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REIS > SEC Filings for REIS > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for REIS, INC.

Form 10-Q for REIS, INC.


1-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

Organization and Business

Reis, Inc. is a Maryland corporation. When we refer to "Reis" or the "Company," we are referring to Reis, Inc. and its consolidated subsidiaries. The Company provides commercial real estate market information and analytical tools to real estate professionals, through its Reis Services subsidiary. For disclosure and financial reporting purposes, this business is referred to as the Reis Services segment.

Reis Services

Reis Services, including its predecessors, was founded in 1980. Reis maintains a proprietary database containing detailed information on commercial properties in metropolitan markets and neighborhoods throughout the U.S. The database contains information on apartment, office, retail, warehouse/distribution, flex/research & development and self storage properties, and is used by real estate investors, lenders and other professionals to make informed buying, selling and financing decisions. In addition, Reis data is used by debt and equity investors to assess, quantify and manage the risks of default and loss associated with individual mortgages, properties, portfolios and real estate backed securities. Reis currently provides its information services to many of the nation's leading lending institutions, equity investors, brokers and appraisers.

Product Overview

The Company's product portfolio features: Reis SE, its flagship delivery platform aimed at larger and mid-sized enterprises; ReisReports, aimed at prosumers and smaller enterprises; and Mobiuss Portfolio CRE, or Mobiuss, launched in early 2013 and aimed primarily at risk managers and credit administrators at banks and non-bank lending institutions. It is through these products that Reis provides online access to a proprietary database of commercial real estate information and analytical tools designed to facilitate debt and equity transactions as well as ongoing asset and portfolio evaluations. Depending on the product or level of entitlement, users have access to market trends and forecasts at metropolitan and neighborhood levels throughout the U.S. and/or detailed building-specific information such as rents, vacancy rates, lease terms, property sales, new construction listings and property valuation estimates. Reis's products are designed to meet the demand for timely and accurate information to support the decision-making of property owners, developers, builders, banks and non-bank lenders, equity investors and service providers. These real estate professionals require access to timely information on both the performance and pricing of assets, including detailed data on market transactions, supply, absorption, rents and sale prices. This information is critical to all aspects of valuing assets and financing their acquisition, development and construction.

Operations

As commercial real estate markets grow in size and complexity, Reis continues to invest in the databases, technologies, intellectual capital and personnel critical to supporting the information needs of commercial real estate professionals. Specifically, Reis has:

developed expertise in data collection across multiple markets and property types;

invested in the analytical expertise to develop decision support systems that generate market trends and forecasts, property valuations, credit analytics, transaction support and risk management;

created product development expertise to collect market feedback and translate it into new products and reports; and

invested in a robust technology infrastructure to disseminate these tools to the wide variety of market participants.

These investments have established Reis as a leading provider of commercial real estate information and analytical tools to the investment community. Reis continues to develop and introduce new products, expand and add new markets and data, and find new ways to deliver existing information to meet client demand, as more fully described below under "- Products and Services." The depth and breadth of Reis's data and expertise are critical in allowing Reis to grow its business.


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Proprietary Databases

Reis develops and maintains three highly curated, proprietary databases which include information on property performance, new construction and sales comparables. The significant characteristics of the Reis databases include:

Breadth - coverage of six property types, including apartment, office, retail, warehouse/distribution, flex/research & development and self storage properties;

Geography - national coverage of up to 275 of the largest U.S. metropolitan CRE markets, over 6,800 discrete market areas and segments with submarket boundaries proprietary to Reis;

Depth - captures critical information such as occupancies, rents, rent discounts, tenant improvement allowances, lease terms, expenses, buyer, seller, purchase price, capitalization rate, financing details and other key factors;

History - up to 34 years of data through multiple cycles of economic/market peaks and troughs; and

Frequency - market and submarket reports available monthly or quarterly and sales comparables and new construction information updated on daily and weekly schedules.

The following table lists the number of metropolitan markets for each of the six types of commercial real estate covered by Reis at both March 31, 2014 and December 31, 2013:

                       Apartment                       275
                       Retail                          190
                       Office                          190
                       Warehouse/distribution           47
                       Flex/research & development      47
                       Self storage                     50

Reis programmatically expands its property level and market coverage by geography and property type. On May 1, 2014, Reis introduced coverage on its seventh property type, senior housing/congregate care, in 57 metropolitan markets.

Reis's core property database contains information on competitive, income-producing properties in the U.S. apartment, retail, office, warehouse/distribution, flex/research & development and self storage sectors. On an ongoing basis, Reis surveys and receives data downloads from building owners, leasing agents and managers which include key building performance statistics including, among others: occupancy rates; rents; rent discounts and other concessions; tenant improvement allowances; lease terms; and operating expenses. In addition, Reis processes multiple data sources on commercial real estate, including: public filings databases; tax assessor records; deed transfers; planning boards; and numerous local, regional and national publications and commercial real estate web sites. Reis screens and assembles large volumes of data into integrated supply and demand trends on a monthly basis at the neighborhood (submarket) and metropolitan market levels. All collected data are subjected to a rigorous quality assurance and validation process developed over many years. At the property level, surveyors compare the data collected in the current period with data previously collected on that property and similar properties. If any unusual changes in rents and vacancies are identified, follow-up procedures are performed for verification or clarification of the results. All aggregate market data at the submarket and market levels are also subjected to comprehensive quality controls.

In addition to its core property database, Reis develops and maintains a new construction database that identifies and monitors projects that are being added to our covered markets. Detailed tracking of the supply side of the commercial real estate market is critical to projecting performance changes at the market and submarket levels. This database is updated weekly and reports relevant information such as project size, property type and location for projects that are planned, proposed or under construction.

Reis also maintains a sales comparables database containing transactions in up to 277 metropolitan markets. The database captures key information on each transaction, such as buyer, seller, purchase price, capitalization rate and financing details, where available, for transactions valued at greater than $250,000 in each market we cover, for our six property types, as well as for hotel properties.

Reis's long-standing relationships with thousands of data sources, including building owners, property managers and agents, represent a unique and highly valuable asset that has required decades of investment. The Company is recognized by the industry and the business and trade press as the premier source of objective, timely and granular market information, a reputation attributable to several


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factors: (1) Reis is viewed as independent as it does not compete as a broker in the listings space; and (2) Reis information is used by owners and managers in underwriting, due diligence and marketing packages.

Products and Services

Reis has invested in a robust technology infrastructure to disseminate a number of market information products to meet the demands of a wide variety of commercial real estate market professionals, from a financial institution seeking an integrated commercial real estate portfolio management platform, to a single access user seeking market intelligence through ReisReports. Reis is continually upgrading and expanding its product offering to reach new markets and new types of consumers of commercial real estate information.

Reis SE

Reis SE ("Subscriber Edition"), available at www.reis.com, is the Company's flagship product, designed to assist in market research, due diligence and support of commercial real estate transactions, including loan originations, underwriting, acquisitions, risk assessment (such as loan loss reserves and impairment analyses), portfolio monitoring, asset management and appraisal. Reports are retrievable by street address, property type (apartment, office, retail, warehouse/distribution, flex/research & development and self storage) or on the market/submarket level and are available as full color, presentation quality documents or in spreadsheet formats.

Key features of Reis SE include:

Market Reports - On a monthly basis, Reis provides updated trends and forecasts of rent, vacancy, and inventory for apartment, office, retail, warehouse/distribution, flex/research & development, and self storage property types in up to 275 metropolitan areas and more than 6,800 discrete market areas and segments.

Rent Comparables - Based on a user specified area, Reis supplies property level performance data such as rents and vacancies, as well as comp group summary statistics, including concessions, operating expenses and lease terms.

Sales Comparables - Reis maintains a sales comparables database containing transactions in up to 277 metropolitan areas. The database captures key information on each transaction, such as buyer, seller, purchase price, capitalization rate and financing details, where available, for transactions valued at greater than $250,000, for seven property types including hotel properties.

Single Property Valuation - Designed to help clients better quantify the value and risk associated with their commercial real estate holdings, the valuation module utilizes three valuation methods - discounted cash flow, direct capitalization and sales price per square foot - supported by comparable transactions in the local market.

"First Glance" Reports - Quarterly narrative reports provide an early assessment of the apartment, office, retail and industrial sectors across the U.S. and commentary on new construction activity.

Quarterly Briefings - Two conference calls each quarter attended by hundreds of Reis subscribers, plus members of the media, during which Reis economists provide an overview of the latest high-level findings and forecasts for the commercial real estate space and capital markets.

Real Estate News and Commentary - "Executive Briefings," the Reis "Observer" and news stories selected by Reis analysts from among hundreds of sources to provide news relevant to a particular market and property type.

Email Alerts - Customizable email alerts that let users receive proactive updates on markets of interest.

Access to Reis SE is by secure password and can be customized to accommodate the coverage, property type and analytical needs of subscribers. For example, the product can be tailored to provide access to all or only selected markets, property types and report combinations.


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ReisReports

ReisReports is a product tailored to meet the needs of smaller enterprises and individuals, professional investors, brokers and appraisers, available at www.ReisReports.com. Although providing subscribers with less content and a more limited number of reports, ReisReports utilizes the same proprietary database that supports Reis SE. Depending on the package chosen by the ReisReports subscriber, content is available on a monthly or annual subscription basis at affordable price points.

The addressable subscriber market for ReisReports includes hundreds of thousands of prosumers and small enterprises. To expand the total user base of ReisReports, the Company markets through various traditional and online media channels. Management believes that there is a significant opportunity to market monthly and annual subscriptions to CRE professionals active in individual metropolitan areas.

Mobiuss Portfolio CRE

Launched in the first quarter of 2013 and developed in partnership with Opera Solutions LLC, Mobiuss enables clients to quickly and thoroughly assess portfolio risks and opportunities by integrating client loan and property information with Reis property and submarket data and Opera Solutions' credit analytics. Opera Solutions is a leader in "Big Data" science, predictive analytics and technological innovations. The Company has a multi-year 50% revenue sharing agreement with Opera Solutions for Mobiuss. The solution is delivered in a web-based, visually engaging interface. Mobiuss is targeted to both debt and equity capital providers active in U.S. commercial real estate and, specifically, to banks with significant CRE loan exposure.

As a loan-level analysis and surveillance platform, Mobiuss enables property valuation, credit analysis, stress testing, benchmarking and portfolio pricing. In addition to providing credit default metrics such as expected losses and probabilities of default at the loan and portfolio levels, outputs include forecasted collateral operating incomes and values under multiple economic scenarios. These features allow clients to integrate internal data to create customizable scenario forecasts to meet regulatory stress testing requirements, set loan loss reserves and monitor their collateral.

The Mobiuss platform is intended for both large and small lending institutions, Commercial Mortgage Backed Security, or CMBS, investors and equity investors, among others. Mobiuss has been designed in a modular fashion that allows banks of varying asset sizes to select the applications and price points most appropriate to the scale of their CRE portfolios.

Data Redistribution/ Marketing Alliances

The Company has established data redistribution agreements with information service providers such as Thomson Reuters, Bloomberg and SNL Financial, among others, as part of a strategy designed to raise brand awareness and generate sales leads for Reis's information and services. Over time, third party users may enter into agreements with Reis directly in order to gain access to the full suite of reports and analytical modules. The Company's data redistribution agreements are typically multi-year contracts in length, do not afford access to Reis's proprietary database and provide limited views of Reis's market data. Reis has also established marketing alliances with the Appraisal Institute and the Certified Commercial Investment Member Institute ("CCIM") to promote ReisReports to its memberships through discounts, e-mail outreach, website advertising and newsletter ads.

As an example of a data redistribution arrangement, Bloomberg Professional subscribers have access to Reis's market information at {REIS < GO > } which is also integrated across property and credit valuation tools on Bloomberg's Commercial Mortgage Backed Security (CMBS) product. Bloomberg subscribers can access Reis's proprietary supply, demand and price data for the nation's largest metropolitan apartment, office, retail and industrial markets.

Cost of Service

Reis's data is made available in six ways, with price points that are reflective of the level of content being made available:

annual and multi-year subscriptions to Reis SE ranging in price from $1,000 to over $1,000,000, depending upon the subscriber's line of business and the combination of markets, property types and reports subscribed to, for which the subscriber is typically allowed to download an unlimited number of reports over the subscription period; renewals for Reis SE are negotiated in advance of the expiration of an existing contract based on factors such as a subscriber's historical and projected report consumption;


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annual and multi-year subscriptions to Mobiuss typically ranging in price from the low tens of thousands of dollars into the hundreds of thousands of dollars;

capped Reis SE subscriptions ranging in price from $1,000 to $25,000, allowing clients to download a fixed retail value of reports over a period of up to twelve months;

subscriptions to ReisReports, which are charged to a credit card, having a retail price ranging up to $150 per month (monthly or annual pricing options are available);

custom data deliverables ranging in price from $1,000 for a specific data element to hundreds of thousands of dollars for custom portfolio valuation and credit analysis; and

individual reports, which can be purchased with a credit card, having retail prices up to $999 per report, are available to anyone who visits Reis's retail web site or contacts Reis via telephone, fax or email; however, certain reports are only available with an annual subscription or capped subscription account.

Reis's revenue model is based primarily on annual subscriptions that are paid in accordance with contractual billing terms. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized monthly.

Other Reis Services Information

For additional information on the Reis Services business, refer to the Company's annual report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 6, 2014.

Additional Segment Financial Information

See Note 3 of the Company's consolidated financial statements included in this filing for additional information regarding all of the Company's segments, including Discontinued Operations - Residential Development Activities.

Selected Significant Accounting Policies

For a description of our selected significant accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2013.

Critical Business Metrics of the Reis Services Business

Management considers certain metrics in evaluating the performance of the Reis Services business. These metrics are revenue, revenue growth, EBITDA (which is earnings (defined as income (loss) from continuing operations) before interest, taxes, depreciation and amortization), EBITDA growth and EBITDA margin. Other important metrics that management considers include the cash flow generation of the Reis Services business as well as the visibility into future performance as supported by our deferred revenue and other related metrics discussed in this Item 2.

Following is a presentation of revenue, EBITDA and EBITDA margin for the Reis Services business (see below for a reconciliation of income from continuing operations to EBITDA and Adjusted EBITDA for both the Reis Services segment and on a consolidated basis for each of the periods presented here).


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(amounts in thousands, excluding percentages)

                                           For the Three Months Ended
                                                   March 31,                                                         Percentage
                                          2014                        2013                  Increase                  Increase

Revenue                         $               9,946            $       8,234          $       1,712                      20.8%
EBITDA                          $               4,066            $       3,277          $         789                      24.1%
EBITDA margin                                    40.9%                     39.8%

                                          For the Three Months Ended
                                       March 31,                  December 31,                                       Percentage
                                          2014                        2013                  Increase                  Increase

Revenue                         $               9,946            $       9,209          $         737                       8.0%
EBITDA                          $               4,066            $       3,788          $         278                       7.3%
EBITDA margin                                    40.9%                     41.1%

Reis Services's revenue increased by approximately $1,712,000, or 20.8%, from the first quarter of 2013 to the first quarter of 2014. The revenue increase over the corresponding prior quarterly period is the 16th consecutive quarterly increase in revenue over the prior year's quarter. In addition, revenue increased by approximately $737,000, or 8.0%, from the fourth quarter of 2013 to the first quarter of 2014. In general, these revenue increases reflect:
(1) additional new Reis SE business; (2) revenue growth from ReisReports; and
(3) revenue growth from Mobiuss in the 2014 period. The Company's revenue growth reflects not just a single strong quarter, but also the momentum created by sustained contract growth during 2013 and into the first quarter of 2014. In 2013, the Company had its best booking year and the fourth quarter of 2013 was the best booking quarter in Reis's history. The Company's overall renewal rate was unchanged at 91% for the trailing twelve months ended March 31, 2014 and 2013 (for institutional subscribers, the renewal rates were 93% and 92% at March 31, 2014 and 2013, respectively). Total Reis SE subscribers increased to 1,007 at March 31, 2014 from 994 at December 31, 2013.

Reis's revenue model is based primarily on annual subscriptions that are paid in accordance with contractual billing terms. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized monthly. Therefore, increases in the dollar value of new contracts are spread evenly over the life of a contract, thereby moderating an immediate impact on revenue. Historically, the largest percentage of our contracts are executed in the fourth quarter of each year.

Two additional metrics management utilizes are deferred revenue and Aggregate Revenue Under Contract. Analyzing these amounts can provide additional insight into Reis Services's future financial performance. Deferred revenue, which is a GAAP basis accounting concept and is reported by the Company on the consolidated balance sheet, represents revenue from annual or longer term contracts for which we have billed and/or received payments from our subscribers related to services we will be providing over the remaining contract period. It does not include future revenue under non-cancellable contracts for which we do not yet have the contractual right to bill; this aggregate number we refer to as Aggregate Revenue Under Contract. Deferred revenue will be recognized as revenue ratably over the remaining life of a contract. The following table reconciles deferred revenue to Aggregate Revenue Under Contract at March 31, 2014 and 2013, respectively. A comparison of these balances at March 31 of each year is more meaningful than a comparison to the December 31, 2013 balances, as a greater percentage of renewals occur in the fourth quarter of each year and would distort the analysis.

                                                                          March 31,
                                                              2014                         2013

Deferred revenue (GAAP basis)                         $         19,251,000         $         16,880,000
Amounts under non-cancellable contracts for which
the Company does not yet have the contractual
right to bill at the period end (A)                             20,838,000                   17,575,000

Aggregate Revenue Under Contract                      $         40,089,000         $         34,455,000

(A) Amounts are billable subsequent to March 31 of each year and represent (1) non-cancellable contracts for subscribers with multi-year subscriptions where the future years are not yet billable, or
(2) subscribers with non-cancellable annual subscriptions with interim billing terms.

Included in Aggregate Revenue Under Contract at March 31, 2014 was approximately $27,009,000 related to amounts under contract for the forward twelve month period through March 31, 2015. The remainder reflects amounts under contract beyond March 31, 2015. The forward twelve month Aggregate Revenue Under Contract amount is approximately 74.1% of revenue on a trailing twelve


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month basis at March 31, 2014 of approximately $36,433,000. For comparison purposes, at March 31, 2013, the forward twelve month Aggregate Revenue Under Contract of $23,315,000 was approximately 72.5% of revenue on a trailing twelve month basis at March 31, 2013.

Both deferred revenue and Aggregate Revenue Under Contract are influenced by:
(1) the timing and dollar value of contracts signed and billed; (2) the quantity and timing of contracts that are multi-year; and (3) the impact of recording revenue ratably over the life of a multi-year contract, which moderates the effect of price increases after the first year. Coupled with record new business and contract signings in 2013, the Company continued to sign new multi-year contracts.

EBITDA for the three months ended March 31, 2014 was $4,066,000, an increase of $789,000, or 24.1%, over the first quarter 2013 amount. On a consecutive quarter basis, EBITDA increased $278,000, or 7.3%, from the fourth quarter of 2013 to the first quarter of 2014. These increases were primarily derived from the increases in revenue, as described above. Operating expenses also continued to grow, but at a slower pace than revenue growth, the net effect of which resulted . . .

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