Altus Group Limited

Welcome to the Altus Group 3rd Quarter 2021 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Kamila Bartasiewicz. Please go ahead.

Thank you, Ariel. Good afternoon, everyone, and welcome to Altus Group's third quarter results conference call and webcast for the period ended September 30th, 2021. The news release announcing our results was issued after market close this afternoon, and it's posted on our website along with our interim MD&A and financial statements. and a press release announcing the signing of the definitive agreement to acquire Reonomy. Joining us today are CEO Mike Gordon and CFO Angelo Bartolini. We'll start with some prepared remarks, and then we'll move right into the Q&A session. If we miss any questions, please contact me directly by email. Angelo will begin by covering off our financial performance during the quarter, and then Mike will provide an operational update and discuss today's announcement regarding the proposed acquisition of Reonomy. Before we get started, please be advised that some of our remarks on this call may contain forward-looking information. Also, please be reminded that Altus uses certain non-GAAP, non-IFRS measures as indicators of financial and operational performance. Forward-looking information and an explanation of these measures are detailed in today's news releases and in our related reports on CEDAR. All of the forward-looking information discussed today is qualified by the cautionary statements included in those reports. I will now turn the call over to Angelo.

Thanks, Camilla, and thank you all for joining us this afternoon. Our solid sales execution and improving operational efficiencies from the changes we made to our go-to-market plans continue to drive strong results, enabling us to deliver better than expected financial results for the third quarter. We're very pleased with our performance, and as we're here today, very excited about the transformational innovation ahead of us enabled by the proposed acquisition of Reonomy. We're making solid progress against our strategic initiatives, which gives us a solid foundation for continued growth over the long term. Turning to our financial results in Q3, I'll discuss our growth rates on an as-reported basis, and where relevant, I'll discuss the constant currency growth rates as well. We're really pleased with the robust growth in our consolidated revenues. up 12.5% to $151.8 million and adjusted EBITDA up 1.5% to $24.4 million. In constant currency, we were up 15.5% and 5% respectively. Altus Analytics delivered very strong results. Revenues were $65 million, up 32% or 38% in constant currency. Organic revenues were up 21% in constant currency. We had double-digit organic growth across all key business lines, software, data solutions, and appraisal management, benefiting from existing customer cross-sell and upsell, and from new customer additions to our platforms. Our organic, constant currency growth is the highest it's been in four years, a solid indicator of the effectiveness of our go-to-market strategies and the strength of the demand for our products and services. Equally impressive Our overtime revenues, our key metric for recurring revenues, were $55.1 million, which in constant currency represented a 38% year-over-year increase, an 18% increase organically, and an 8% sequential increase. We had solid growth across software subscription, data subscriptions, and appraisal management solutions. In addition to the strong overtime revenue growth, Total revenue growth also benefited from higher software consulting revenues, which provides strong indication of the investments companies are making in their technology platforms. Adjusted EBITDA showed strong improvement in the quarter of 22% to $11.7 million, 29% in constant currency. Organic growth was 6% or 13% in constant currency. and adjusted EBITDA margins were 18% and 17.3% for the quarter and year-to-date, respectively. Similar to last quarter, earnings were impacted by a $1 million purchase price accounting adjustment to finance active's deferred revenues, which in turn had a 1% impact to our margins. Our gross retention rates remain the industry-leading range across all our software and data analytics solutions, many of which are considered to be mission critical by our clients. Our customer success team is laser focused on driving positive results to both net and gross retention. By one measure, our AE software maintenance retention rate remains resilient at 95%. Booking's growth continues to trend very strongly, up 89%. in Q3 in constant currency, of which 77% was organic. As you'll hear from Mike shortly, we're making steady progress against our cloud transition plans, all to say the growth engine at Altus Analytics is going strong, and we're really pleased with the solid execution as all the key leading performance indicators on our very positive trajectory. Turning to the CRE consulting segment, our results were on par with the prior year. At property tax, revenues were up 0.5% to $58.5 million, and earnings were up 1% to $22.5 million. As discussed in our business update during the quarter, COVID-related disruptions and appeal settlement delays in the U.S. and in the U.K. caused some revenue variability. This translated to anticipated third quarter revenues to be deferred into future quarters, something we've seen play out before. As a result, revenues in the US and the UK were on par with the prior year on a constant currency basis, with healthy growth in Canada driven by strong performance in Ontario and Alberta. Overall, we're on track to deliver a record revenue and earnings year for property tax in 2021, with growing scale, a robust backlog of appeals, and our ongoing digital improvements. Our performance is becoming more balanced across our key markets to help us mitigate the inherent quarterly variability of this business. Our property tax bookings are up year over year, and as we deliver on our digitization initiatives and go-to-market programs, we remain very well positioned for the long term. As you'll hear from us at the Investor Day, we're positioning the business for the very attractive opportunity ahead of us to become more tech-enabled and operationally efficient. And finally, our valuation and cost advisory businesses continue to deliver steady performance, a solid reflection of their market leadership. Revenues were up 2% to $28.3 million and earnings were $3.9 million. As Camilla mentioned, we also wanted to discuss the proposed acquisition of Reonomy on today's call. which is scheduled to close tomorrow given that today is a bank holiday. Mike will cover off the strategic rationale and I'll spend a couple of minutes now on their financials as we have factored the proposed acquisition into our updated financial guidance for the year. First, this is a very exciting and highly strategic acquisition for us that really propels our data strategy. The synergies are significant in both the revenue and cost side of the equation. The acquisition also immediately improves our overtime revenue profile as we layer on these additional fast-growing recurring revenues. On a trailing 12-month basis to September 30th, their total revenues were $18.3 million. Their annual recurring revenues are expected to be $21 million by year-end and expected to grow to the mid-to-high $20 million range next year. On the earnings front, adjusted EBITDA loss was $16.9 million, also on a TTM basis. The loss largely reflects Reonomy's investment focus on user growth, revenue acceleration, and on platform development. With the anticipated synergies beginning soon after the close of the transaction and into early next year, we expect nominal impact to our earnings for 2022. and we expect Reonomy to be accretive to earnings in 2023. Notwithstanding Reonomy's impact to the Altus Analytics adjusted EBITDA in 2022, we still expect a year-over-year improvement in Altus Analytics EBITDA margins for full year 2022. The purchase price of $201.5 million represents roughly a nine and a half multiple under 2021 ARR. in line with recent comparable transactions in the market and reflects today's environment for scarce, high-growth data and analytics companies. As we think about the value creation potential ahead of us over the next couple of years and how it will fuel growth and enable transformative innovation, we expect the returns from this transaction will be extremely attractive as it will give us an increased position in the CRE data and analytics space. Again, very strategic transaction for us. So factoring in Reonomy, we have increased our full year 2021 consolidated revenue guidance, calling for year-over-year growth in the range of 10.5% to 11.5%. And our adjusted EBITDA guidance, which would have been on the top end of our previous range, has now been adjusted to reflect the impact of Reonomy's losses. A table of our updated financial guidance by business segment is available in our press release or as detailed in our MD&A. With robust financial flexibility, we're well positioned to acquire Reonomy for approximately 250 million Canadian, which will be funded primarily by a combination of cash on hand and in addition to our credit facility of approximately 100 million, with a total of approximately 330 of debt subsequent to the acquisition. We estimate this will bring our funded debt to adjusted EBITDA leverage ratio to approximately three times, still maintaining healthy room to our maximum covenant of four times. We're comfortable being at this level in the near term, as we see a significant deleverage path to the low twos by the end of 2022 through a combination of debt repayments and higher adjusted EBITDA.