Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.8.0.1
Acquisitions
9 Months Ended
Sep. 30, 2017
Business Combinations [Abstract]  
Acquisitions
Acquisitions
Pending Acquisition Activity
Lease Rent Options
In February 2017, we entered into an agreement (“LRO Purchase Agreement”) to acquire the assets that comprise the multifamily business (“Lease Rent Options” or “LRO”) of The Rainmaker Group Holdings, Inc. (“Rainmaker”). The closing of the proposed acquisition is subject to standard closing conditions, including the completion of the Hart-Scott-Rodino Antitrust Improvements Act review process. The acquisition of LRO will extend our revenue management footprint, augment our repository of real-time lease transaction data, and increase our data science talent and capabilities. We expect the acquisition of LRO to increase the market penetration of our YieldStar Revenue Management solution and drive revenue growth in our other asset optimization solutions.
Pursuant to the LRO Purchase Agreement, consideration will consist of a cash payment at closing of approximately $298.5 million, subject to reduction for outstanding indebtedness, unpaid transaction expenses, and a working capital adjustment; and a deferred cash obligation of up to $1.5 million. The deferred cash obligation serves as security for our benefit against the sellers' indemnification obligations. Subject to any indemnification claims made, the deferred cash obligation will be released approximately twelve months following the acquisition date. We expect to finance this transaction with cash on hand and funds available under our Credit Facility, as defined in Note 6.
In May 2017, the LRO Purchase Agreement was amended to extend the Termination Date, as defined in the LRO Purchase Agreement, to December 31, 2017. In August 2017, a second amendment to the LRO Purchase Agreement was executed (“Second LRO Amendment”) under which RealPage will have the unilateral right to extend the Termination Date beyond December 31, 2017, in the event that the U.S. Department of Justice files a complaint under applicable antitrust laws with respect to the transaction on or before December 31, 2017. Any such extension by RealPage will effectively extend the Termination Date by six months or the earlier of (i) such time as a federal court issues a final non-appealable order or takes any other action permanently restraining, enjoining, or otherwise prohibiting the closing, or otherwise rules that the transaction violates applicable antitrust laws, or (ii) such date as RealPage notifies Rainmaker that it elects to terminate the extension. The Second LRO Amendment further provides that if RealPage does not elect to extend the Termination Date, either party has the right to terminate the LRO Purchase Agreement within 20 days after the U.S. Department of Justice files a complaint under applicable antitrust laws. In the event RealPage elects to extend the Termination Date, RealPage will pay one-half of Rainmaker’s legal and related fees and expenses reasonably incurred, from the date such extension is exercised to the Termination Date, in defending the transaction from any complaint filed pursuant to antitrust laws. If the closing has not occurred by the Termination Date, either RealPage or Rainmaker may, subject to certain limitations, terminate the LRO Purchase Agreement.
Current Acquisition Activity
On-Site
In September 2017, we acquired certain discrete assets of On-Site Manager, Inc. (“On-Site Manager”), including its ownership interest in its majority-owned subsidiary, DepositIQ & RentersIQ Insurance Agency, LLC (“DIQ”) (collectively, “On-Site”). We also acquired the remaining minority interest in DIQ. On-Site is a leasing platform for property managers and renters that assimilates leads from any source and converts them into signed leases for both the multifamily and single family housing industries. The acquisition of On-Site increased the footprint of our screening services and added incremental consumer oriented data that benefits our data analytics solutions. Additionally, we anticipate On-Site will improve the integration of our leasing solutions into other major property management systems.
We acquired On-Site, including the minority interest in DIQ, for an aggregate purchase price of $253.4 million. The purchase price consisted of a cash payment of $226.0 million at closing, net of cash acquired of $3.7 million, and a deferred cash obligation of up to $29.0 million. The fair value of the deferred cash obligation was $27.4 million at the date of acquisition. Subject to any indemnification claims made, the deferred cash obligation will be paid over a period of 36 months, with the majority due approximately twelve months following the acquisition date. This acquisition was financed using cash on hand, which included a portion of the net offering proceeds from the issuance of the Convertible Notes in May 2017.
The acquired identifiable intangible assets consisted of trade names, developed technologies, and client relationships, which will be amortized over estimated useful lives of two, five, and ten years, respectively. Preliminary goodwill recognized of $206.3 million primarily arises from anticipated synergies from leveraging our existing cost structure and integrated sales force. Goodwill and the acquired identified intangible assets arising from the acquisition of On-Site Manager are deductible for tax purposes; those arising from the acquisition of DIQ are not. Acquisition costs associated with this transaction, including those incurred as a result of the Hart-Scott-Rodino Antitrust Improvements Act review process, totaled $1.4 million and were expensed as incurred.
American Utility Management
In June 2017, RealPage acquired substantially all of the assets of American Utility Management (“AUM”), a provider of utility and energy management services for the multifamily housing industry. AUM helps maximize cost recovery, reduces energy usage and expense, and provides the tools operators of rental real estate need to manage their utilities more effectively. Additionally, AUM’s platform includes tools that enable operators to benchmark energy cost and consumption against their peers. The acquired assets will be integrated with our existing resident utility management platform and our data analytics tools.
We acquired AUM for a purchase price of $69.4 million. The purchase price consisted of a cash payment of $64.8 million at closing, net of cash acquired of $0.1 million, and a deferred cash obligation of up to $5.1 million. The fair value of the deferred cash obligation was $4.6 million at the date of acquisition, and is payable over a period of four years following the date of acquisition. This acquisition was financed using cash on hand, which included a portion of the net offering proceeds from the issuance of the Convertible Notes.
The acquired identifiable intangible assets consisted of trade names, developed technology, non-compete agreements, and client relationships, which will be amortized over estimated useful lives of two, three, five, and ten years, respectively. Goodwill recognized of $44.9 million primarily arises from anticipated synergies from integrating the acquired assets with our existing resident utility management system and leveraging the energy cost and consumption benchmarking capabilities and data acquired. Goodwill and the acquired identified intangible assets are deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.3 million and were expensed as incurred.
Subsequent to the acquisition date, management continued to review information relating to events and circumstances that existed at the acquisition date. This review resulted in certain adjustments to the provisional amounts previously recognized. The net effect of these measurement period adjustments resulted in a decrease in goodwill of $0.4 million during the quarter ended September 30, 2017.
Axiometrics LLC
In January 2017, we acquired substantially all of the assets of Axiometrics LLC (“Axiometrics”). Axiometrics provides its customers with timely market intelligence on apartment markets accumulated from survey and research data. Axiometrics also provides tools to analyze the data at an asset level by multiple variables such as asset class, age, and specific competitive floor plans. The acquisition of Axiometrics expanded our multifamily data analytics platform and was integrated with MPF Research, our market research database, to form Data Analytics.
We acquired Axiometrics for a purchase price of $73.8 million. The purchase price consisted of a cash payment of $66.1 million at closing; deferred cash obligations of up to $7.5 million, payable over a period of two years following the date of acquisition; and contingent cash obligations of up to $5.0 million if certain revenue targets are achieved during the twelve-month period ending December 31, 2018. The fair value of the deferred and contingent cash obligations was $6.9 million and $0.8 million, respectively, at the date of acquisition. This acquisition was financed using cash on hand.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names. These intangible assets were assigned estimated useful lives of five, ten, and three years, respectively. We recognized goodwill in the amount of $54.2 million related to this acquisition, which is primarily comprised of anticipated synergies with our existing multifamily data analytics platform. Goodwill and the acquired identified intangible assets are deductible for tax purposes. Acquisition costs associated with this transaction totaled $0.3 million and were expensed as incurred.
We have adjusted our initial purchase price allocation based on management’s ongoing review of information available at the acquisition date. These measurement period adjustments resulted in an increase in goodwill, deferred revenue, and other liabilities of $1.3 million, $0.4 million, and $0.9 million, respectively.
Purchase Price Allocation
The estimated fair values of assets acquired and liabilities assumed presented below are provisional and are based primarily on the information available as of the acquisition dates. We believe that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is awaiting additional information necessary to finalize those values. Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition dates. The preliminary allocation of each purchase price, including the effects of measurement period adjustments recorded as of September 30, 2017, was as follows:
 
Axiometrics
 
AUM
 
On-Site
 
(in thousands)
Restricted cash
$

 
$
5,954

 
$
3,357

Accounts receivable
1,620

 
2,409

 
5,570

Property, equipment, and software
416

 
319

 
4,489

Intangible assets:
 
 
 
 
 
Developed product technologies
15,500

 
10,800

 
14,811

Client relationships
6,830

 
7,470

 
21,230

Trade names
3,200

 
208

 
4,160

Non-compete agreements

 
3,920

 

Goodwill
54,174

 
44,935

 
206,342

Other assets
273

 
1,208

 
276

Accounts payable and accrued liabilities
(367
)
 
(1,156
)
 
(1,348
)
Client deposits held in restricted accounts

 
(6,334
)
 
(3,357
)
Deferred revenue
(7,115
)
 
(321
)
 
(711
)
Other long-term liabilities
(774
)
 

 

Deferred tax liability

 

 
(1,400
)
Total purchase price
$
73,757

 
$
69,412

 
$
253,419


At September 30, 2017, deferred cash obligations related to acquisitions completed in 2017 totaled $41.5 million and were carried net of a discount and indemnified obligations of $2.8 million. The aggregate fair value of contingent cash obligations related to these acquisitions was $0.3 million at September 30, 2017. During the three and nine months ended September 30, 2017, we recognized a gain of $0.3 million and $0.5 million, respectively, due to changes in the fair value of contingent cash obligations related to acquisitions completed in 2017.
2016 Acquisitions
eSupply Systems, LLC
In June 2016, we acquired substantially all of the assets of eSupply Systems, LLC (“eSupply”) and those of certain entities related to eSupply. We have used the acquired assets, which include an e-procurement software and group purchasing service, to augment our Spend Management solutions.
We acquired eSupply for a purchase price of $7.0 million, consisting of a cash payment of $5.5 million at closing and a deferred cash obligation of up to $1.6 million, payable over 18 months after the acquisition date. The fair value of the deferred cash obligation on the date of acquisition was $1.5 million. This acquisition was financed using proceeds from the Term Loan issued in February 2016.
The acquired identified intangible assets primarily consisted of developed technology and client relationships. These intangible assets were assigned estimated useful lives of three and ten years, respectively. We recognized goodwill in the amount of $3.2 million related to this acquisition, which is primarily comprised of anticipated synergies with our existing Spend Management solutions. Goodwill and the acquired identified intangible assets are deductible for tax purposes.
AssetEye, Inc.
In May 2016, we acquired all of the issued and outstanding stock of AssetEye, Inc. (“AssetEye”). AssetEye is a data aggregation, reporting, and collaboration platform for institutions holding multiple real estate asset classes. This solution provides asset and portfolio managers with a solution to evaluate performance, trends, and operations across a portfolio with transparency into property-level data. The acquisition of AssetEye expanded our on demand solutions to serve all asset classes, including: commercial, hospitality, multifamily, single family, senior living, and student housing.
We acquired AssetEye’s issued and outstanding stock for a purchase price of $4.9 million. The purchase price consisted of a cash payment of $3.6 million at closing, net of cash acquired of $0.8 million; deferred cash obligations of $1.0 million, payable over a period of two years following the date of acquisition; contingent cash payments of up to $1.0 million if certain revenue targets are achieved during the three-month period ending September 30, 2017; and additional cash payments of $0.2 million due to former shareholders of AssetEye. The fair value of the deferred and contingent cash obligations was $0.9 million and $0.2 million, respectively, at the date of acquisition. This acquisition was financed with proceeds from the Term Loan issued in February 2016.
The acquired identified intangible assets primarily included developed technology and client relationships having useful lives of five and ten years, respectively. We recognized goodwill in the amount of $3.2 million related to this acquisition, which is primarily comprised of anticipated synergies between the AssetEye solution and our existing complementary solutions as well as our sales and marketing infrastructure. Goodwill and identified intangible assets recognized in connection with this transaction are not deductible for tax purposes.
NWP Services Corporation
In March 2016, we acquired all of the issued and outstanding stock of NWP Services Corporation (“NWP”). NWP provides a full range of utility management services, including: resident billing; payment processing; utility expense management; analytics and reporting; sub-metering and maintenance; and regulatory compliance. The primary products offered by NWP include Utility Logic, Utility Smart, Utility Genius, SmartSource, and NWP Sub-meter. We are primarily integrating NWP into our resident services product family. The integrated platform will enable property owners and managers to increase the collection of rent utilities and energy recovery. Goodwill arising from this acquisition consists of anticipated synergies from the integration of NWP into our existing structure.
We acquired NWP’s issued and outstanding stock for a purchase price of $68.2 million. The purchase price consisted of a cash payment of $59.0 million at closing, net of cash acquired of $0.1 million; deferred cash obligations of $7.2 million, payable over a period of three years following the date of acquisition; and other amounts totaling $3.2 million, consisting of payments to certain employees and former shareholders of NWP. The acquisition-date fair value of the deferred cash obligation was $6.0 million. This acquisition was financed with proceeds from the Term Loan issued in February 2016. Acquisition costs associated with this transaction totaled $0.3 million and were expensed as incurred.
The acquired identified intangible assets were comprised of developed technologies, trade name, and client relationships having useful lives of five, three, and ten years, respectively. Goodwill and identified intangible assets acquired in this business combination, valued at $35.3 million and $16.3 million in our initial purchase price allocation, had carryover tax bases of $0.7 million and $11.0 million, respectively, which are deductible for tax purposes. Goodwill and identified intangible assets recognized in excess of those carryover tax basis amounts are not deductible for tax purposes. Accounts receivable acquired had a gross contractual value of $11.3 million at acquisition, of which $3.4 million was estimated to be uncollectible.
We assigned approximately $10.2 million of value to deferred tax assets in our initial purchase price allocation, consisting primarily of $9.9 million of federal and state net operating losses (“NOL”). This NOL amount reflects the tax benefit from approximately $27.3 million of NOLs we expect to realize after considering various limitations and restrictions on NWP’s pre-acquisition NOLs.
In connection with the acquisition of NWP, we recorded an indemnification asset of $1.2 million, which represents the selling security holders’ obligation under the purchase agreement to indemnify the Company for the outcome of certain accrued obligations. The indemnification asset was recognized on the same basis as the corresponding liability, which is based on its estimated fair value as of the date of acquisition.
Subsequent to the acquisition date, management continued to review information relating to events and circumstances that existed at the acquisition date. This review resulted in measurement period adjustments to the provisional amounts recorded at the acquisition date related to deferred cash obligations paid to the sellers and deferred tax assets associated with the transaction. These measurement period adjustments resulted in a change in goodwill, deferred tax assets, and the deferred cash obligation of $(1.8) million, $1.0 million, and $(0.8) million, respectively, during the fourth quarter of 2016.
Purchase Price Allocation
The allocation of each purchase price was as follows:
 
NWP
 
AssetEye
 
eSupply
 
(in thousands)
Restricted cash
$
4,960

 
$

 
$

Accounts receivable
7,902

 
90

 
287

Property, equipment, and software
3,194

 

 

Intangible assets:
 
 
 
 
 
Developed product technologies
2,740

 
1,638

 
2,160

Client relationships
12,900

 
1,041

 
1,390

Trade names
709

 
6

 
35

Goodwill
33,520

 
3,154

 
3,194

Deferred tax assets, net
11,173

 

 

Other assets, net of other liabilities
3,065

 
8

 
53

Accounts payable and accrued liabilities
(6,962
)
 

 
(44
)
Client deposits held in restricted accounts
(5,018
)
 

 

Deferred revenue

 
(16
)
 
(29
)
Deferred tax liabilities, net

 
(1,010
)
 

Total purchase price
$
68,183

 
$
4,911

 
$
7,046


At September 30, 2017 and December 31, 2016, deferred cash obligations related to acquisitions completed in 2016 totaled $7.3 million and $8.7 million, and were carried net of a discount and indemnified obligations of $2.2 million and $1.2 million, respectively. The aggregate fair value of contingent cash obligations related to these acquisitions was $0.3 million and $0.5 million at September 30, 2017 and December 31, 2016, respectively. During the three and nine months ended September 30, 2017, we recognized a gain of $0.5 million and $0.3 million, respectively, due to changes in the fair value of contingent cash obligations related to these acquisitions. During the same periods in 2016, a loss of $0.1 million was recognized related to these obligations.
We made deferred cash payments of $1.3 million during the nine months ended September 30, 2017, related to these acquisitions. There were no deferred cash payments made during the same period in 2016. During the nine months ended September 30, 2017 and 2016, we made payments totaling $0.1 million and $3.3 million, respectively, related to amounts due to certain employees and former shareholders of the acquired businesses described above.
Acquisition Activity Prior to 2016
At September 30, 2017 and December 31, 2016, the aggregate carrying value of deferred cash obligations related to acquisitions completed prior to 2016 totaled $0.1 million and $6.6 million, respectively. We paid deferred cash obligations related to these acquisitions in the amount of $6.4 million and $5.1 million during the nine months ended September 30, 2017 and 2016, respectively.
No contingent cash obligations remained outstanding at September 30, 2017 related to acquisitions completed prior to 2016. The aggregate carrying value of contingent cash obligations related to these acquisitions was estimated to be zero at December 31, 2016. During the nine months ended September 30, 2017, we paid contingent cash obligations in the amount of $0.7 million related to acquisitions completed prior to 2016. A gain of $0.4 million and $0.8 million was recognized during the three and nine months ended September 30, 2016, respectively, due to changes in the fair value of contingent cash obligations related to these acquisitions. During the nine months ended September 30, 2017, a loss of $0.7 million was recognized related to acquisitions completed prior to 2016.
Pro Forma Results of Acquisitions
The following table presents unaudited pro forma results of operations for the three and nine months ended September 30, 2017 and 2016, as if the aforementioned acquisitions, excluding the proposed LRO acquisition, had occurred at the beginning of each period presented. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax benefit, and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the beginning of the periods presented, or of future results.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
Pro Forma
 
2016
Pro Forma
 
2017
Pro Forma

 
2016
Pro Forma

 
(in thousands, except per share amounts)
Total revenue
$
181,463

 
$
170,455

 
$
537,296

 
$
485,887

Net income
6,650

 
1,753

 
19,191

 
805

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.02

 
$
0.24

 
$
0.01

Diluted
$
0.08

 
$
0.02

 
$
0.23

 
$
0.01