Company Overview: RealPage, Inc. (NASDAQ: RP) is engaged in offering on-demand property management solutions to aid owners and managers of single-family and a wide array of multi-family rental property types to handle their screening, pricing, marketing, leasing, purchasing, accounting, and other property operations. Formed in 1998, the company leverages data to integrate and streamline complex processes. RP’s products include OneSite Solutions, to enhance occupancy and decrease operating expenses via efficient operations.

RP Details

RP Rides on Acquisition Synergies & Higher Investments: RealPage, Inc. (NASDAQ: RP) is one of the leading worldwide providers of software and data analytics to the real estate industry. The company’s data analytics and software solutions assist rental real estate industry to manage property operations for better operational and financial decision-making. Higher adoption of new technology, which is aimed at enhancing operating margins and customer experience, has been ongoing for quite some time now. It is worth noting that the outbreak of the virus, which caused an era of social distancing, needed an almost-overnight shift to virtual operations for the continuity of normal business operations. The need for apartment tours and leasing, lease renewals, rent payments and service requests via online platforms became the most essential requirements. Henceforth, companies like RealPage, which provides on-demand property management solutions, would quickly adapt to such modernizations and are expected to enjoy a competitive edge over others.

In 2020, the company acquired inked an Agreement and Plan of Merger deal with Modern Message Inc. As per the deal, RP will purchase all of the outstanding stock of Modern Message for a purchase consideration of $64.7 million. In 2019, the company completed five acquisitions namely, LeaseTerm Solutions, Hipercept, Simple Bills, IMS and Buildium. It is worth mentioning that, since July 2002, the company has finalized more than 45 acquisitions of complementary technologies to augment its internal product development and sales and marketing efforts to develop the scale of its solutions. The company also remains committed to greater resources to expand and enhance its sales platform of data analytics and on-demand solutions. The company remains on track to pursue further acquisitions of complementary businesses, products, and technologies, in near future.

Total revenues for the years ended December 31, 2019, 2018, and 2017 stood at $988.1 million, $869.5 million, and $671.0 million, respectively. In the same time span, operating income came in at $92.4 million, $66.1 million, and $30.0 million, respectively, and net income of approximately $58.2 million, $34.7 million, and $0.4 million, respectively. In addition, for the same time period, no one client accounted for more than 10% of total revenues. Revenues for the largest client were 6.1%, 5.9%, and 6.2% of total revenues for the periods ended December 31, 2019, 2018, and 2017, respectively. This indicates that the company is well equipped to diversify the sources of revenues as well as decrease the concentration of sales across multiple customers, industries, and products. Going forward, investment in product development and sales and marketing will remain high to benefit from the ever-changing environment of the way renters live and work in a post-COVID world. This in turn positions the company to sustain its long-term growth prospects.

Past Performance (Source: Company Reports)

2QFY20 Key Financial Highlights: During the quarter, the company reported non-GAAP net earnings of $0.49 per share, which increased 14% from the previous corresponding period. Revenues for the quarter came in at $285.6 million, up 17% on a year over year basis, owing to the negligible impact of COVID-19 and higher demand of RP’s solutions. Adjusted EBITDA for the period came in at $79.9 million, an increase of 17% year-over-year. The company’s financial performance remained strong given the current economic backdrop. During the quarter, the company witnessed, non-GAAP on-demand growth of 19%, driven by 18% year over year growth in Property Management, 28% growth in Resident Services, 2% growth in Leasing & Marketing and 15% growth in Asset Optimization. Adjusted gross profit came in at $181.7 million as compared to $153.8 million reported in the year-ago period. Total non-GAAP operating expenditure stood at $106.9 million, up from $90.4 million reported in the year-ago period.

Revenues & EBITDA Highlight (Source: Company Reports)

Other Key Numbers: Annual Client Value (ACV) during the quarter grew at 19% on a year over year basis. Revenue per ending on demand unit (RPU) in 2QFY20 was worth $59.22 as compared to $57.1 in 2QFY19. The company’s on demand property management solution for the small and medium-size (“SMB”) market segment, stood at $424 million in 2QFY20. Revenues from corporate and enterprises came in at $341 million and $353 million, respectively in 2QFY20.

Segment-wise Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Position: The company generated ~$96 million of cash from operating activities in 2QFY20, up from $69.4 million reported in the year-ago quarter. It had $638.6 million of cash, and cash equivalents as of June 30, 2020. Debt at the end of the period amounted to $1,182 million, with debt, net of cash and cash equivalents amounting to $543 million. Capital expenditure at the end of the period stood at $16 million. The available cash can be utilized for investment in growth initiatives, engaging in planned acquisitions, and enhancing shareholder’s value.

Balance Sheet Highlights (Source: Company Reports)

Recent Key Updates:

1. On October 1, 2020, the company informed the market regarding the rebound in the U.S rental apartment leasing in the third quarter. During the time frame from July through September 2020, the occupied apartment count rose by 146,517 units. Also, demand for net leasing volume in the third quarter, increased by 8% year over year. At the end Q3, ongoing construction came in at 583,393 units. Occupancy during the period remained strong.
2. On September 22, 2020, RealPage, Inc. entered into an agreement with Camden℠ Property Trust to deploy RealPage® CommunityConnect Smart Access controls in 50,000 units by 2021 end.
3. On September 14, 2020, RealPage, Inc. unvieled the RealPage® Waste Management Solution, an artificial intelligence-based solution that transforms multifamily waste and recycling management. The latest solution aids property management companies to lessen waste-associated costs while increasing net operating income (NOI) and sustainability without problems. In another update, the company launched CommunityConnect, to accelerate implementation of smart access, and smart apartment devices in the multifamily industry.
4. On August 31, 2020, the company acquired STRATIS IoT, which connects smart apartment systems and devices into a single, easy-to-use resident app. The buyout of STRATIS IoT positions RealPage to enter a growing market for smart access control, smart home devices and innovative new bulk Wi-Fi networks.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 52.74% of the total shareholding. T. Rowe Price Associates, Inc. and The Vanguard Group, Inc. holds the maximum interests in the company at 12.34% and 7.82%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported Jun’20 EBITDA margin at 23.5%, higher than the industry median of 10.3%. Net margin for the same time span stood at 4%, against the industry median of -0.4%. ROE, in Jun’20, stood at 0.8%, against the industry median of -0.2%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: Despite the technology support, the impact of COVID-19 led pandemic is affecting the rent-paying capabilities of residential tenants. Concerns have been rising over the reduced unemployment payments. Further, increasing expenditure due to virus outbreak are potential headwind. For instance, to deal with COVID-19 crisis, the company has made investments to support its business growth, which may require additional funds. This along with acquisition related expenses can weigh on financial performance. RP’s leveraged balance sheet also poses risks with debt of $1,182 million and net debt of $543 million as of June 30, 2020. Company's cash and cash equivalent position amounting to ~$639 million, indicates that the company needs to be more focused towards the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, competition from peers adds to the woes.

Future Expectations: For 3QFY20, the company expects non-GAAP earnings per share to be in the range of $0.43-$0.46. Revenues for 3QFY20 is expected to be in the range of $288-$294 million. Adjusted EBITDA is expected in the ambit of $74-$78 million in 3QFY20. For FY20, the company expects non-GAAP earnings per share to be in the range of $1.77-$1.84. Revenues for FY20 is expected to be in the range of $1,134-$1,154 million. Adjusted EBITDA is expected in the ambit of $300-$380 million in FY20.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of RP closed at $58.79 with a market capitalization of ~$5.99 billion. The stock made a 52-week low and high of $36.91 and $69.79, respectively, and is currently trading above the average of its 52-week trading range. The stock went up ~10.1% in the last six-month period. On a technical analysis front, the stock has a support level of ~$54.85 and a resistance level of ~$65.54. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Northrop Grumman Corp (NYSE: NOC), General CoStar Group Inc (NASDAQ: CSGP), PTC Inc (NASDAQ: PTC), and ANSYS Inc (NASDAQ: ANSS). Hence, we recommend a “Buy” rating on the stock at the closing price of $58.79, up 1.24% on 5 October 2020.

RP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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