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REIS > SEC Filings for REIS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for REIS, INC.

Form 10-Q for REIS, INC.


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. The primary business of Reis, Inc. and its consolidated subsidiaries, which we refer to as Reis or the Company, is providing commercial real estate market information and analytical tools for its subscribers, 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.

Reis, through its flagship institutional product, Reis SE, and through its small business product, ReisReports, 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 evaluations. Depending on the product, users have access to trend and forecast analysis 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, and equity investors. 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.

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.


As commercial real estate markets have grown in size and complexity, Reis, over the last 32 years, has invested in the areas critical to supporting the information needs of real estate professionals in both the asset market and the space leasing market. In particular, Reis has:

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

invested in the analytical expertise to develop decision support systems around property valuation, 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 and anticipate 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's commercial real estate databases contain 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. The following table lists the number of metropolitan markets for each of the six types of commercial real estate covered by Reis at September 30, 2012:

Number of metropolitan markets:

                     Apartment                           200
                     Retail                              190
                     Office                              190
                     Warehouse/distribution               47
                     Flex/research & development          47
                     Self storage                         30

Reis programmatically expands its property level and market coverage by geography and property type, most recently for the office, self storage, retail shopping centers, warehouse/distribution and flex/research & development sectors. Reis now monitors over 6,600 market areas and segments at September 30, 2012.

Reis entered into an exclusive market data agreement with the Self Storage Association in June 2011 and introduced coverage of the U.S. self storage market in September 2012. This is the sixth major property type for which Reis provides market data and analytics.

In addition to the 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 criteria 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 203 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 the covered markets of our six property types, as well as for hotel transactions.

Products and Services

Reis SE, and the next generation of our flagship product, Reis SE 2.0, available through the web site, serves as a delivery platform for the thousands of reports containing Reis's primary research data and forecasts, as well as a number of analytical tools. Access to Reis SE is by secure password only and can be customized to accommodate the needs of subscribers. For example, the product can be tailored to provide access to all or only selected markets, property types and report combinations. The Reis SE interface has been refined over the past several years to accommodate real estate professionals who need to perform market-based trend analysis, property specific research, comparable property analysis, and valuation and credit analysis estimates at the single property.

On a monthly and quarterly basis, Reis updates thousands of neighborhood and city level reports that cover historical trends and current conditions. In all of the primary markets, five year forecasts are updated quarterly on all key real estate market indicators. Monthly and quarterly updates are supported by property, neighborhood and city data collected during the relevant reporting periods.

Reports are retrievable by street address, property type (apartment, office, retail, warehouse/distribution and flex/research & development) or market/submarket and are available as full color, presentation quality documents or in spreadsheet formats. These reports are used by Reis's subscribers to assist in due diligence and to support commercial real estate transactions, including loan

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originations, underwriting, acquisitions, risk assessment (such as loan loss reserves and impairment analyses), portfolio monitoring and management, asset management, appraisal and market analysis.

Reis also has a product tailored to the needs of smaller enterprises and individuals, professional investors, brokers and appraisers, which we refer to as ReisReports, available at ReisReports utilizes the same proprietary database of information that supports our Reis SE subscribers. Depending on the package chosen by the ReisReports subscriber, a set number of market reports is available on a monthly basis at an affordable price point.

Reis continues to develop new products and applications. In the second quarter of 2012, we launched the next generation of our flagship product, Reis SE 2.0. This major upgrade provides users with more tools and features to better service their transactional and management needs. In September 2012, we initiated coverage on the self storage sector and on 58 additional metropolitan office markets (bringing our total coverage to 190 office markets). For 2013, we intend to add additional markets to our apartment coverage and are considering the feasibility of introducing coverage on an additional property type.

We are also actively seeking to expand our revenue streams through licensing portions of our data to major business information vendors. To date, we have entered into data redistribution relationships with SNL Financial, FactSet, Capital IQ, Thomson Reuters and Bloomberg, and we continue to engage these partners to potentially expand the existing relationships, while seeking to add additional partners.

In the past, Reis has performed ad-hoc portfolio reviews for debt and equity investors. We are developing enhancements to our portfolio analytics products as heightened regulatory scrutiny increases the demand for lenders to monitor the risk profile of their mortgage assets. These enhancements and products are planned for introduction in 2013 and may be developed in conjunction with a strategic partner.

Cost of Service

Reis's data is made available in five primary ways: (1) annual and multi-year subscriptions to Reis SE; (2) capped Reis SE subscriptions allowing subscribers to download a limited retail value of reports; (3) online single report credit card purchases; (4) custom data requests; and (5) subscriptions to ReisReports, charged to a credit card. Annual subscription fees for Reis SE range 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 a twelve month period. Capped subscriptions generally range from $1,000 to $25,000 and allow clients to download a fixed retail value of reports over a twelve month period. Retail prices of individual reports range up to $999 per report and 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 by a subscription or capped subscription account. Custom data deliverables range in price from $1,000 for a specific data element to hundreds of thousands of dollars for custom portfolio valuation and credit analysis. Renewals are negotiated in advance of the expiration of an existing contract. Important factors in determining contract renewal rates include a subscriber's historical and projected report consumption. The monthly retail price for ReisReports is currently $75 or $125 depending on the package chosen by the subscriber; annual pricing options are also available.

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, 2011, which was filed with the Securities and Exchange Commission on March 8, 2012.

Discontinued Operations - Residential Development Activities

Reis was originally formed on January 8, 1997 as Wellsford Real Properties, Inc., which we refer to as Wellsford. Wellsford acquired the Reis Services business by merger in May 2007, which we refer to as the Merger. Wellsford's primary operating activities immediately prior to the Merger, and conducted through its subsidiaries, were the development, construction and sale of its three residential projects and its approximate 23% ownership interest in the Reis Services business. The Company completed the sale of the remaining units at its Colorado project in September 2009, sold its Claverack, New York project in bulk in February 2010 and sold its remaining project in East Lyme, Connecticut in bulk in April 2011.

The Company has determined, as a result of the April 2011 sale of property in East Lyme, Connecticut, that the Residential Development Activities segment, including certain general and administrative costs that supported that segment's operations, should

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be presented as a discontinued operation. As a result of this determination and the fact that the historic operations and cash flows can be clearly distinguished, the operating results of the Residential Development Activities segment and related general and administrative costs are aggregated for separate presentation apart from continuing operating results of the Company in the consolidated financial statements for all periods presented.

On March 13, 2012, in connection with litigation regarding construction defects at the Gold Peak project in Colorado, a jury rendered its verdict, whereby Reis, one of its subsidiaries (Gold Peak at Palomino Park LLC, the developer of the project, which we refer to as GP LLC), two former senior officers of Reis (Jeffrey H. Lynford, who was also previously a director of the Company, and David M. Strong) and the construction manager/general contractor for the project (Tri-Star Construction West, LLC ("Tri-Star")) were found jointly and severally liable for an aggregate of $18,200,000, plus other costs of approximately $756,000. The Company recorded a charge of $14,216,000 during the first quarter of 2012. On June 20, 2012, Reis reached a settlement with the plaintiff, the Gold Peak homeowners association, providing for a total payment by Reis of $17,000,000. Of this amount, $5,000,000 was paid on August 3, 2012 and the remaining $12,000,000 was paid on October 15, 2012, in accordance with the settlement terms. As a result of the settlement, in the second quarter of 2012 the Company reversed $1,956,000 of the previously recorded charge, resulting in the net litigation charge for the nine months ended September 30, 2012 of $12,260,000. For additional information pertaining to the Gold Peak litigation, see Note 11 included in the unaudited financial statements in Item 1 of this quarterly report on Form 10-Q.

Additional Segment Financial Information

See Note 3 of the consolidated financial statements included in this filing for additional information regarding all of the Company's segments.

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, 2011.

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, EBITDA (which is defined as earnings before interest, taxes, depreciation and amortization) and EBITDA margin. Following is a presentation of these historical metrics for the Reis Services business (for a reconciliation of income (loss) 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 see below).

   (amounts in thousands, excluding percentages)
                            For the Three Months Ended
                                   September 30,                              Percentage
                               2012               2011          Increase       Increase
   Revenue                $        7,827        $   6,747      $    1,080            16.0 %
   EBITDA                 $        3,228        $   2,722      $      506            18.6 %
   EBITDA margin                    41.2 %           40.3 %

                             For the Nine Months Ended
                                   September 30,                              Percentage
                               2012               2011          Increase       Increase
   Revenue                $       22,647        $  20,201      $    2,446            12.1 %
   EBITDA                 $        9,219        $   8,089      $    1,130            14.0 %
   EBITDA margin                    40.7 %           40.0 %

                            For the Three Months Ended
                          September 30,         June 30,                      Percentage
                               2012               2012          Increase       Increase
   Revenue                $        7,827        $   7,522      $      305             4.0 %
   EBITDA                 $        3,228        $   3,070      $      158             5.1 %
   EBITDA margin                    41.2 %           40.8 %

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Reis Services's revenue increased by approximately $1,080,000, or 16.0%, from the third quarter of 2011 to the third quarter of 2012 and $2,446,000, or 12.1%, in the nine months ended September 30, 2012 over the comparable 2011 nine month period. The revenue increase over the corresponding prior quarterly period is the tenth consecutively quarterly increase in revenue over the prior year's quarter. In addition, revenue increased by approximately $305,000 or 4.0%, from the second quarter of 2012 to the third quarter of 2012. These revenue increases reflect: (1) incremental new business as the nine months of 2012 produced the highest level of new contract signings in the Company's history (reflected in the growth in the number of Reis SE subscribers from 726 at December 31, 2011 to 828 subscribers at September 30, 2012); (2) revenue growth from our data redistribution initiatives; (3) revenue growth from ReisReports; and (4) the cumulative impact of the increased volume of contract signings in 2011 and through 2012. The Company's overall renewal rate for the trailing twelve months ending September 30, 2012 was 92%, as compared to 93% for the corresponding period in 2011 (for institutional subscribers, the renewal rates were 94% and 95% at September 30, 2012 and 2011, respectively).

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. As a result, in times of favorable pricing, larger consecutive quarter revenue growth occurs in the fourth and first quarters.

Our contract pricing model is based on actual and projected report consumption; we believe it is generally not as susceptible to economic downturns and personnel reductions at our subscribers as a model based upon individual user licenses. We typically impose contractual restrictions limiting our immediate exposure (during existing contract terms) to revenue reductions due to mergers and consolidations. However, we have been, and we may in the future be impacted by consolidation among our subscribers and potential subscribers, or in the event that subscribers enter bankruptcy or otherwise go out of business.

Two additional metrics management utilizes in understanding the business and future performance are deferred revenue and Aggregate Revenue Under Contract. Analyzing these amounts can provide additional insight into Reis Services's 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 September 30, 2012 and 2011, respectively. A comparison of these balances at September 30 of each year is more meaningful than a comparison to the December 31, 2011 balances, as a greater percentage of renewals occur in the fourth quarter of each year and would distort the comparison.

                                                  September 30,                                Percentage
                                              2012              2011           Increase         Increase
Deferred revenue (GAAP basis)             $ 14,435,000      $ 12,368,000      $ 2,067,000             16.7 %
Amounts under non-cancellable
contracts for which the Company does
not yet have the contractual right to
bill at the period end (A)                  13,974,000        12,263,000        1,711,000             14.0 %

Aggregate Revenue Under Contract          $ 28,409,000      $ 24,631,000      $ 3,778,000             15.3 %

(A) Amounts are billable subsequent to September 30 of each year and represent
(i) non-cancellable contracts for subscribers with multi-year subscriptions where the future years are not yet billable, or (ii) subscribers with non-cancellable annual subscriptions with interim billing terms.

Included in Aggregate Revenue Under Contract at September 30, 2012 was approximately $20,711,000 related to amounts under contract for the forward twelve month period through September 30, 2013. The remainder reflects amounts under contract beyond September 30, 2013. The forward twelve month Aggregate Revenue Under Contract amount at September 30, 2012 was approximately 69.9% of revenue on a trailing twelve month basis at September 30, 2012 of approximately $29,626,000. For comparison purposes, at September 30, 2011, the forward twelve month Aggregate Revenue Under Contract amount of $18,508,000 was approximately 70.2% of revenue on a trailing twelve month basis at September 30, 2011. Management believes that this is a strong indicator of revenue visibility and the power of our business model.

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 multiyear; and (3) the impact of recording revenue ratably over the life of a contract, which moderates the effect of price increases after the first year.

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EBITDA for the three months ended September 30, 2012 was $3,228,000, an increase of $506,000, or 18.6%, over the third quarter 2011 amount and increased $1,130,000, or 14.0%, in the nine months ended September 30, 2012 over the comparable 2011 nine month period. On a consecutive quarter basis, EBITDA increased $158,000 or 5.1% in the third quarter 2012 over the second quarter 2012. These EBITDA increases were driven by the revenue growth as described above, offset by increasing employment related costs in 2012 over 2011, the net effect of which improved our EBITDA margins over the prior year periods to 41.2% and 40.7% for the three and nine months ended September 30, 2012, respectively.

Reconciliations of Income from Continuing Operations to EBITDA and Adjusted

EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and stock based compensation. Although EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, senior management uses EBITDA and Adjusted EBITDA to measure operational and management performance. Management believes that EBITDA and Adjusted EBITDA are appropriate metrics that may be used by investors as supplemental financial measures to be considered in addition to the reported GAAP basis financial information to assist investors in evaluating and understanding (1) the performance of the Reis Services segment, the primary business of the Company and (2) the Company's continuing consolidated results, from year to year or period to period, as applicable. Further, these measures provide the reader with the ability to understand our operational performance while isolating non-cash charges, such as depreciation and amortization expenses, as well as other non-operating items, such as interest income, interest expense and income taxes and, in the case of Adjusted EBITDA, isolates non-cash charges for stock based compensation. Management also believes that disclosing EBITDA and Adjusted EBITDA will provide better comparability to other companies in the information services sector. EBITDA and Adjusted EBITDA are presented both for the Reis Services business and on a consolidated basis. We believe that these metrics, for Reis Services, provide the reader with valuable information for evaluating the financial performance of the core Reis Services business, excluding public company costs, and to make assessments about the intrinsic value of that stand-alone business to a potential acquirer. Management primarily monitors and measures its performance, and is compensated, based on the results of the Reis Services business. EBITDA and Adjusted EBITDA, on a consolidated basis, allow the reader to make assessments about the current trading value of the Company's common stock, including expenses related to operating as a public company. However, investors should not consider these measures in isolation or . . .

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