[RP] RealPage
In 1998 RealPage Communications, an internet hosting service for the commercial and residential real estate industry, merged with Rent Roll, a provider of property management software, giving birth a few years later to the company’s flagship property management SaaS, OneSite. At a time when property managers were still awkwardly fusing disparate general purpose on-premise systems to meet their needs, OneSite represented a core ERP for property managers to handle back-office accounting, measure property performance, and generate lease documents. Soon after launching OneSite, the company embarked on a flurry of acquisitions, spending nearly twice its free cash flow to cobble together a bundle to meet whatever the lessor’s need wherever in rental cycle: filling vacancies, running background checks on potential renters, pricing units, or collecting payments from renters. Land with OneSite, the property management system that comprises 27% of on-demand revenue; expand with…
Resident Services: 42% – processes lease and utility payments from renters, offers renter’s insurance
Lease Management: 20% – runs a paid lead generation site, operates outsourced contact center services, enables online quoting and lease execution
Asset Optimization: 11% – optimizes pricing, occupancy, and rent collection; provides business intelligence and performance benchmarking…this is the “analytics” piece of the bundle
Bringing a novel on-demand offering to broad acceptance among a stodgy, tech averse set of customers in 2001 required hitting the targeted niche with a comprehensive bundle. But RealPage crossed the chasm long ago and this proscription is far less differentiated at this relatively mature stage of SaaS acceptance among professional commercial property managers. Buying companies, cross-selling modules, and pitching new customers with the promise of an “integrated end-to-end” offering is the oldest play in the enterprise software handbook and a strategy that can and is being replicated by most other competitors in the market. Yardi, a private company founded in the early 1980s, offers a comparable SaaS bundle. So does AppFolio, which has been growing twice as fast as RP on a smaller base while significantly leveraging its sales and marketing costs. And there are competitors, too numerous to name, for each point solution inside RealPage’s bundle – CRM, background checks, internet listing services, data and research, utility billing – most with an acquisition-driven suite-building strategy.
If you follow other acquisitive SaaS companies, the RP bull case will sound familiar: grow the number of housing units covered under RP’s flagship property management solution and cross-sell modules to generate more revenue per unit on a largely fixed cost base, driving persistent margin expansion. Once a client’s resident data and accounting information is contained within RealPage’s system, it makes little sense for that client to defect to a competitive product that doesn’t offer a materially better service…and from what I can tell, all these products are essentially the same. So as you might expect, RealPage’s software is impressively sticky, with retention rates in the high-90s.
The stock trades at over 6x revenue and nearly 40x EBITDA, the market is pricing in a long runway of competitively advantaged growth. Management cites its addressable market opportunity at 44mn rental units, implying that with 12.3mn units, the company has just 28% market share. When you jack up the RPU from $58 today to $247 (which assumes full bundle adoption), the company claims it is only 6% penetrated by revenue. But I think this portrayal of market opportunity is a bit misleading. Let’s start with the unit TAM. The typical RealPage client is a professional property management organization with lots and lots of units under its domain. RealPage has 12,500 clients, including the 10 largest multifamily property management companies, managing 12mn+ units, but with seemingly massive concentration of units in the hands of a small number of clients…around 1/3 of the company’s annual client value comes from clients managing over 20k units, over 2/3 from clients managing over 5,000.