For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What RealPage does
RealPage is a software-as-a-service applications provider to apartment communities and single-family housing developments. The company has a portfolio of cloud-based software products that allow apartment communities to automate leasing, renting, management, and accounting activities. It also provides software capable of helping apartments originate and find new leads, as well as optimize rent yields.
In its fourth-quarter report, RealPage saw its revenue jump 20% to $85.7 million while net income rose 43% to $10.2 million over the year-ago period. Looking toward full-year 2013, RealPage anticipates revenue growth of 20% to a mid-point forecast of $386 million, with EPS forecast to be between $0.57 and $0.60.
Whom it competes against
RealPage doesn't have any comparably sized publicly traded competition. The greatest point of concern for any RealPage shareholder has to do with the overall health of the housing market, the trends in rent prices, and the underlying drive of residential real estate investment trusts to drive growth.
In recent months, rental growth trends have slowed as housing prices began to once again creep higher and lending standards relaxed just enough to allow previously locked-out potential buyers the ability to buy a home. According to MPF Research, effective rent growth for new leases grew 2.6% in the first quarter, which is still strong, but down from the 4.8% growth we saw in the fourth quarter of 2011. On the flip-side, apartment vacancy rates are at their lowest levels (4.3%) since 2001.
To get a better idea of how RealPage is doing, it's always best to look at occupancy rates for some of the nation's biggest residential-REITs. In AvalonBay Communities' (AVB 1.61%) most recent quarter, the company reported a 5% increase in revenue attributable to a 4.7% boost in prices in established communities, and a 0.3% uptick in occupancy. For Equity Residential (EQR 2.43%) it was much of the same, with revenue rising 5.4% in the fourth-quarter as occupancy rates rose 40 basis points to 95.4% from the year-ago period. Finally, Essex Property Trust (ESS 1.83%) delivered some of the strongest occupancy results of all, with 96.9% of its units occupied as of the end of January. The point is that with occupancy rates at their lowest levels in more than a decade, these residential REITs are driving growth by boosting prices because of rent scarcity.
After carefully reviewing the prospects for RealPage, I've decided to make a CAPScall of outperform on the company.
Although RealPage's valuation leaves a lot to be desired for a deep-discount value seeker like myself -- it's valued at 34 times the mid-point of this year's EPS estimates -- its cloud-based applications are sitting in the sweet spot of an industry with incredible pricing power.
Looking at the first from a housing inventory perspective, the home buying process may be getting moderately easier as lenders ease their qualifications for a loan. However, inventory levels themselves are at multi-year lows, which is boosting home prices and pushing prospective homebuyers out of the market. This is only going to further push existing renters into "wait-and-see" mode.
From a residential-REIT's point of view, they'd be foolish not to utilize RealPage's rent optimization and automation tools to boost their margins. All three REITs noted above should maintain the ability to boost rental rates so long as vacancy rates remain near their lows, which provides more than ample reason for RealPage's cloud-based software to remain in high demand.