Description

Long RP @ $41.80 / $3.5b mkt cap / $3.4b TEV

RealPage (RP) is a high quality SaaS business operating primarily in the U.S. multifamily real estate industry which is largely split between RealPage and Yardi (private). The company’s solutions help property managers optimize the value of their properties through on demand software solutions that span a range of functions like marketing / pricing / screening / leasing / accounting. The company’s strategy has been to acquire best in class add-ons to the core accounting software, whereby increasing revenue per average on demand unit (RPU) over time.

RP is a compelling long term investment given the market opportunity is largely green field and there isn’t strong competition. RP is already tracking one year ahead of their multi-year roadmap based on the opportunistic M&A they’ve done while sustaining underlying organic growth in the 10-12% yoy range. Based on conversations with property managers and competitors, the multi-family property management market lacks a dominant software solution and RP is best positioned to emerge as the number one player in the space given their best in class end-to-end offerings + open integration with other vendors.

Based on management’s 2020 targets, ($1b in revenues / $300m in EBITDA) stock’s trading at ~12x EBITDA, but the key point is that contribution margins, even in the face of inorganic revenues coming in at subscale levels, is 40%+. This means the business can support EBITDA margins of 40%+ (assuming the contribution margins continue to track north of 40% as M&A is a crucial part of the long term thesis) and I believe the next set of targets will be $2b in revenues @ 40% EBITDA margins five years after achieving 30% EBITDA margins (which will be in 2019). Therefore, based on 2024 EBITDA of $800m @ 18x EBITDA multiple (I choose high teens given RP operates in a duopoly and is a vertical software company that is currently under the radar of larger software investors given the liquidity issues, therefore multiple is likely to expand closer to peers), stock is worth ~$175 / 300%+ upside in 6 years or ~27% annualized return over this timeframe.

The above is the high level thesis for the story and there’s a lot of detail under the covers, like:

• quality of acquisitions they’ve done + multiples paid
• ·       what’s going on with the rental market
• ·       the various levels of RPU you need to underwrite in order to get to $2b in revenues
• ·       market penetration
• ·       how a rising rate environment impacts rentals
• ·       what Yardi is currently doing wrt litigation
• ·       DoJ scrutiny on the space given RP’s roll up strategy
• ·       what CoStar is planning on doing longer term in the multifamily rental market
• ·       tax reform
• ·       logical acquirers of RP

I’m happy to address the above in a follow up post to the extent anyone is interested, but for now given time and resource constraints I have to end the write up here.

Catalyst

• outperformance of 2020 targets
• initiation of new LT targets in a couple years
• stock price appreciation + increased liquidity should lead to more investors willing to look at RP as an investment