Altus Group Limited (AIF) Earnings Call Transcript & Summary

We'll get started here with the next session. So my name is Paul Treiber. I cover Canadian technology stocks at RBC. So we're pleased to be hosting Altus. And then from Altus, we have CEO, Jim Hannon. So I'd like to welcome him. Thank you.

Thank you.

Altus, for those of you who don't know, is a $2 billion market cap provider of CRE or commercial real estate analytics software and services.

So just before getting to the more specific questions, just if you can provide an intro to your journey to date with Altus, what attracted you to join the company. You've been here for several years. What do you see as the opportunity for Altus going forward?

Absolutely. That went by in a blink, didn't it? So I've been here 3 years now. I came in first with the prior CEO. He asked me to come in as a consultant for him. We have done several companies, public and private. And he asked me to come in and evaluate Altus Analytics for him. And I came in. We had just -- prior to that, we just sold a company. So I came in, gave him an assessment, saw the opportunity. Basically, what -- so I came in as the President of Analytics on December 1, 2020. What I saw as the opportunity there was that I did what you guys do. I ripped through the financials. I went through the margins. I was like this should be operating much more efficiently. Had some thesis about how to do that. In those 2 months, I had the opportunity to basically do due diligence on the company. Great group of people. Saw a massive opportunity between the technology and the blue chip customer base. It was just an awesome opportunity to take tech. And I saw relationships that every other tech firm that I've been at running sales organizations where the ideal position would be to get into that consultative sales position with clients like it's every sales methodology you go through. It's how to get to that trusted adviser place. And Altus has that. So we had that in the VMS business. We had awesome technology that was still very segregated. So lots of models sitting on clients' desktops. So the opportunity to aggregate data on scale, amazing asset-level data on scale and then have that trusted relationship with marquee clients, it was just a formula for success. Had to jump in. And the people were awesome.

And just to back up a bit, in terms of the commercial real estate market, could you speak to like the penetration of data in software to date and why -- generally speaking, it's quite low versus other industries, why that's been? And what do you see as driving an increased penetration going forward?

Yes. So went through this cycle with the banks 10, 12, 13 years ago, where it was looked at as my data is proprietary. It's my secret weapon on how I make better decisions than others. And I'm not going to share it in any type of derivative way or in a consortium-type way. And they were losing the power of global perspective on data. So that's a cultural change, and that's been working its way through commercial real estate. Commercial real estate right now is at the point of how do I organize my data. Like that's kind of the biggest problem that they're struggling with. Before you even get to all the advanced analytics, it's help me organize my data to make core decisions, and that in and of itself is a huge current opportunity for us.

And just switching to some recent news. So last week, you reported Q3 results, but you also announced your largest acquisition of a company called REVS for CAD 310 million. Can you provide some background on the acquisition and then how it fits strategically within Altus?

So it goes back to that marquee client base for the -- the client base is very complementary. So there's not a lot of overlap between our base and the REVS base. Much of the REVS base uses ARGUS Enterprise at the core as most of the industry does. But REVS didn't have the same ability to bring the advanced analytics using all of the derivative data out of ARGUS Enterprise because we own those rights, which our clients have given to us, again, to bring back to them. So we use their data on an anonymized basis but at a mass level. So this opportunity allows us to bring those advanced analytics to the REVS client base where they would have been precluded from getting it prior. And these are the clients who are defining the requirements for advanced analytics. And when we work through this current capital cycle here with interest rates, the REVS clients, our clients are going to be the winners in the number of assets they own. Our clients and REVS clients are going to come back faster than the rest of the industry because of the amount of capital that they have. So huge opportunity for us to consolidate much more data, awesome asset-level data and to bring technology into -- as we've been doing with our own VMS business to drive margin expansion, into that business to drive margin expansion, leveraging technology and then the upsell of the analytics.

I'll get eventually to the data business, but first I wanted to elaborate -- if you could elaborate on the VMS space in general. Can you explain -- I think there's a lot of confusion from investors in terms of like what VMS is, like the core value proposition of VMS and then how technology helps deliver the value to clients.

Sure. So if you [ have ] thousands of assets and you need to get monthly or quarterly or annual valuations done on that, you're going out and -- you have to engage appraisers. You need to validate the work. You need to validate the assumptions. We do that on behalf of clients. So we're not out -- for most clients, except where like it's required for specialty reasons. For the most part, we're not doing the appraisal. So the VMS business is majority U.S. We just had a couple of large clients in Canada, say, who had portfolios in the U.S. that we have to bring this process into Canada. But for the most part, it's a U.S. business, and we don't do the appraisals. The appraisal is lower margin, more price-sensitive work. We manage the entire process. But in managing that process, we're also consolidating the output of that process. Think about all of the exhaust data that goes into evaluation. So we're normalizing the models on behalf of the clients. And then we're going in with analytical insights on performance at a broad level but performance at a very specific asset level. So what's driving net operating income, right? What are the underlying factors that are driving the valuation? What's driving net operating income? What are the characteristics of the assets that are driving alpha? And how do we help you find more assets that look like that? So that's the relationship of the VMS clients. So you can think of it as a really high-tech advisory role. It's effectively a sales role as well because it's not sales. It's a client relationship role that leads to growth, and it's been a huge engine of growth for us.

And can you speak about the macro environment and how it's impacted your business? I think VMS sees bookings variability, but it's a high mix of recurring revenue. It's almost effectively managed services. Could you just speak to any other macro impacts you may have seen as well?

So the macro environment, obviously, you guys are seeing the same headlines, live in the same world we're in. For a lot of commercial real estate, the revenue models are transaction driven. Our revenue models, our base is not driven on transactions. So transactions can fall through the floor. Our revenue model is not going to change. Our growth model is going to change. And so depending on the research report you want to look at, clients are sitting on, at the low end, well north of $100 billion; on the high end, hundreds of billions of dollars of capital that's been raised to be deployed in commercial real estate. And clients are going through a price discovery right now to see where is that floor. At some point, transactions are going to start to flow. And again, it's our clients who are going to be the ones in there acquiring the assets. There's a -- outside of the timing of all of this, there is a huge upside for us because we get paid per asset. So if pricing is coming down, our clients can buy more assets, which is good in our growth model, right? So our future revenue model. If transactions drop, they're still running valuations. So our revenue is very stable even in a down market. The growth has slowed, but it's deferred, not lost.

Switching gears to ARGUS, which is -- that's the former name of ARGUS Enterprise, ARGUS DCF. Is that -- where do you see it in terms of the opportunity with ARGUS? And because you've gone through a number of evolutions. You've now migrated over to the cloud. I think 72% is in the cloud. Is it driving further cloud adoption? Is it trying to expand into international? Is it finding more use cases? Can you speak about ARGUS?

Sure. So there's a couple of pieces of the business that go together. So what -- earlier I said clients are in that data organization phase. So ARGUS is an awesome tool for helping clients manage their assets. So if you have hundreds or thousands of assets across dozens of countries, can normalize the data into ARGUS and then manage your portfolio, your performance of those assets out of that core data structure. The key here then becomes tying all of the data together with other data. So it could be our data. It could be third-party data. It could be insights we have out of the VMS business. It could be from the Tax business. And that is what we've been building for the last 2 years with our acquisition of Reonomy. The acquisition of Reonomy sped up our deployment of what we call the Altus ID. So now you have tens of millions of assets around the world. You have an Altus ID for each of those assets. Our Knowledge Graph, which -- I'm not sure how familiar you guys are with Knowledge Graph, but Knowledge Graph is kind of the data ontology you use to harmonize data and connect data. And then you have the underlying technology to do things like location resolution. Sounds really mundane. It's really hard to do. This building could have 6 different addresses. So you have models out in the world all on this building with their own set of assumptions. And historically, you would have to manually try to figure out, is that the same asset that we're talking about. So Reonomy gave us machine learning, AI to do property resolution, massive opportunity to help our clients organize their data. Now you have the AE data, ARGUS Enterprise data, sitting out in the cloud. Like I said, 11 million models, hundreds of millions of data points. And you connect all that data using the Reonomy Knowledge Graph technology that we have. And you drop it into our StratoDem acquisition technology, which is a machine learning analytics.

And just with the transition to the cloud, what's been the feedback from customers? I mean obviously, I think it's apparent, the benefit to you having data in the cloud. You mentioned upfront that customers view their data as proprietary. Has that mentality shifted?

It is absolutely shifting every single day. So the first advanced analytics offer we put out there, as an example, to prove that the Altus Performance Platform was real and live was our Altus Market Insights Premium. So Premium allows you to, I think, compare NOIs across properties and then identify other properties across different geographies that have the characteristics of those assets that are outperforming. That's just the tip of the iceberg. So we're in the very early innings of what we can do. Not referenceable yet, but one of our -- one of the largest investors in the world just signed on with that last week. They are not referenceable because it's strategic for them. So we're just in the early innings of adoption of the advanced analytics, but those are the clients. Those VMS-type clients are the ones who are helping us define and roll out those analytics. Now back to your core question, taking the ARGUS Enterprise data and tying it to the Knowledge Graph is the first step. That's a big step, and that's the path that we're on, and that's what we're rolling out right now.

And in terms of data, so there are other data providers for the CRE market. How does your data compare versus what's out there? Like is it unique data? Is it complementary? Like do you expect to replace existing vendors? Or is it augmented?

There's -- it's the asset-level data that we're -- at an aggregated level that no one else can bring. So there's the core names that you know. That is high-level portfolio type-level data, very, very aggregated. So you're not going to be figuring out how is this asset performing against all the other opportunities that I have to invest in using most of the current big-name data providers' data. They've got good data on like what was the last transaction, what was the last lease rate for the 14th floor at 340 Madison, right? That data is important to brokers. It's important to owners to figure out what's my next lease going to be. But that data, that kind of rent roll data, it's transactional. It has a shelf life. It's interesting. It ends up in our ARGUS models. But it's -- I think I said this to you last year. That's kind of perishable data. We're at the asset level of what's driving the performance of that asset. How do I improve the performance of that asset? And how do I find other assets that look -- that have these characteristics?

We're mostly focused on the analytics business, but Altus also has several more consulting or services businesses. What are the -- so first of all, how do you data enable those businesses? And then what do you see as the synergies between the CRE consulting businesses with your analytics business?

It all converges. So when you think about -- let's pick the Tax business as an example. The start of a tax appeal process is a valuation, right? So it's not -- it's a very different use case, but it's a valuation. You're going through a valuation methodology. The -- where we're going here is with -- again, with Reonomy that has machine learning, AI, with StratoDem that has machine learning, AI, and then with our tax acquisition from our last acquisition before last week, the acquisition of Rethink and the itamlink platform. itamlink, we're deploying across our Tax business right now, our U.S. Tax business in particular, right, because you had to do some bite-size chunks. So we're changing all of the processes in the U.S. business to run on itamlink, which again is a consolidation of data and analytics. I tell my team all the time, I think we do a disservice calling our Tax business tax because it's an analytics business. We go in. We evaluate an asset. We look at -- depending on the jurisdiction you're in, your tax may be based on your rent roll and may be based on comps. So an entire -- it's an entire analytics process that looks a lot like everything else we do in the analytics business. So we spend a lot of our time on joint deployment. We just named David Ross as our Chief Technology Officer across everything. He was our CIO. David's been with me for, again, 13 years or so in product management and development and CTO roles. He was the CTO of our last company. So David's mandate is now to take that core infrastructure that he just built for the company and tie it into the core architecture that we've been building in analytics for the last 2 years. And that's make our own groups, whether it's tax or VMS, more efficient. So the first deployments of the technology are all about making our people more efficient and more insightful for their clients.

The -- another acquisition that you announced last week is a company in New Zealand called Forbury, which is, I guess, a competitor in Asia Pacific to AE. Can you speak to, I guess, the stickiness of AE? I guess Forbury -- because years ago, you were in Asia Pacific. You left because I guess it was difficult to displace them. What's the international opportunity? Who would you further displace if you continue to grow internationally?

Well, there's the different aspects of the business. So let's start with Forbury is a fantastic company. And in the last -- so I've been here 3 years in that analytics role. Every cycle I went through, what's it going to take to drive ARGUS Enterprise growth in the Australia region, right? And then like through our Singapore offices. And we kept coming back to Forbury is much more fit for purpose for certain markets because ARGUS Enterprise is based on a DCF valuation methodology. ARGUS Enterprise could handle it, but it required significant development. But even on the back of that development, we still have to go in and invest in marketing and sales training. And I can never make the case to make the investment to displace Forbury given all of the other fantastic investment opportunities we had. So when this came up, it gave us a chance to, again, expand beyond the DCF applicable markets of ARGUS Enterprise. And we picked up a fantastic tech team. So the next part of who else do we displace, we're focused on following our clients who are diversifying. So our Canadian and U.S. clients who have significant portfolios in the APAC region. So this gives us more data to support them. It gives us a larger scale to work off of, and it's really a follow the client strategy.

The -- you mentioned when you first came in, you looked at analytics, and you felt it could be more profitable. Margins have expanded over that time. What have been the sources of margin expansion? And where do you see margins going, particularly as the data strategy gets traction?

So the margins, we don't give specific guidance. I think you guys have probably heard me say this. We don't give specific guidance. But the way Pawan and I do capital allocation strategies is we plan around 300 bps of margin expansion in analytics. Last year, I think we did 410. Year-to-date, I think we're at 480. But we're sticking with our 300 because it gives us headroom to make organic investments in areas where we want to expand. So we're keeping a very, very close eye on the markets and the timing of revenue growth. But we also know the backlog we're building and when it goes, we're going to have serious service delivery requirements for our clients that we want to make sure we're prepped to serve them properly. So the margin drivers are, one, that came in and the first thing -- so externally, we don't have a traditional tech P&L. Internally, I do. And the first thing we did is went through just basic expense-to-revenue ratios. And the ratios were off across the P&L line item. So R&D as a percentage of revenue, sales as a percentage of revenue, marketing. So early last year -- I put this motion in '21 when I got to the company, but we put the -- we call it our 2025 TOM, target operating model, and we've been shifting our investments over the last 2 planning cycles to get there. We're pretty close to our end state of what we want our investments per line item to be. So that was part 1. Part 2 was we had to just eliminate all of these different software versions that we have in platforms and get to platform economics, get to what cloud companies have been doing for 20 years, which we were just behind on. And we've caught up. So there's significant value there, not only in rationalizing the investment but also just driving the focus on market requirements and product requirements, building it once, building it at scale. And that's what we've done with the Altus Performance Platform. The third part of rationalizing that portfolio was we gave the -- before I got here, the clients had a long runway to move to cloud. And that was suppressing margins significantly because you're supporting all these other versions. So we gave them the incentives to move. And then we said, okay, it's time to start raising maintenance pricing, right? So you give all sorts of upfront pricing drivers to get there, and then you go, but we're going to also raise maintenance pricing and start squeezing down the entitlements that you get with maintenance. And that's also helped us with margins.

I just want to open up to the audience. I don't know if there's any questions.

Sorry, Paul. One last thing. So the next step in margin expansion, why we're very comfortable with the 300 is because of this Altus Performance Platform technology that we have and taking it across everything, whether it's the Tax business, so the CRE services business, as you talked about, but our VMS incremental contribution margin. So every incremental dollar of VMS revenue falls through to the bottom line in what looks exactly like data and analytics P&Ls that I've been running for a long time. So that's the contribution margin leverage of that business, which then goes back to the rationalization on the acquisition. That is highly tech-enabled, highly valued by our clients business, which is why we're focused there. And it gives us more runway for margin expansion.

And do you also see that in the CRE consulting businesses where there is operating leverage as they become more data enabled?

Absolutely, particularly the Tax business. And there's -- different jurisdictions have different reasons for it. In the U.S., you're dealing with so many jurisdictions. If you're not heavily leveraging tax, you're just going to keep creating people processes everywhere, which doesn't scale. So we're doing 2 things there. Back to we're deploying itamlink in the U.S. And at the same time, as we've been investing to grow that business, we're investing in our global service center in India. So that does 2 things for us. One, it gives us an awesome talent pool to go attract folks into Altus. There's a wage arbitrage piece to that, which helps drive margin expansion. But most importantly, as we're moving to the [ GSC ] and deploying itamlink, it's a catalyst for us to review all of the processes and find the operational efficiencies in those processes.

Just -- we have just under 3 minutes left. There's a couple of rapid-fire questions that we're asking everyone at the end. This is really short. Just on macro, are trends getting better, stabilizing, worse?

Probably better for your banking clients. I think you guys answered your question. We are in 20 -- so this is by no means a broad economic indicator. In the beginning of 2021, coming out of COVID, what we saw right in that moment was clients putting investments into their core infrastructure to drive better operating decisions, and we're seeing more of those opportunities. We just -- in Q3, we had a big win with a major investor that you guys know right in that space. So asset performance is where they're hunkering down, and we're really well positioned to chase them on that. So I think that's a good sign when you see the capital budgets going, let's focus here because they're prepping for their own growth. The other key macro indicator here is this, that even in one of the toughest commercial real estate environments in well over a decade, we're still putting up over $20 million of bookings. And those bookings, particularly on the -- we don't break out AE and VMS, but a significant part are VMS bookings. So you have the biggest investors in the world. That booking represents the number of assets that they plan to deploy in the next 12 months. So they're telling us, be prepped for it. We are being wildly cautious. We're optimistic, but we're cautious. And again, Pawan and I will allocate capital and allocate budgets based on a tempered market while prepping for service delivery growth for our clients. So it's -- the bookings are out there, and we're not -- the clients are driving that.

Next one, gen AI. How do you see gen AI impacting either the company or the industry?

Great question. So I see it, one, first, enabling our expert services to deliver more -- better, faster decisions for our clients. So we will handle the tech and the AI on behalf of our clients while they learn to adopt. So back to the theme here, clients are in organize their data, do the calculations, which the APP allows us to do. And then gen AI is really in almost the presentation level based on large language models. So it will facilitate the adoption. But that AI is embedded in everything we do.

And just the last question. What's the single biggest item that excites you when you look forward?

Commercial real estate is a resilient asset class. It's always been there. It's always going to be there. We have the top clients in the world. They're going to deploy their capital. They're going to deploy it smartly, and that means a giant backlog of business for us. So it's going to turn. Price discovery will end. It's going to turn, and no one is better positioned to take advantage of that than we are.

Great. On that, we should wrap up. Thank you very much.

All right. Thank you, sir.