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Greenberg: Tearing Into RealPage

By: Herb Greenberg | 02/12/14 - 11:22 AM EST

SAN DIEGO (TheStreet) -- A recurrent theme of Reality Check is keeping an eye on seemingly high-growth acquisitive companies whose growth, in reality, appears to be slowing.

Which is why, when apartment-management software company RealPage (RP) reports fourth-quarter financial results, perhaps as soon as Thursday, the quality of the numbers will be front and center.

For good reason: Quality, or lack thereof, appears to be getting messy.

To understand why, you first need to understand what RealPage does. Its cloud software helps rental housing managers, mostly multi-family, determine pricing so they can maximize revenue -- not much different than the airlines price seats. Or as the company says in its 10-K:

Our solutions enable property owners and managers to increase revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes.

More Than 2 Dozen Deals

Much of its growth has been through acquisitions, with 26 deals since 2002.

Even with all of those deals, however, overall revenue growth has been slowing. In the third quarter it rose 17.8%, down from 23% a year earlier and 40.9% two years ago -- a near peak, of sorts, since the company's 2010 IPO.

As with all acquisitive companies, however, the metric is organic revenue growth -- that is, the growth of the business without acquisitions. At RealPage, organic unit growth is equally important, because the company charges based on the number of units its customers manage.

Both appear to be slowing, though you wouldn't know it just by looking at the headline numbers.

'Accounting Getting Creative'

Dig deeper, and "it looks like their accounting is getting very creative," says Mark Roberts of the independent research firm Off Wall Street. "When that happens it's usually a sign the end is near."

Roberts, whom regular readers might recall from his warnings here on MercadoLibre  (MELI), has been raising concerns about RealPage for two years. He points to a number of accounting issues, including the way RealPage has changed its revenue recognition policy. Notably, a quarter ago the company disclosed that it was shrinking the amount of time it books licensing revenue to three years from four.

The impact of that, and a change in the way it records non-GAAP income, had the appearance of making revenue look greater than it would have been. Ditto for organic growth, which without the out-of-the-blue accounting changes would have resulted in organic growth of just just 15.6%, Roberts says -- well below the company's claim of 20% and its stated growth goal of 20% to 25%.

Amazing Market Opportunity?

That's where this story gets interesting: The story RealPage tells investors is that its market opportunity is nothing short of huge.

Speaking at an investor meeting last summer, Stephen Winn said:

"If you look at the rental housing industry, there are about 43 million rentals in the United States. RealPage currently offers one or more of our products to 8.6 million of those 43 million. If we add up the value of all the products and services that we offer to a rental, it comes up to about $350 for a conventional property and about $150 for an affordable property.

"Today, we're capturing a little over $42 per unit per year in revenue. So we have an opportunity to grow the business north of a $2 billion recurring revenue stream simply by selling all of the products that we currently market into just the customers that we currently enjoy a relationship with."

That's not all: The total addressable market, he says, is "a little less than $10 billion and RealPage's annual contract value, or the run rate of our revenue right now, at the end of the second quarter, was about $365 million."

'Tougher Future Growth'

That's a pretty impressive opportunity. "They paint a picture as if nobody else is doing this," Roberts says. Until you take a closer look, as did Roberts and as did Credit Suisse analyst Michael Nemeroff, who rates RealPage an underperform.

Writing in a report last September, Nemeroff said his firm's proprietary analysis suggests that RealPage "has a 42% share of U.S. multi-family units, which could make future unit growth tougher." At the same time he points out, RealPage's largest competitor, Yardi Systems, reports that it has an almost equal number of units.

In other words, combined they already control 84% of the multi-family market. Such a large concentration, Nemeroff says, "will inhibit . . . organic unit growth for RealPage over the next few years."

The upshot, if he's right, is that RealPage will be forced to run up the down escalator of making more acquisitions of other companies (to get the units they've sold to) to just keep the unit growth at current levels.

Adding insult to injury, Nemeroff says each acquisition makes RealPage "more complicated . . . due to the required technology and operational integration . . . ."

Reality Check: The proof will be in the numbers, and whatever the numbers are they'll likely require a thorough scrub of its 10-K, whenever that's filed.

-- Written by Herb Greenberg in San Diego



Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

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