Description
Description
REIS Inc (REIS: $6) utilizes a proprietary database to provide commercial real estate market information and analytical tools on a subscription basis to investors, lenders and other interested professionals. Media articles and detailed searches regarding commercial real estate will almost invariably lead to a reference to the Reis Services data.
The company's core REIS services division is highly profitable (08 and ytd '09 ebitda margins above 40%) and is holding revenue relatively flat in a horrendous environment for their end customer. The parent company has no net debt and yet trades at 2/3 of fair public market value and 1/2 of strategic value due largely to the entanglements of a legacy real estate development business, a previously leveraged balance sheet and an excessive corporate overhead burden.
Investment Thesis
Two years after an ill-advised (or certainly, ill-timed) merger into a publicly traded real estate development company and one year after rejecting a hostile approach from a larger competitor at about 50% above the current price and 2X the current ebitda valuation, REIS inc is poised to emerge as a highly profitable core information services provider with a net cash balance sheet and a sizable NOL. As the noise from legacy real estate development activities fades, corporate costs are further reduced and net cash continues to build (or funds aggressive share buybacks) REIS's reported results and strategic value should continue to appreciate. As these improvements become transparent to even the casual observer, we believe the gap between the public market valuation and the strategic value will compress, either through market appreciation or a sale of the company, or hopefully a combination of both! Our sense is that management is increasingly frustrated with the current situation. Fair public market value would be a 50% gain, while reasonable strategic value is a double from current levels. Management concedes that only a strategic transaction is likely to truly maximize value for shareholders given the prospects for eliminating public company costs, residual corporate overhead and redundant divisional costs.
We will not spend any time on the company's real estate assets as they now amount to only $4M of net asset value and a nominal p&l impact, albeit after significant write-downs over the past 12 months.
There is a corporate expense line amounting to almost $5M/year, however, this line is declining due to management initiatives and should take another step down as the real estate operations are fully dismantled. We believe that all of the current corporate expense line could be eliminated in the event of an industry consolidation.
REIS core Reis Services earnings power is obscured by the real estate and corporate expense issues mentioned above and by significant intangibles amortization.
Valuation
At $6, with 11M f.d. shares and no net debt, REIS has a market cap and EV of just $65M. This represents 6X 2009 core REIS services EBITDA ($11M) and a 14% free cash flow yield, defined as (EBITDA-Capex)/EV. On '10, the EBITDA multiple drops to 5X and the free cash flow yield jumps to 17%. ($12M-$2M)/$60M. Capex (mostly capitalized database development) should be about $2M in both years. The company's data-centric, subscription-based model results in very high ROIC. Estimated 2009 EBITA of $10.5M may be achieved on negative net tangible assets. We have not explicitly included any value for the approximately $20M NOL (see Real Estate writedowns and prior operating losses), but the tax shield should produce a substantial cash flow benefit
REIS trades at 85% of 6/30/09 stated book value of $7, however ALL of the stated BV is intangibles and goodwill (none from Real Estate), so tangible book is basically zero. I leave it to the reader to decide if the intangibles or goodwill are impaired, although we clearly think they actually understate intrinsic value.
Strategic Value
We estimate that the entire run rate of $5M of corporate overhead costs could be eliminated in the event of a combination with a host of industry players. A strategic buyer could thus realize the $12M of 2010E core Reis Services EBITDA and consummate a highly accretive deal at 10X ebitda or $11 per REIS share, nearly 2X the current $6 stock price. While management previously rejected a 10X ebitda bid we believe (are hopeful?) that they more realistic in the current environment. We are of course happy to settle for their # if a buyer agrees more with them!
To fully understand REIS it is necessary to split REIS Services, Real Estate and Corporate G&A. Conveniently, management has started including this analysis in the 10Q (in the press release real estate and corp g&a are combined).
Strategic transactions in the data/subscription sector would suggest valuations in the 10-12X ebitda range adding about $24-48M or $2-4/share to the 8X/$9 "public market" valuation target. Management identified the mid-2008 CoStar bid of $8.75 as representing a 10X core ebitda valuation (and as inadequate!). Perhaps they'd like a Mulligan on that one?
Management
REIS's management and directors own almost 30% of the company and continue to insist that the stock is "dramatically undervalued". Beginning in December 2008 the board has approved a series of small, but aggressively implemented, buybacks which have reduced shares outstanding by over 5% (no easy feat given the trading volume, see below).
Despite the Real Estate debacle, or perhaps because of it, management now appears to be disciplined and quite focused on economic valuation creation. I recommend CEO Lloyd Lynford's 2008 letter to shareholders, which clearly (albeit not concisely) articulates management operational and capital allocation strategies.
There are 343k RSU shares and 528k options, of which 320k options have a $10.40 exercise price.
Buyback
In December 2008, REIS authorized a $1.5M share repurchase which accounted for nearly 5% of the market cap at that time. This buyback was expended to an aggregate of $3M on August 27th. On March 17th (194k shares @ $2.63) and again on Sept 8th (360k shares @ $5) the company announced block purchase transactions and had cumulatively repurchased nearly 6% of shares outstanding at around $4.20 per share.
Core Business
The core Reis services segment is built around a proprietary database and an annual subscription model which generates a very high level of recurring revenue. The pricing model is usage based and the total number of reports consumed in 2008 increased although clearly industry transactions declined markedly. As a number of large financial institutions failed, merged or downsized, Reis's growth slowed and renewal rates and pricing power softened although profitability remained strong. In Q1-09, management cited a rebound in report usage, while the Q2-09 conference call specifically cited an improved growth/pricing outlook for 2010.
At yearend 2008, REIS had contracts with 720 companies and derived 75% of contracts revenues from banks, other financial institutions, funds, equity owners and regulators, while 25% came from service providers, including brokers and appraisers. The largest customer accounts for less than 3% of sales.
Risks
The collapse of the commercial real estate transaction market in 2008, demonstrated that Reis is not immune to the extraordinary upheaval which impacted its entire client base.
CoStar - the jilted suitor has since made a small acquisition and has expressed designs on a bigger presence in the subscription date market.
Management may do something utterly silly again, but seems to have religion and there is no more fervent follower than a late convert.
Catalysts
Emergence as a net cash, high margin data services pure play, free of real estate assets and p&l drag.
Improvement in Revenue and EBITDA driven by upticks in renewal rates, contract growth and pricing in 2010.
Strategic process initiated by mgmt, shareholders or strategic players (again).
Catalyst
Emergence as a net cash, high margin data services pure play, free of real estate assets and p&l drag.
Improvement in Revenue and EBITDA driven by upticks in renewal rates, contract growth and pricing in 2010.
Strategic process initiated by mgmt, shareholders or strategic players (again).