Tribe Property Technologies Inc

XTSX:TRBE

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Tribe Properties Technologies Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jennifer Laidlaw, Vice President, Marketing and Communications. Please go ahead.

[Jenn Laidlaw, executive]

Thank you, operator, and good morning, afternoon, everyone. Thank you all for joining us today. On our call, we have Tribe's CEO, Joseph Nakhla; and our CFO and President, Angelo Bartolini.

Yesterday, before market opened, Tribe issued a news release announcing our financial results for our fourth quarter and fiscal year 2023. This news release is available on Tribe's website under the Investor tab and is filed on SEDAR+ profile.

Please note portions of today's call, other than historical performance, includes statements of forward-looking information within the meaning of applicable securities laws. These statements are made under the safe harbor provisions of those laws. Forward-looking statements that are based on management's current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements that is appended to our news release.

Please review our press release and Tribe's reports filed on SEDAR+ for various factors that could cause actual results to differ materially from the projections. We use terms such as gross profit, gross margin, adjusted EBITDA and MRR on this conference call. These are non-IFRS and non-GAAP measures. For more information on how we define these terms, please refer to the definition set out in our management discussion and analysis.

In addition, reconciliations between and the adjusted EBITDA and net income are included in the press release issued yesterday. The company believes that adjusted EBITDA is a meaningful financial metric as it measures cash generated from operations, which the company can use to fund working capital requirements, service future interest and principal debt repayments and fund future growth initiatives. Adjusted EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS.

Please note that all financial information is provided in Canadian dollars, unless otherwise noted. Following the prepared remarks by Joseph and Angelo, we will conduct a Q&A session, during which questions will be taken from analysts. And with that, I'll turn the call over to Tribe's CEO, Joseph Nakhla.

[Joseph Nakhla, executive]

Thank you, Jennifer. It's a pleasure being with all of you today. It's a summary of our Q4 and year-end results of '23. We're quite pleased to point to the fact that we've achieved another record revenue in Q4 and also for the full year of 2023, despite some of the challenges that have been in the market.

We also saw a significant improvement in our adjusted EBITDA year-over-year, approximately 51%, mainly driven by cost reduction optimization, all as indicated in our most previous calls that we're aware of what the market expectation is. And growth at any cost is not something that the Street is interested in, and we completely agree. So we've made some adjustments, as you can see in our EBITDA numbers, and I'll be speaking a little more about that as we go.

Our gross margin improvement is very strong. It's 47% in Q4 compared to 37% in Q4 '22 the year before. The big highlight there, and I'll be speaking a little bit about that later, is some adjustments, apples-to-apples, but we've also made some adjustments to the way we calculate our gross margin just to really give the analysts on the Street a little bit more insight into the quality of the product and services that we have.

We have a strong outlook for 2024. We're pretty darn excited about this year and what it holds for us, a really strong pipeline of M&A. And as those of you that know our story, we're working our way up the pyramid in terms of quality, in terms of size and revenue composition of the M&A companies that we're looking at. And we're fortunate to be in a place where we have the ability with banking relationships that allowed us to make moves like that.

We did, in Q4, complete our acquisition of Meritus Group. We had the benefit of a bit short of a month in terms of its revenue addition to our quarter. I'll hand this over to the next slide about the financials to Angelo who will be walking through it.

Go ahead, Angelo.

[Angelo Bartolini, executive]

Great. Thank you, Joseph. Since joining Tribe, I have been captivated by the immense potential within the business and the trajectory it has in transforming the property management industry. Despite the market challenges, Tribe once again delivered a strong financial performance in Q4 with revenue of $5.1 million, an increase of 8% compared to $4.75 million in Q4 of 2022. Gross margin percentage was 47% in Q4 '23 compared to 37% in Q4 of '22.

Adjusted EBITDA for the quarter of '23 was an outflow of $1.03 million, an improvement of 51% compared to an outflow of $2.08 million in the fourth quarter of 2022. We are very proud of having achieved this 51% improvement in our adjusted EBITDA. Our cost cutting and restructuring measures are having an impact, and we expect more.

Revenue for fiscal 2023 was $19.39 million, an increase of 9% compared to $17.81 million for fiscal '22. The increase in revenue was due to an increase in software and services fee as a result of more properties on the Tribe platform and the acquisition of Meritus. Gross margin percentage was 41% in fiscal '23 compared to 38% in fiscal '22. The increase in gross profit percentage was a result of the addition of service contracts through organic growth and acquisitions and restructuring efforts.

Adjusted EBITDA for fiscal '23 was an outflow of $6.56 million compared to a net flow of $8.18 million for fiscal 2022, an improvement of 20%. The improvement in adjusted EBITDA was achieved as a result of an increase in revenue and cost-cutting efforts. This year, we were fully dedicated to improving profitability by reducing costs and optimizing efficiencies in our operations. Tribe's commitment to achieving profitability is unwavering as strategic steps are being taken every day to position the company for sustainable financial success.

Last quarter, we implemented additional cost reduction strategies, which included employee process improvements, cost optimizations, headcount reduction and consolidation of back office systems. These expense reductions proved to be effective as shown by the company's impressive 51% year-over-year improvement in adjusted EBITDA, and improvement in our gross margins going from 38% in '22 to 41% in fiscal '23. We expect these expense reductions to continue benefiting Tribe's financial performance heading into and throughout 2024.

In summary, Tribe remains in a solid financial position with growing revenue and improving profitability. We remain excited about the company's growth prospects and continue to be committed to improving our profitability, while increasing revenues and strengthening our market leadership. That concludes my financial update.

Back to you, Joseph.

[Joseph Nakhla, executive]

Thank you, Angelo, and thanks to the team for working through the interesting times we've experienced in the last quarter. As I give you a little bit more insight into what the organization has been up to, it's a helpful to give a little bit of a insight into the macroeconomics and the revenue per home, revenue per customer, all those types of key KPIs that we've accustomed the Street to learning more about. We had a great Q4. Our revenue was up 8% year-over-year.

What was really interesting there is also our overall MRR when you look at the graph on the right. You'll see that actually our MRR per community was approximately -- almost $2,500. So this is a monthly recurring revenue per building, which is an improvement of about 9% from Q4 of last year. What's interesting is also we did not include the improvement or the addition of Meritus into this graph.

So that way, we can just compare it without because we only have Meritus for 3 to 4 weeks. What's really helpful for everybody to understand about this is we continue to be able to generate more revenue per customer, due to the service delivery. And as you may have remembered from my last quarterly result, I've indicated that we actually had made some optimization of our revenue break through our customers.

So we essentially identified customers where the revenue mix was not suitable to our service delivery model and wasn't yielding enough gross margin. And that adjustment is -- we'll continue to do that, but it has been that big extent done in Q4. You also see our monthly recurring revenue per home in the table below still very healthy. We're still approximately almost $32 per month per home with transaction revenue still trending in the right direction, yielding about $36.90. Again, this does not include revenue from our latest acquisition, Meritus, which would be added in the next quarter as we look forward in these numbers.

After that, just by way of reminder. We needed to make Meritus for the GTA market in the condo space. You have to be under a rock to not recognize the change of the GTA skyline. And we had been on the periphery of that market. We've been licensing our software to developers there. But we didn't really have a big presence in there, in terms of boots on the ground and licensing to be able to go out and leverage it. So this great acquisition of ours, that we've made Meritus a great company, great leadership. We've added more than 5,000 homes under management. Quite a bit of experience there.

And the great news is here we are a quarter past is that we're starting to get leads into that market that were actually essentially pointing to our service delivery model to enhance the service delivery that Meritus has historically done a great job with. But even give them a bit more of a digital edge, stick to the Street there, and that's starting to yield the results as we speak here in end of Q1.

High level, Q4 update. Obviously, the revenue line has been a record for us. We've added new property developers utilizing all of our software for the efficiency management, warranty management and Tribe management services. We call the holistic sales. This is whereby, with all of our products and services that exist and actually into the hands, into a community and in the hands of a developer. And it often, often, often leads further sales in the future. So we don't usually just sign 1 or 2. This is the stuff that came up in the last quarter.

But usually, we have larger agreements with them to reflect on new construction in the future. We've Tribe Home Pro software. We've added just pure software, added 8 new projects with the hope of winning further management recurring business from them as they're erected and up and running and people move in with them. First, in projects using our platform. These are contracts that we had signed previously, but they're up and running in the quarter and 18 management agreements in what we call new communities to us.

So these are [indiscernible] new agreements with existing buildings that decided to leave their existing service provider and come to us. And 22 communities were onboarded. So this would be agreements that were signed prior to this quarter, but they're not completed or the movement or transition of this building to start generating revenue from, did not happen until a point of Q4.

And for those that would remember how we generate our revenue. We've historically spoken about 3 revenue buckets. We've got software and services, our MRR sticky business through our partnerships with other REITs and/or condo corporation. We have transaction revenues. This is -- we call this like in-app purchases. Essentially, things that are relating to our building and we have digital service on partnerships. Probably our last year, it will be our last quarter presenting it this way.

We're going to be breaking these into 2 big buckets. One will be the software and service recurring revenue and the bottom two are going to come together because of the number of partnerships that we've added, and how the line is getting blurry between transactional revenue, back office revenue. So you'll see us represent that in two big buckets that we'll be reporting on moving forward.

Key goals for '24 will always be in the business of adding more contracts and increasing our MRR revenue, and we feel really good about performance of Q1, and we've got some exciting stuff coming in. Past that, we're going to complete additional acquisitions.

We've made it very clear that acquisition will continue to be a big part of our strategy. The biggest difference is you'll see us move up the acquisition permit with bigger transactions and bigger EBITDA effect on our bottom line. We'll continue to drive efficiencies in the business. We've invested heavily in our back office in bringing all of our accounting systems under one umbrella, and it came with a big investment, a big expense to the company.

But it is really yielding us the ability to be able to be a lot more nimble, move quicker and continue to sustain the growth that we're experiencing. And you also see an increase in our partnership revenues. We continue to identify either efficiencies or opportunities for our buildings to lower their operating costs while generating more revenues for us. And it's kind of the absolute win-win scenario and we'll be a little bit more clear on indicating what some of these projects are in the next quarterly call to kind of illustrate the value to the bottom line on that.

Our outlook for next year. Continue to drive towards profitability. It's not gone missing on us, how important that is to the business. And I think the team has done a wonderful job identifying the opportunities and executed on it. And we've got a long list of areas of -- an initiative that will continue to improve the bottom line.

Interest rates and inflation have, obviously, been a bit of headwind. We haven't really been affected that much. We've been able to navigate through it. At the end of the day, buildings have to be managed with our new buildings as we manage more efficiently. And we will be a little bit more clear in our messaging to the Street in '24 about how well the buildings we're managing are doing compared to buildings that we're not managing, in terms of health and cost per category, per door. That will be a big part of our marketing moving forward.

And we'll continue to execute on our cost savings efforts and we'll improve gross margin and EBITDA in '24. We have a very, very healthy pipeline of proposals. There's no lack of opportunities. We just got to make sure we do the deals that make sense for the business that still delivers that value. Now we are officially a national player with a large, large scale. This large scale allows us to do a significant amount of partnerships and clever solutions that will deliver directly to the bottom line, and we'll be speaking more about that in Q1. And we'll continue to be active with M&A that's a part of our DNA as an organization. That won't be stopping in '24.

I'll pause here and see if there's any questions that anybody would like to ask from the analyst community.

[Operator]

[Operator Instructions] Our first question comes from Kiran Sritharan with Eight Capital.

[Kiran Sritharan, analyst]

Good to see the [ progress ] on profitability. Can you talk about how the new initiatives you enacted should flow through the year? Can you also discuss the hiring plans ahead of the opportunity mid year?

[Joseph Nakhla, executive]

Yes. Thank you for the question. We're basically -- the way we looked at it is we've made almost 11 tuck-in through our history, and to be very specific about the way we integrate these businesses. So obviously, the client-facing side of the business, we put our software in there. We digitize all their activities and kind of change the service delivery to what we believe is a much richer experience. We, obviously, by digitizing these communities, we open up revenue streams that [ were in ] there before.

One of the areas we need a very clear area of focus for us in late '23 and early '24 is bringing all the back office of all these communities. And just to give people a perspective. This probably in the neighborhood of, I would say, approximately between $250 million to $300 million that go through our rail and micro transactions annually, somewhere in that neighborhood. So the reason that's significant is envision all these have to be accounted for, I have to be reported on and accurately and we compare to every single communities budget. This is a mother of an undertaken, obviously, when it comes to AP/AR and all the activities around that.

So the biggest initiative we embarked on last year was not only integrating our front solutions with our back offices, but also amalgamating all of our back office. And I'm talking specifically about accounting, AP/AR, all the solutions that all sit in island in 1 area and 1 place, whereby we can actually generate all these financial right across to all of our customers, regardless support of the geographically.

So that took a massive initial-- -- that was a massive initiative. And I'll be honest, I would say there's nobody in the country that does that. But I would say there's almost nobody in the country that does that. We're definitely pioneering that. And the reason it's relevant is because it really introduces mass efficiency by visibility, not only for our homeowners and our communities, but also for our teams to start seeing in catching trends for some of these buildings based on the amount of utilities. They're using gas or hydro or what have you. So that's a massive initiative.

On the hiring side, I'd like to think our staff has been doing more -- is doing a lot more with a lot more of the technology that we've implemented. We were piloting 3 or 4 initiatives on the technology side that can be really game changers, in terms of allowing us to continue to manage more communities with less people, and allow them to do the more important things versus just basic communication daily. So you'll see as we continue to grow, you're not going to see the graph move the exact same way as it pertains to our hiring staff for '24.

[Kiran Sritharan, analyst]

That's good color, Joseph. And now you called out inorganic priorities. How has the pipeline progressed here? Can you also remind us of a typical target profile?

[Joseph Nakhla, executive]

Yes, fair question. Pipeline is very, very healthy. We're constantly in deep negotiation with transactions. I constantly referred to the visual of a pyramid, if you think of property management companies in Canada and the U.S. Overall, a majority them are tiny, $2 million or less or net neighbor out of recurring business annually, maybe running at about between 5% to 12% EBITDA. But as you work your way up the pyramid, it's less and less companies, obviously. But also the quality improves and the scale that they have and the verticalization because property management aren't all serving the same verticals.

There's multiple verticals that we're very interested in. Government is a big one. [indiscernible] housing is another big one. Even rental looks to the naked eye as one vertical. Actually, it's subcategorized in multiple areas. So for those who know the industry know that as we work our way up the chain, you get better accessibility and solutions on product to service these verticals. These new verticals are ones that were not as deep in. And also, you start seeing opportunity to leverage and the EBITDA profitability that can actually be layered on our direct positive potentially path towards our own profitability as well. So it will just accelerate that. So keep an eye on us. We'll be speaking to these activities as soon as we get them over the line.

[Kiran Sritharan, analyst]

That's helpful. And then finally, I'll take a step back. Can you comment on some of the housing starts and some of the trends you're seeing in this space into this year? And how your progress has been in expanding into some of these new projects?

[Joseph Nakhla, executive]

Yes. For most people aren't as close to the space, probably almost requires a dictionary for people to really understand some of the initiatives of the government's embarking on. So here's my best version of speaking to that. Truth of the matter is we're incredibly short on housing period. This is all categories, not just one category.

And that's rental housing mainly even in the world of condos. So you'll see more verticalization. If anything that's really interesting is places like DC are coming up with some arguably clever solutions to even allow people with single-family homes to get rezoned to quads. A lot of people will have heard about that, in some areas even multiplexes of 6 units.

That's going to be an initiative because none of those can go into the market without being what we call stratified or treated like condos. So I actually think our software solution will be really suitable for that. But on the rental side, where a lot of the noise has been made, I think what's really going to happen is bigger partnerships between the public and private essentially. Then the day the government isn't going to be able to go out there and lead the construction and the development that's required to satisfy the need of the market.

So they're given incentives on creating some opportunities for privates to go in. We're in large conversations with a number of developers on what we call master plan communities whereby the cities come in and saying, look, we need you to build some below market or at market rental communities there. We come in to consult with them. We're seeing quite a bit of activities around that. That obviously doesn't yield revenue for us for a year or 2, depending on the stage of construction, but we're seeing quite a bit of movement there. And I'm -- for the sake of our children, I'm hopeful that a lot of these initiatives will ease some of the pent-up demand. But for the business, there's no doubt that there's never going to be a lack of need on the property management, especially companies that can digitize and can ensure that these buildings are healthier.

[Operator]

[Operator Instructions] The next question is from Suthan Sukumar with Stifel.

[Suthan Sukumar, analyst]

I just wanted to -- first question, I want to touch on things from an organic growth perspective. You guys reported some healthy KPIs to close out the year. Can you provide some color on how these KPIs may have been trending over the quarter?

[Joseph Nakhla, executive]

Suthan, I don't know if it was just my phone or everybody out there -- you broke up a little bit. Was your question regarding how the KPI is trending for the quarter. Did I hear that correctly?

[Suthan Sukumar, analyst]

Correct. Yes. I just wanted to get a sense of how KPIs have been trending year-to-date post Q4.

[Joseph Nakhla, executive]

Got it. Thank you so much. Yes, we think we're going to -- Q1 was healthy from a revenue point of view. We usually experience when we make an acquisition a bit of a dip and a bit of churn in the customer base. I'm pleased to say that the Meritus Group has done a really good job sustaining the business and it seems to be quite a bit of an excitement around the building that we acquired with them -- through them.

Even though we're just cutting our teeth on the full digitization process because it's a bit of an Ontario market, and our technology has to play nice with all the regulation there. So that's going well. New construction seems to be on track. I think sales, due to the interest rates, have dipped a bit, but I do think good products that are being priced properly in the market are there. We have seen a couple of projects that have been hit hard by their inability to complete, whether it's due to a developer having financial struggles or people kind of [indiscernible] on the pricing because it maybe it was overpriced to start with in the market.

But our KPIs, as far as deconstruction onboarding, looked good in Q1 is going to be very strong in Q2. Our gross margins continue to be trending in the right direction. The second bucket of our revenue, that is the higher margin items associated with partnerships and digital services that we'll definitely have had our best quarter ever in history in Q1, and we'll speak more clearly about that when we put our results, and we'll point to the drivers there, but we're quite pleased with that.

And we see amount of opportunity to replicate a lot of these types of solutions that we're taking out to leverage that out to Q1. You'll see that in our revenue per door as it pertains to the transaction revenue side of it. We're just coming out of the big integration project around accounting. I would say that Q1 probably was the most we've arguably spent on getting that project over the line compared to Q4, but it's in the neighborhood.

But the big outcome of that will be a cost reduction that's going to be realized in Q2 and mostly Q3 really when everything normalizes around our revenue or our cost per door that will be trending in the right direction has been, but it will be really trending in the right direction later in the year.

[Suthan Sukumar, analyst]

Okay. Great. I wanted to touch on the Meritus acquisition in terms of how it's setting up Tribe for growth in the Ontario market. Can you talk a little bit about your broader growth strategy here in Ontario? Is it -- do you need to make more organic growth investments here? Or is this really more about consolidating the Ontario market to gain more scale?

[Joseph Nakhla, executive]

Yes, it's a fair question. Look, Ontario has experienced tremendous growth in the last 10 years, and we feel that we're just scratching the surface on our presence there. On the condo side, we've got a couple of offices now that play in that space. We've been [indiscernible] with our technology first. A lot more developers use our technology than they use our holistic solution, which is saying a lot of the buildings that you see in the downtown core being built are used in our technology.

But we hadn't had boots on the ground to secure the recurring business associated with the management, and that's changing. So Meritus has given us that footprint, and we're actually -- we spent quite a bit of Q1, meeting with the developers that we've worked with there or that licensed our technology to let them know about our ability and services. And that's going to yield really well for us in terms of again, as brand-new condo building that we will be fully managing with our technology and our services.

But there is a significant amount of verticalization in the market that we don't play heavy in. And we don't play heavy in institutional rental in Ontario market or the GTA market, and you'll see us make moves there. We don't play at all in the government market, and we think our government housing, which we think is a completely massive opportunity.

And there are very, very, very few companies in our national footprint that can actually deliver to government entities, the security and the opportunity that we can give them. Then you'll see us also be very active in places like student housing or more kind of institutionalized student housing. We like that space a lot. We think there's a big opportunity there. So the quick answer on that is we will be very active in those areas. And you don't need to make multiple acquisitions, sometimes 1 or 2 can actually do the job for you that are the right size with the right leadership.

[Suthan Sukumar, analyst]

Okay. Great. Last question from me, Joe, and Angelo, just on the margins. You guys have made some pretty good progress here on the path to profitability. Can you remind us on what your targets are for gross margins in the medium to long term? And on EBITDA, how do you think about your time line to breakeven? And what are some of the key areas of investment that you still plan to make looking ahead here?

[Joseph Nakhla, executive]

Yes. I'll take those high level and work my way through it. So on the margin, and I referenced that earlier. What we wanted to do is really allow our shareholders on the Street to really understand the composition and the value of our product and revenue streams. And we felt that things that are passed through, there's not a big amount of our revenue, but some of our revenues kind of cloud in that conversation. For example, we have an entity called RDC that really allows a lot of the REITs to manage the employees on site.

They're not really working for us, but they kind of sit there as pass-through items or ancillary services. And they're not a big number of our revenue, but they kind of cloud that. So one of the exercises we did and we saw the impact of that here is we kind of removed that aside. It's not a big amount of revenue for us. It's percent-wise, it's like 7% or 8%. But what we've done is we've taken that out, and we've put that -- put aside and said, "Look, you want to look at our gross margin." Apples-to-apples, we want to be -- we think we can get to between the almost -- about 50% -- 47% to 48%.

I think we can actually hit 50%. I think the increase of our partnership's revenue, which is really high gross margin bucket will really start driving more value there. And you will start seeing signals of that in Q1, but Q2 and Q3 are going to be really telling a very specific story to that. So we should be hitting those. I think a big national player like us, always pulled back every time we make an acquisition because most places aren't operating at the same level of gross margins we are. But generally, we should be aiming for that 50-plus percent.

In terms of initiatives to further improve our gross margins. I mean, the most obvious one I spoke highway about today is, obviously, generating all of our accounting service delivery on one platform through a one platform with one process. That's going to really yield us quite a bit of help. We don't see that yet. We haven't had the benefit of that yet, but the work has been done to get us there. So you'll see the impact of that in Q2 and Q3. It's a pretty obvious place to go. But also our ability to introduce more technology and more digitization in the buildings that manage will also allow us to continue to manage more homes and address more inquiries with less people.

And I think that's a big initiative that we're embarking on. We think AI plays a role there. AI plays currently a role in allowing us to benchmark the performance of our buildings in different categories, which I think is going to open up new opportunities for revenue because it's one thing to say, "Hey, we deliver better service than the company next door." It's another to say, "Look, our building use less administrative -- or have administrative cost or less utility bill than the building next door to it, due to our technology or solutions that we've deployed." And you'll hear us speak more about that in the next quarters.

And as far as EBITDA profile is concerned. We see a direct path to 15% to 20% EBITDA, in a fully big national player, with all the acquisition and integration that we want. We're already starting to get into that into that space. There's only 3 national players that play in the condo space, and we're obviously the youngest and smallest but we're there. And there's only 3 or 4 big national players that play in the rental space. And I would argue really 2, but 3 or 4 claim that, and we're there. So we're taking our rightful place in these places. The difference for us, when we just continue to grow.

[Operator]

This concludes Tribe's Fourth Quarter and Full Year 2023 Results Conference Call. A replay of this conference call will be available on Tribe's website in the coming days. Thank you for attending today's call, and enjoy the rest of your day.