REIS INC REIS
June 01, 2010 - 4:08pm EST by
zach721
2010 2011
Price: 6.30 EPS $0.00 $0.00
Shares Out. (in M): 10 P/E 0.0x 0.0x
Market Cap (in $M): 64 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 57 TEV/EBIT 0.0x 0.0x

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Description

REIS provides proprietary data for commerical real estates transactions, in many ways as a similar business to Bloomberg or Capital IQ, both in terms of their business model and the indispensability of their service to the customer. Their competitive advantage lies in their propriety time series database stretching over 30 years of commercial real estate operational and transaction data, as well as their analytical tools and models. Five parties have high demand for this information: a) the seller B) the buyer C) the lender D) the loan committee/underwriter E) the portfolio manager. REIS is used by mainly by large organizations (GS, BofA, Citi, GE, WSJ, Reuters) including investors with capital at risk in the commercial real estate market, such as banks, REITS, hedge funds, asset managers, insurance companies, and appraisers. Below are some compelling aspects of REIS information services:

 

  • 90% annual client retention rates
  • Model targets 40-50% EBITDA margins (pre-corporate G&A)
  • Price hikes 4-5% annually, and usage + price hike is 8-9% on second year
  • 10% of market cap in net cash
  • Recently repurchased 6.3% of outstanding shares
  • Trades for under 7x 2010 EBITDA versus 12-17x for its peers
  • We estimate REIS has around 15,000 subscribers that pay $1600 a year per sub.
  • EBITDA power of $2 per share in 3-4 years, which we think would put the stock $25-30 range (see below)
  • Insiders own 30% and are focused on realizing value for their stock
  • Fairness opinions have valued the company using discounted cash flow models at levels far exceeding the current price: Lazard valued the business at $13-18 and Houlihan Lokey valued it at $10-12 in 2007 when they became public through a reverse merger (see S-4)
  • REIS rejected an offer from CoStar for $8.75 cash in middle of 2008

 

The business is cheap and undiscovered, despite so many positive qualities, due to a lack of coverage and two business segments which have created a complex story.  REIS was a private company that reverse merged into a public real estate company called Wellsford in 2007.  The resulting company subsequently changed its name to REIS and immediately began to liquidate all real estate assets to become a pure play business information company.  This dual structure has caused a high level of confusion for investors and made their consolidated results look poor, given the turmoil in the market for those with real estate holdings over the past couple years.  However, REIS has made great progress in divesting their real estate holdings, and as of the first quarter, their only major real estate asset left is the ownership of 119 home lots in East Lyme, CT, which is also process of being sold.  Additionally, the company is small, with a relatively illiquid stock and without Wall Street coverage. We think this will change as the company will soon become a pure-play, high-margin services business with resumed growth and several new high margin products. 

 

REIS’ detailed historical and current information and analytical tools/models cover:

 

  • 250,000+ Properties in 1,800+ neighborhoods in 169 metropolitan markets
  • Over 20+ billion square feet covered
  • 7.9 million apartments, 5.4 billion square feet of office space, 4.2 billion square feet of retail space
  • REIS is used by just under 700 organizations with 15,000 users
 

 

The following table shows the revenue and EBITDA (before central G&A) forecasted by management (filed with the SEC, S-4) in 2006 in conjunction with their reverse merger versus actual performance:

 

 

 

 

2006

2007

2008

2009

2010

2011

2012

Management Projections

 

 

 

 

 

 

 

 

 

Revenue

$18,855

$23,880

$28,524

$33,712

$39,220

$44,918

$50,817

 

EBITDA

$6,592

$8,577

$11,600

$15,119

$19,125

$23,470

$27,899

Actual Results

 

 

 

 

 

 

 

 

Revenue

$19,288

$23,668

$25,851

$23,892

 

 

 

 

EBITDA

$6,136

$8,505

$11,541

$10,721

 

 

 

 

 

As you can see, prior to 2009 the company’s performance was impressively close to management projections. Obviously, when there is an 87% peak to trough decline in commercial real estate market transactions and a number of small banks folding (causing REIS customer base to contract from 800 to 670), the 12% decline in revenue while holding 40%+ EBITDA margins does not look so bad.  With that said, REIS is off by about two years from their original projections made in 2006. Therefore we think REIS’ 2010 results will resemble their 2007-2008 projection ($10mn or $1 per share), and 2011 will be between the 2008-2009 estimates ($13mn or $1.30 per share). Given their very high EBITDA margins, reasonable top line growth and forecasted corporate expense savings, the company should generate $3-4mn in additional EBITDA per year which at a 10x multiple should add $3-4 in incremental per share per year.

 

In April 2008, REIS received an $8.75 buyout offer for the company from CoStar (CSGP), one their competitors.  REIS’ CEO commented on the offer: “We have illiquid stock as you know, trading on average just over 7,000 shares a day and therefore the concept of a premium to stock price in our judgment is largely irrelevant, whether you are talking about a 20% premium to stock price or a 97% premium to stock price. Our stock trades very few shares a day and we do not believe it reflects the true value or the prospects of the Company.”

“[In 2006 when we merged with Wellsford] there was tremendous interest in the Company. I think the document discloses that there were 16 bids; there were a number of finalists. And in fact Wellsford stepped into a previously negotiated contract with another bidder. And there were many bidders from both private equity as well as from the strategic arena. So I think it’s instructive for you...all of you...to go back and review that and look at the multiples of EBITDA that were being offered for our Company at that time.”-CEO Aug 08 earnings call

 

The multiples bankers thought were fair given comparable transactions over a number of years were a range from 12-20x EBITDA. We think that 12x REIS services EBITDA is the right number given the number of attractive attributes and the operating leverage in the model which would imply $12-13 per share.  Below are the current trading multiples for Reis and its main publicly traded competitors.


The CEO provided the following comments to shareholders in his April 2009 letter to shareholders: "REIS's stock price continue to be a metric of abiding concern to us. Senior management and our board collectively own approximately 28.5% of REIS's common stock, of which I personally own 10.6% any my co-founder, Jonathan Garfield, owns 7.1%. We believe the company continues to be dramatcially undervalued, and at the current valuation, our stock represents an attractive investment opportunity."


We think the downside is fairly limited $5 and the upside today is $11-12.


Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell at any time without updating the board.






Catalyst

Fog clears with the Sale of East Lyme lots...then pure play business information business and valued more like peers LOOP/CSGP
 
Business is beginning to show slow top line growth
 
Additional Buybacks/Possible Dividend
 
Expanding into new markets/new products see Page 33: in terms of new product direction and growth drivers (licensing data to 3rd parties, direct to consumer launch of reisreports.com, new markets raw land, hotels)
http://files.shareholder.com/downloads/REIS/875489653x0x376624/6d56aa24-7a93-4135-b6e4-bbb2d496134c/Reis%20Presentation%20Slides%20%28final---high%20quality%29.pdf
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    Description

    REIS provides proprietary data for commerical real estates transactions, in many ways as a similar business to Bloomberg or Capital IQ, both in terms of their business model and the indispensability of their service to the customer. Their competitive advantage lies in their propriety time series database stretching over 30 years of commercial real estate operational and transaction data, as well as their analytical tools and models. Five parties have high demand for this information: a) the seller B) the buyer C) the lender D) the loan committee/underwriter E) the portfolio manager. REIS is used by mainly by large organizations (GS, BofA, Citi, GE, WSJ, Reuters) including investors with capital at risk in the commercial real estate market, such as banks, REITS, hedge funds, asset managers, insurance companies, and appraisers. Below are some compelling aspects of REIS information services:

     

    • 90% annual client retention rates
    • Model targets 40-50% EBITDA margins (pre-corporate G&A)
    • Price hikes 4-5% annually, and usage + price hike is 8-9% on second year
    • 10% of market cap in net cash
    • Recently repurchased 6.3% of outstanding shares
    • Trades for under 7x 2010 EBITDA versus 12-17x for its peers
    • We estimate REIS has around 15,000 subscribers that pay $1600 a year per sub.
    • EBITDA power of $2 per share in 3-4 years, which we think would put the stock $25-30 range (see below)
    • Insiders own 30% and are focused on realizing value for their stock
    • Fairness opinions have valued the company using discounted cash flow models at levels far exceeding the current price: Lazard valued the business at $13-18 and Houlihan Lokey valued it at $10-12 in 2007 when they became public through a reverse merger (see S-4)
    • REIS rejected an offer from CoStar for $8.75 cash in middle of 2008

     

    The business is cheap and undiscovered, despite so many positive qualities, due to a lack of coverage and two business segments which have created a complex story.  REIS was a private company that reverse merged into a public real estate company called Wellsford in 2007.  The resulting company subsequently changed its name to REIS and immediately began to liquidate all real estate assets to become a pure play business information company.  This dual structure has caused a high level of confusion for investors and made their consolidated results look poor, given the turmoil in the market for those with real estate holdings over the past couple years.  However, REIS has made great progress in divesting their real estate holdings, and as of the first quarter, their only major real estate asset left is the ownership of 119 home lots in East Lyme, CT, which is also process of being sold.  Additionally, the company is small, with a relatively illiquid stock and without Wall Street coverage. We think this will change as the company will soon become a pure-play, high-margin services business with resumed growth and several new high margin products. 

     

    REIS’ detailed historical and current information and analytical tools/models cover:

     

    • 250,000+ Properties in 1,800+ neighborhoods in 169 metropolitan markets
    • Over 20+ billion square feet covered
    • 7.9 million apartments, 5.4 billion square feet of office space, 4.2 billion square feet of retail space
    • REIS is used by just under 700 organizations with 15,000 users
     

     

    The following table shows the revenue and EBITDA (before central G&A) forecasted by management (filed with the SEC, S-4) in 2006 in conjunction with their reverse merger versus actual performance:

     

     

     

     

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    Management Projections

     

     

     

     

     

     

     

     

     

    Revenue

    $18,855

    $23,880

    $28,524

    $33,712

    $39,220

    $44,918

    $50,817

     

    EBITDA

    $6,592

    $8,577

    $11,600

    $15,119

    $19,125

    $23,470

    $27,899

    Actual Results

     

     

     

     

     

     

     

     

    Revenue

    $19,288

    $23,668

    $25,851

    $23,892

     

     

     

     

    EBITDA

    $6,136

    $8,505

    $11,541

    $10,721

     

     

     

     

     

    As you can see, prior to 2009 the company’s performance was impressively close to management projections. Obviously, when there is an 87% peak to trough decline in commercial real estate market transactions and a number of small banks folding (causing REIS customer base to contract from 800 to 670), the 12% decline in revenue while holding 40%+ EBITDA margins does not look so bad.  With that said, REIS is off by about two years from their original projections made in 2006. Therefore we think REIS’ 2010 results will resemble their 2007-2008 projection ($10mn or $1 per share), and 2011 will be between the 2008-2009 estimates ($13mn or $1.30 per share). Given their very high EBITDA margins, reasonable top line growth and forecasted corporate expense savings, the company should generate $3-4mn in additional EBITDA per year which at a 10x multiple should add $3-4 in incremental per share per year.

     

    In April 2008, REIS received an $8.75 buyout offer for the company from CoStar (CSGP), one their competitors.  REIS’ CEO commented on the offer: “We have illiquid stock as you know, trading on average just over 7,000 shares a day and therefore the concept of a premium to stock price in our judgment is largely irrelevant, whether you are talking about a 20% premium to stock price or a 97% premium to stock price. Our stock trades very few shares a day and we do not believe it reflects the true value or the prospects of the Company.”

    “[In 2006 when we merged with Wellsford] there was tremendous interest in the Company. I think the document discloses that there were 16 bids; there were a number of finalists. And in fact Wellsford stepped into a previously negotiated contract with another bidder. And there were many bidders from both private equity as well as from the strategic arena. So I think it’s instructive for you...all of you...to go back and review that and look at the multiples of EBITDA that were being offered for our Company at that time.”-CEO Aug 08 earnings call

     

    The multiples bankers thought were fair given comparable transactions over a number of years were a range from 12-20x EBITDA. We think that 12x REIS services EBITDA is the right number given the number of attractive attributes and the operating leverage in the model which would imply $12-13 per share.  Below are the current trading multiples for Reis and its main publicly traded competitors.


    The CEO provided the following comments to shareholders in his April 2009 letter to shareholders: "REIS's stock price continue to be a metric of abiding concern to us. Senior management and our board collectively own approximately 28.5% of REIS's common stock, of which I personally own 10.6% any my co-founder, Jonathan Garfield, owns 7.1%. We believe the company continues to be dramatcially undervalued, and at the current valuation, our stock represents an attractive investment opportunity."


    We think the downside is fairly limited $5 and the upside today is $11-12.


    Disclaimer: This does not constitute a recommendation to buy or sell this stock. We own shares in this company, and we may buy or sell at any time without updating the board.






    Catalyst

    Fog clears with the Sale of East Lyme lots...then pure play business information business and valued more like peers LOOP/CSGP
     
    Business is beginning to show slow top line growth
     
    Additional Buybacks/Possible Dividend
     
    Expanding into new markets/new products see Page 33: in terms of new product direction and growth drivers (licensing data to 3rd parties, direct to consumer launch of reisreports.com, new markets raw land, hotels)
    http://files.shareholder.com/downloads/REIS/875489653x0x376624/6d56aa24-7a93-4135-b6e4-bbb2d496134c/Reis%20Presentation%20Slides%20%28final---high%20quality%29.pdf
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