Annual report pursuant to Section 13 and 15(d)

Stock-based Compensation

v2.4.1.9
Stock-based Compensation
12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Compensation
Stock-based Compensation
Our Amended and Restated 1998 Stock Incentive Plan (“Stock Incentive Plan”) provided for awards which could be granted in the form of incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights and performance restricted stock. In August 2010 we discontinued issuance of new awards under the Stock Incentive Plan and concurrently adopted the 2010 Equity Incentive Plan ("Equity Incentive Plan"). The Equity Incentive Plan provides for awards which can be may be granted in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares under substantially the same terms as the Stock Incentive Plan.
We also grant awards to our directors, generally in the form of stock options, in accordance with the Board of Directors Policy (“Board Plan”). The options generally vest immediately and have a four-year term. Should a director leave the board, we have the right to repurchase shares as if the options vested on a pro rata basis.
In connection with our acquisition of Multifamily Technology Solutions, Inc. ("MTS"), on August 24, 2011, we assumed 349,693 non-qualified and incentive stock options granted from MTS’s 2005 Equity Incentive Plan (“MTS Plan”) for 96 employees. Assumed options were converted to equivalent stock-based awards of RealPage based on the ratio of our fair market value of stock to the fair market value of MTS’s stock on the acquisition date. The number of shares and ratio of exercise price to market price were equitably adjusted to preserve the intrinsic value of the award as of immediately prior to the acquisition. The conversion was accounted for as a modification which did not result in an incremental increase in the fair value of the assumed option awards. The majority of assumed options vest over a four-year period at a rate of 25% or 20% after one year and then monthly on a straight-line basis thereafter while others vest ratably over a four-year period. Options granted generally are exercisable up to 10 years. No further options will be granted under the MTS Plan.
Our board of directors periodically approves increases to the number of shares of common stock reserved for issuance under the Equity Incentive Plan. At both December 31, 2014 and 2013, 22,134,259 shares of the Company's common stock were reserved for awards under the Equity Incentive Plan. The exercise of stock options and restricted stock units are fulfilled through the issuance of previously authorized but unissued common stock shares.
Total compensation expense related to our stock-based compensation plans was $37.1 million, $29.7 million and $18.2 million, for the years ended December 31, 2014, 2013, and 2012, respectively. During the years ended December 31, 2014, 2013, and 2012 we recognized a tax benefit of $14.0 million, $11.2 million and $6.8 million, respectively. Total unrecognized compensation expense related to our stock-based compensation plans was $57.1 million at December 31, 2014, and is expected to be recognized over a period of 2.0 years. Cash proceeds related to stock-based compensation transactions totaled $9.9 million, $10.6 million and $12.1 million during the years ended December 31, 2014, 2013, and 2012, respectively.
Stock Option Plan
Stock options granted prior to February 2014 under the generally vest over a period of 16 quarters with 75% vesting ratably over 15 quarters and the remaining 25% vesting in the 16th quarter. Beginning in February 2014, stock options granted generally vest ratably over a period of twelve quarters. Awards under the plan generally expire ten years from the date of the grant. All outstanding options were granted at exercise prices equal to or exceeding our estimate of the fair market value of our common stock at the date of grant.
The following table summarizes stock option transactions under our Stock Incentive Plan, Equity Incentive Plan, Board Plan and MTS Plan:
 
 
Number of
Shares
 
Range of
Exercise
Prices
 
Weighted
Average
Exercise
Price
Balance, January 1, 2012
 
7,292,031

 
$
0.91

$
29.50

 
$
9.95

Granted
 
1,641,470

 
17.67

24.64

 
20.09

Exercised
 
(2,389,704
)
 
0.91

27.18

 
5.05

Forfeited/cancelled
 
(684,154
)
 
0.94

29.50

 
17.04

Expired
 
(1,030
)
 
0.94

27.18

 
2.73

Balance, December 31, 2012
 
5,858,613

 
0.91

29.50

 
13.97

Granted
 
2,421,124

 
19.78

25.70

 
22.20

Exercised
 
(1,556,865
)
 
0.91

25.24

 
6.81

Forfeited/cancelled
 
(800,470
)
 
4.28

29.50

 
18.71

Expired
 
(7,600
)
 
24.03

24.64

 
24.35

Balance, December 31, 2013
 
5,914,802

 
0.91

29.50

 
18.56

Granted
 
1,934,031

 
15.19

21.54

 
17.68

Exercised
 
(907,765
)
 
0.91

21.60

 
10.92

Forfeited/cancelled
 
(1,336,894
)
 
4.28

29.50

 
20.93

Expired
 
(37,286
)
 
19.78

24.64

 
24.02

Balance, December 31, 2014
 
5,566,888

 
0.91

29.50

 
18.89


The below table provides information regarding stock options fully vested and expected to vest outstanding and exercisable at December 31:
 
 
2014
 
2013
 
 
Options Fully Vested and Expected to Vest
 
Options Exercisable
 
Options Fully Vested and Expected to Vest
 
Options Exercisable
Number of options
 
5,545,427

 
2,455,134

 
5,864,340

 
1,984,472

Weighted-average remaining contractual term (in years)
 
7.7

 
6.6

 
7.9

 
6.6

Weighted-average exercise price
 
$
18.88

 
$
17.04

 
$
18.53

 
$
14.42

Aggregate intrinsic value
 
$
22,012

 
$
14,704

 
$
32,023

 
$
18,784


The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $8.5 million, $23.3 million and $42.7 million, respectively.
The fair value of each stock option grant was estimated on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions and resulting weighted-average fair value per share:
 
2014
2013
2012
Risk-free interest rates
1.3%
1.3%
1.0%
Expected option life (in years)
4.4
6.0
6.0
Forfeiture rate
—%
0.9%
0.8%
Dividend yield
—%
—%
—%
Expected volatility
42.8%
48.5%
51.4%
Weighted-average grant date fair value
$6.44
$10.37
$9.78

Risk-free interest rate. This is the average U.S. Treasury rate (having a term that most closely approximates the expected life of the option) for the period in which the option was granted.
Expected life of the options. This is the period of time that the options granted are expected to remain outstanding.
Forfeiture rate. This is the projected annual rate at which we expect awards to be forfeited in the future.
Dividend yield. We have never declared or paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.
Expected volatility. Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We arrived at a volatility rate after considering our expected and historical volatility rates and the volatility rates of publicly traded peers.
Restricted Stock Awards
Restricted stock is an award that entitles the holder to receive shares of our common stock as the award vests. The fair value of each non-market-based restricted stock award is based on the closing common stock price on the date of grant.
Time-based restricted stock awards:
Time-based restricted stock awards granted prior to February 2014 generally vest ratably over 16 quarters following the date of grant. Beginning in February 2014, restricted stock awards granted generally vest over a period of 12 quarters following the grant date. Compensation expense for time-based restricted stock awards is recognized over the vesting period on a straight-line basis.
A summary of time-based restricted stock awards’ activity is presented in the table below.
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Non-vested shares at January 1, 2012
 
998,958

 
$
24.54

Granted
 
1,022,609

 
19.93

Vested
 
(426,675
)
 
23.08

Forfeited/cancelled
 
(233,945
)
 
23.34

Non-vested shares at December 31, 2012
 
1,360,947

 
21.58

Granted
 
1,747,501

 
22.09

Vested
 
(712,434
)
 
21.30

Forfeited/cancelled
 
(305,211
)
 
21.58

Non-vested shares at December 31, 2013
 
2,090,803

 
22.10

Granted
 
1,238,226

 
17.69

Vested
 
(1,101,143
)
 
21.18

Forfeited/cancelled
 
(603,367
)
 
20.36

Non-vested shares at December 31, 2014
 
1,624,519

 
20.01


Performance-based restricted stock awards:
We have also granted certain employees performance-based restricted stock awards. These shares vest dependent upon attainment of various levels of performance that equal or exceed targeted levels and generally vest in their entirety one to two years from the date of grant. Compensation expense for performance-based restricted stock awards is recognized based on the probability of achievement of the performance condition.
A summary of performance-based restricted stock awards’ activity is presented in the table below.
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Non-vested shares at January 1, 2012
 
533,587

 
$
23.39

Granted
 
270,000

 
22.93

Vested
 
(132,791
)
 
12.87

Forfeited/cancelled
 
(395,539
)
 
27.26

Non-vested shares at December 31, 2012
 
275,257

 
22.46

Granted
 
100,000

 
21.60

Vested
 
(31,902
)
 
17.99

Forfeited/cancelled
 
(273,355
)
 
23.40

Non-vested shares at December 31, 2013
 
70,000

 
18.10

Granted
 

 

Vested
 

 

Forfeited/cancelled
 
(70,000
)
 
18.10

Non-vested shares at December 31, 2014
 

 


Market-based restricted stock awards:
During 2014 we granted certain employees market-based restricted stock awards. The shares were issued in two tranches that become eligible for vesting if the average closing price per share of our common stock equals or exceeds an established threshold for each tranche for twenty consecutive days prior to July 1, 2017. The shares vest quarterly over one year following the date they became eligible for vesting and, if then eligible, shall be fully vested on July 1, 2017.
A summary of performance-based restricted stock awards’ activity is presented in the table below.
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Balance at December 31, 2013
 

 
$

Granted
 
520,000

 
11.26

Vested
 

 

Forfeited/cancelled
 

 

Balance at December 31, 2014
 
520,000

 
11.26


We estimate the fair value of market-based restricted stock awards using a discrete model to analyze the fair value of the subject shares. The discrete model utilizes multiple stock price-paths, through the use of Monte Carlo simulation, which are then analyzed to determine the fair value of the subject shares. The awards granted during 2014 were valued using the following assumptions:
Risk-free interest rates
1.1%
Expected volatility
43.6%

Risk-free interest rate. We estimated the risk free rate from the 3-year U.S. Treasury strip note yield curve at the valuation date.
Expected volatility. Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We arrived at a volatility rate after considering our expected and historical volatility rates and the volatility rates of publicly traded peers.
Compensation expense related to market-based restricted stock awards is recognized over the requisite service period on a straight-line basis. The requisite service period is a measure of the expected time to reach the respective vesting threshold. We estimated this period by utilizing a Monte Carlo simulation, considering only those stock price-paths in which the threshold was exceeded. The estimated requisite service period for the market-based restricted stock shares issued in 2014 ranges between twelve and seventeen months.