maybe talk to the M&A capital deployed last year and roughly how much of that was tied to kind of ancillary services versus the platform build-out -- or excuse me, against the title business?

And then, Fred, maybe if you could talk to just the broader strategy around the platform? And as you kind of step back from what was obviously a busy year, how much of the heavy lifting you feel like there's left on that kind of platform build-out?

Right. Go ahead.

Yes, sure, John. So a lot of stuff in the fourth quarter and then throughout the year, some weather activity. But yes, it's probably a few hundred million in services, right, between PropStream and IOR as we disclosed. And then, yes, I think we did about 600 or 600-plus total. So the rest would have gone to the sort of the core platform title agency type activity.

Yes. I think as you look at our business, it's been a pretty interesting couple of years. We went from about $1.8 billion company to $3.3 billion, right? So we grew over $1.5 billion. And obviously, the market was good, but we've kind of repositioned ourselves.

And as we've talked, we looked at all the MSAs and I would say there's still 15 or 20 MSAs I'd like to see a material change in our share position, but it's a lot less vulnerable than it was. And you saw we took some additional actions this quarter on some consolidations, leasing elimination, closing some offices. Not a lot of that stuff left to do, but I think there's opportunity in a material way in some of our MSAs.

And then the other thing -- the point I would make is that if you look at our 90 markets essentially, our leadership is so much better and well positioned, that is our ability to do tuck-ins in micro geographies and stuff, if it makes sense. So I think there's opportunities that continue to be in front of us.

I think there's a -- if I use the word platform a little broader, we still also -- when we started the journey, I said it's 3 years of work here to really get some catch up. And we still have some work on our data management. We still have some work on some of the technology investments we want to make, there's still some work on our operating model as far as workflows goes that we're making good progress on. But we're still -- we have still improvement in front of us that we've got to focus on.

So I like the combination for us that there's opportunities to grow as well as continue to improve. And it's going to be -- our view of the market is while it's now seasonal again, and it's not as good as last year, it's going to be a very good market. I mean our outlook for the next couple of years is that we think these are going to be 2 of the better years in history in the industry if the purchase holds up.

And there's some uncertainty coming into the first quarter, but we feel pretty good about where we are in total. So I think we have more work to be done, but I feel we're in a good place as we continue to move forward.

That makes sense. That's helpful. I saw the office consolidation costs that you guys called out in the press release. It didn't look like you backed that out of your adjusted numbers. Is there a way to frame up -- was that a meaningful cost? Or any kind of color there?

Yes, it was in the $5 million range. We always look, John, to try to improve the business when we can. And so that's an example. Just get it ready for the longer term in the cycles.

Yes. As you know, when we started, I described it as an inch deep and a mile wide, and we had a lot of stuff in a lot of places. And our whole view is if we can't see clarity to winning at a local market level, we shouldn't really keep investing there. And so again, most of that is behind us, but we still have some work to do in a number of markets to gain us a level of share that I -- that we feel comfortable we can deliver a consistent service and great margins through the cycle. So a little bit of work to do.

Makes sense. Last one, just if I could squeeze in one more. On the reserves, it looks like it came down to maybe 3.9% or so this quarter. Obviously, it was down last quarter as well. So I don't know if you're seeing better trends in the back half, you're feeling better about that. But just give us an idea or a sense of how we should be thinking about that for 2022.

Yes. We've guided mid-4s. I would leave that guidance the same. Maybe it will be a couple of ticks higher than that or a couple of ticks below that, but that mid-4 number, I think, is a solid number. If you remember what happened, during some of the turmoil, we were very thoughtful about reserves. So if you look at where we are on a range, we're at kind of the most conservative point in our range.

So if things happen well, it kind of gets thrown into the earnings because we have been reserving quite strongly, which I think is appropriate given the uncertainty. But the mid-4s is the right -- I mean, I don't -- again, whether it's 2/10ths above that or 2/10ths below that, but it's -- that's the right number still. There's nothing material that we see that would make us take that down.

Our next question comes from Geoffrey Dunn, Dowling & Partners.

I got a few questions here. As you noted, I mean, the outlook is strong for '22, '23, but you are facing seasonality for the first time in a year or 2 with this Q1, and you also got some rate headwinds. Can you give us an idea of how January trended for open and closed? And just remind how you think about a Q1 and a typical year since it seems like we're maybe back to the normal pattern.

Yes. Jeff, it's David here. Yes, I mean, I think we saw continued decline a little bit in January from where we were in December. And then a little bit below January of last year. I think what's really going on, I mean, we've seen, what, since the December Fed meeting through the January Fed meeting, just a tremendous increase in the 10-year and the mortgage rate itself.

And so a month of sort of negative activity there, and we've seen that a little bit on the orders. So -- but purchase continue-- most of that's in refinance, purchase continues to be strong, probably will be at similar levels to last year, if not a little up. But that's generally what's going on. But refinances are getting hit pretty hard.

Yes, and you can see -- well, in the data that's in the release, you see our December open orders. You can see the drop, right? And what's interesting is last year, there was no seasonality. One of the unique things that last year was we didn't see any. And to your point, I think it is back to normal. And so it will be a little choppy probably in the first quarter back where -- returning to what the normal cycle is.

I would also say that early January, we had a bunch of bad weather. And we've also had what was interesting last year is the weather was great across the country. So it didn't have any pickup. So I think it's going to be fine, but it's going to be just -- we're going back to a more seasonal outlook. And that's why I look at the whole year, and I feel really good, as I said. I think it's going to be a fine year, but it's going to be less than last year.

All right. And on that outlook, I mean, if you erase the last 2 years, the forecast from the MBA for '22, '23 seem almost ideal for title, given a strong purchase market. So is success in '22, '23 based on the existing forecast, a double-digit margin for title?

I mean, again, I've said this a couple of times. I think what happens in our business, it was so good last year that your same-store -- basically, you're at 100% capacity and then you have refi on top of it, you use over time. But your marginal margin, if you will, in this industry is quite high when you count what you've had last year. And a lot of people have been hired for that excess volume, they just ran overtime.

That's getting out of the system. So there's a couple of points in margin for everybody in the industry as that comes down. And so again, but we believe we are better, right? We think we managed -- we've positioned ourselves. So we believe we can maintain double-digit margins. That's what we're shooting for.

All right. And just 2 more here. In terms of the MS and corporate segment, can you give us an idea of a bit of the run rates there? It looks like corporate might be like an $8 million to $9 million run rate when you factor in a full quarter of debt expense. And then you got your Informative Research around 15% margin, PropStream at 40%. If I assume that the kind of core MS business is a negligible margin there, is this a double-digit margin on the mortgage services operations once PropStream is integrated?

Yes. So our goal in that area is low double digits, right? So -- and I think we're right on track to do what we need to do to do that. And it's got a combination of a couple of things. One is, to your point, there's a mix thing going on there where we didn't have kind of, I would say, data-type assets and services. And so that mix is enhancing it a little bit. But we're also -- I mentioned last call and a couple of other times, the assembly of all the assets, particularly around appraisal, there was some real important platform work we need to do to get that to where we target kind of returns.

And to -- we wanted to minimize some customer disruption, so we kicked that work into this year. And so it's going to carry forward into this year, but it's all come together nicely. And so I feel very confident that that business is going to be able to be right whatever [did to] year, low double digits and sustain that. So I think we've got a nice business there and it's established and we're right on track for where we want to be.

Okay. And then just 2 number questions. What was holding company cash at year-end? And also, I think there was $5.6 million of purchase price amortization in Q4. What's the full Q1 run rate for PropStream -- including PropStream?

Yes. On the amortization, Geoff, we're still going through all the purchase accounting and stuff. So I think that's probably in the area, but it could go up a little bit with -- once we finish everything. And in terms of holdco cash, I think we are probably in the $50 million to $70 million range.

Our next question comes from Ryan Gilbert of BTIG.

First one is on competition in the title business. I'm just wondering if you had any thoughts around competitive dynamics in the fourth quarter and then what your expectations are for 2022?

Yes, I don't think there's much of a change. What's interesting, I think, when it happened. There is a number of competitors that are very skewed towards refi, around the regional, et cetera. And so there's some actions starting to take that you're going to create opportunities for us, whether it's staffing or resource allocation, stuff like that. So we're getting back to what I would consider a more normal market. And I think the strong players will have some advantage during this time.

And so, again, I'm looking forward to actually -- there's challenges with this transition. But in my view, it's a more normal market where a local market share and kind of your position on the purchase side is going to drive your success. And so I feel pretty good about what's transpiring here.

But again, it's -- the commercial, we've already mentioned, I think the commercial is back from where it was. And so that's a really good market. Again, leading to the larger players with capital and underwriting scale have a huge advantage with that in that world. So again, there's some interesting things, what I would say, is on getting back to a more normal mix market, but still very attractive. And so it lends -- it creates some opportunity, I think, for everybody that's got some size and scale. So, good.

Okay. Got it. That's helpful. Second question on refinance volume, down 30% in the quarter, and it looked like open orders were maybe closer to down 40%. That's, I think, better than on a year-over-year decline rate than what -- certainly what I was expecting, and I think the market is maybe closer to down 60%. So is the -- do you feel like you picked up share in refi in the quarter? Or are there any specific dynamics around refinance that you want to call out that benefited Stewart relative to the market overall?

Yes, I don't -- that's a great question. What's interesting, we have less refi than anybody in the top 6 or 7 competitors. We didn't focus on centralized offering historically. We don't have a lot of the national agents that drive refi. We have some great relationships with great people. But if you looked at the national agents, we're a weak player historically because of some ease-of-use questions that occurred a couple of years ago.

But -- so we -- our mix of refi is more distributed than our competitors. What I mean by that is more in the direct offices and sort of a piece of our business versus with the huge national agents that are dedicated to it or a centralized title. We don't have a big, centralized title operation. And so I think we have -- there might be a lag here for some reason because of that.

I'm not sure we're immune, if you will, to the trends of refi. But it is interesting, and it is a different profile. And because it's less to us, it's a less meaningful change to our revenue stream, but it is an interesting observation because I think you're right. I don't -- I haven't seen all the data reported. But we would anticipate that the market is down in the 50s. And that is what we're planning for, if you will, 50s or so.

And, Fred, we're not as big out in the West Coast or in California. I mean, the other guys are a lot bigger in California, and that's a big refi market.

That's very true.

Okay. Got it. That's really helpful. Last one for me, just a point of clarification. I think you mentioned in response to one of the other questions, there was some uncertainty in 1Q '22. Is that just a function of the increase in mortgage rates that we've seen year-to-date or any other areas of uncertainty?

I think that's the question, right? I mean everybody has anticipated -- all you guys, as you thought through your models -- I mean, everybody has been talking about, we all use -- we all look at the same forecasts. We're very comfortable that this is going to be a pretty good year. But if something happens beyond that because of the inflation because obviously, that would change a little bit. So that's why there's some uncertainty in it. But the rest of it, to me, is kind of what we see is kind of on track to what our views are. So again, we feel like this could be a very good year for us and for the industry, those particularly that are purchase-focused.

That does conclude the question-and-answer session. I'll turn the program back over to Fred for closing remarks.

Again, I want to thank everybody for joining us on our Stewart fourth quarter call. Thank you so much for your interest.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.