MSCI Inc. (MSCI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the MSCI Investor Conference Call to discuss the acquisition of Real Capital Analytics. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to now turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you, operator. Good day, and thanks for joining us to discuss MSCI's acquisition of Real Capital Analytics. Earlier this morning, we issued a press release announcing our acquisition of Real Capital Analytics. This press release, along with an investor presentation we will reference on this call, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, we may also refer to non-GAAP measures, including, but not limited to, adjusted EBITDA margin. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the investor presentation. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. Finally, I'd like to point out that members of the media may be on the call this morning in a listen-only mode. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Salli. Good day, everyone, and thank you for coming to this call on short notice. We have spoken with you at great length in the past about our agenda of creating what we call the MSCI of private assets. That endeavor undertakes an effort to do -- to create databases such as the understanding of investments and the pricing of those investments, index and analytics and workflow solutions -- workflow applications. For nearly a decade now, MSCI has been working on these initiatives. In 2012, we opportunistically acquire Investment Property Databank, or IPD, which has been the foundation of our commercial real estate business. We have spent a number of years learning about the private asset class model to build a data and analytics and software applications and evolving IPD's data and operations. In 2020, we made an investment to acquire 40% of Burgiss, which has expanded MSCI's footprint more broadly in private assets. We are currently hard at work with Burgiss to evaluate their significant data sets in private equity, private credit and opportunistic real estate. Today, we are very excited to announce that MSCI is acquiring Real Capital Analytics, or RCA. RCA is the go-to data and analytics provider of the properties, transactions and participants that drive the commercial real estate capital markets all over the world. It is a fantastic business in its own right. But the combination of MSCI's real estate business and RCA will be a powerhouse provider for global investors, managers, lenders, originators and other participants in the private real estate markets around the world. It also will accelerate MSCI's private asset strategy as real estate is one of the key building blocks in that effort, which is also private equity, private debt and eventually, infrastructure. Let me spend a minute on what this accomplishes for MSCI, both in its real estate offering and in its broader private asset strategy. This transaction positions MSCI to further improve transparency in the commercial real estate investment process. MSCI will be able to significantly expand the high-quality, must-have real estate data sets we already have. We will then have that much broader of a platform on which to build analytics, indices and climate risk solutions as we know very well that the latter, i.e., climate risk is one of the key components in properties around the world in the coming years and decades. And RCA's client base is highly complementary to MSCI's. It also expands it, providing a larger installed base for cross-selling solutions from across MSCI. The acquisition of RCA, coupled with MSCI's strategic partnership with Burgiss, accelerates MSCI's private asset strategy, as I mentioned before. One of the key building blocks of private assets is commercial real estate, where we now have the combination of MSCI's real estate business, Burgiss real estate databases and RCA's extensive data sets. Burgiss also provides us with data covering private equity, private debt and some infrastructure. High-quality data is the foundation for building investment decision tools that help investors build better portfolios. We can extend our analytics offerings for performance and risk, for cash flow, liquidity and asset allocation. We are especially excited to help investors and other market participants measure climate risk in their private asset portfolios. Baer will speak further about the tremendous opportunities we see in this combination. We have a strong conviction in our ability to create incremental value from this combination and are raising our long-term target for real estate revenue growth to the high teens from the mid-teens percentage range. Before we hear from Baer, Andy will walk us through the financial highlights of the transaction. Andy?

Thanks, Henry. As you noted, we view this transaction as a tremendous value generator for MSCI with a number of areas of combination benefits. We're really viewing it as a buy-to-build opportunity that, together with our existing real estate franchise and our relationship with Burgiss, helps us to further differentiate our offering and establish unique and attractive solutions for the real estate space. To provide a brief summary of the key financial terms. The purchase price for RCA is $950 million and will be funded with cash on hand. You may recall that we ended the second quarter with just under $2 billion of cash on our balance sheet. And as such, we'll continue to have significant liquidity to fund our operations as well as to potentially pursue opportunistic share repurchases and/or other MP&A, in line with our existing capital allocation framework and historical practices. In RCA, we're acquiring a great business with a strong financial track record. To dimension it for you, at the end of the second quarter, RCA had approximately $70 million in annual recurring revenue that has been growing in the double-digit percentage range. This will nicely complement and roughly double the size of MSCI real estate's approximately $60 million in current run rate. And RCA has had EBITDA margins in the high 20% as a stand-alone franchise. Like MSCI, RCA is a recurring subscription business that is focused on and achieved strong client retentions. I would note that post closing, we will be redistributing MSCI's corporate allocations across our segments, which may impact our segment margins. I would also note that we plan to execute certain transaction -- excuse me, we plan to exclude certain transaction-related and integration costs from MSCI's adjusted EBITDA expenses, adjusted EBITDA and adjusted EPS. While the deferred revenue write-down is expected to result in some modest dilution to adjusted EPS in the near term, the transaction is expected to be accretive to earnings -- to adjusted EPS in 2022. We'll have more of an update for you and be able to provide more clarity on financial impact during our third quarter earnings announcement in late October, and we'll also update guidance for you then, which will reflect the addition of RCA's business as well as various purchase accounting adjustments, as you would expect, including the fair value adjustments to RCA's deferred revenue, the amortization of purchased intangibles and the transaction-related and integration costs I mentioned. We expect to close the acquisition at the end of the third quarter or early in the fourth quarter this year, and we'll be including RCA in our all other private asset reporting segment. As Henry highlighted, we are raising our long-term target for real estate revenue growth to the high teens percentage range to reflect our confidence in the incremental value we can create through our ownership by unlocking the significant opportunities that Baer will walk us through. As a buy-to-build opportunity with potentially significant long-term benefits, we are also raising our long-term target for real estate expense growth to the mid-teens percentage range from the low double-digit percentage range. With that, let me turn the call to Baer.

Thank you, Andy. Greetings, everyone. I'm pleased to speak to you today both about the great businesses we already own and the one we are acquiring as well as how we see them coming together to create significant value for our clients and our shareholders. As you heard from Henry, MSCI has a long history in providing real estate performance analysis for funds, investors and managers. These analytics range from enterprise-wide analysis across all funds to property-specific analytics. In addition to research, reporting market data and benchmark offerings, we also provide business intelligence to real estate owners, managers, developers and brokers worldwide. Let me spend a minute to go over some of our key solution areas. MSCI has more than 70 major market property and property fund indexes. And in addition to this, calculates 20,000 custom index benchmarks across various regions, subregions and specific markets. We have one of the industry's most extensive private real estate databases covering $2 trillion of assets. We offer solutions to support a variety of analyses on portfolios, funds, specific assets and tenancy. And more recently, after MSCI's acquisition of Carbon Delta, we have developed a real estate climate value at risk, or CVAR solution, to help investors measure climate-related risks and opportunities. We currently provide CVAR capabilities on more than 30 countries and are adding to that. As you would expect, this part of the business, in particular, has been growing rapidly as the urgency to address climate change has accelerated globally, including among global real estate investors. Today, we are very excited to add Real Capital Analytics, or RCA, to MSCI's real estate business. RCA has an extensive database. We believe it is the real estate industry's most comprehensive of $20 trillion of commercial property transactions linked to more than 200,000 investor and lender profiles, providing an extremely rich data set. RCA also has the most complete pricing data we have found from cap rates on the most recent deals to historical analysis on trends, including pricing averages and distribution. This transaction and pricing data is highly complementary to MSCI's investment data. Furthermore, while MSCI's data has been primarily focused on core real estate assets, RCA's data extends our capabilities into opportunistic real estate. In short, there are multiple ways in which RCA substantially expands MSCI's real estate footprint. As Henry referenced, a strong foundation of quality data is a critical base for building high value-add analytics and other decision support tools. With RCA's rich transaction and pricing data, we see a wealth of use cases that we can integrate into cash flow models, liquidity models, asset allocation tools and many other solutions. We've spoken with you about MSCI's mission to provide solutions to enable all participants in the investment process. RCA expands and in some cases, unlock several effective client segments for MSCI. These segments include asset managers and asset owners, where MSCI is well established on an enterprise level. They also include real estate brokers, agents, originators, lenders and government advisers, providing MSCI excellent entry points to cross-sell our offerings from across MSCI. RCA's 2,000 clients will be a tremendous addition to MSCI real estate's 900 clients. RCA currently serves a wide variety of use cases for its clients, providing a holistic framework for due diligence across the full real estate asset life cycle, data and analysis to inform pricing decisions for real estate investors, highly granular property-level and participant-level data that can be aggregated into various benchmarks and analytics with a broad geographic coverage of global real estate assets and trends. The combination of MSCI's real estate performance benchmarks, analytics and climate tools, with those of RCA's unrivaled commercial real estate transaction prices and capital flows database, truly elevate the investment process for real estate investors. RCA also enables MSCI to extend our reach to the front office, helping clients with due diligence and deal sorting -- sourcing, excuse me. The resulting front to back office set of solutions will have powerful applications. Examples provided are creating new data products, including evaluated pricing indexes and enhanced real estate; climate risk models; real estate due diligence, combining historic, current and forward-looking data for performance, price, climate and income risk; real estate portfolio performance and risk monitoring; tracking portfolio and properties relative to market indicators and transaction activity; and real estate fund intelligence for asset owners searching for and evaluating real estate funds and managers based on a variety of characteristics. Clearly, everything I have been talking about is focused on commercial real estate. But as Henry said, all of this is an important building block in our broader strategy for private assets. I'll now turn the call back to Henry who will provide closing remarks before we move on to Q&A.

Thank you, Baer. In summary, MSCI, Burgiss and RCA together create a powerhouse for the highest quality commercial real estate data and insights. While the data is valuable, in and of itself, it also creates enormous opportunities to build new indices and analytical tools, including climate risk solutions. RCA's client base both complements and expands MSCI's client base, extending our reach to new end users within our existing accounts as well as new client segments such as originators and lenders or banks. This acquisition reinforces MSCI's commitment to transform private asset investing, leveraging commercial real estate as one of the key building blocks in that strategy. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Manav Patnaik of Barclays.

Henry, I just had a quick question around the -- you typically talk about how you like the MP&A strategy, which includes partnerships. I was just curious, in this case, why the outright acquisition versus the partnership. Have you worked with them before? Just some thoughts around that would be helpful.

Yes. So we have known Bob White, the Founder and CEO of RCA, for quite a number of years and had frequently talked and discussed how we could work together on how these 2 companies could create value in the whole value chain in commercial real estate. So that was the -- a big part of the impetus in us over the years, evaluating the RCA business and how it could complement what we do. So when Bob and his shareholders decided that they wanted to sell the company, we were very excited about the prospects and the opportunity and spent a great deal of additional work in due diligence and valuation for this asset. So we believe that this, combined with the core real estate database and analytics that we have in MSCI real estate, plus the over $1 trillion of property database that is mostly opportunistic that sits within Burgiss, creates a powerful combination that we can build on top of.

Got it. And maybe, Andy, if you can help us with what we should expect from synergies because the financial profile, obviously, is attractive, but the multiple seems like it's double of what we've seen from other similar transactions. So just curious what we're missing there.

Yes. Just specifically on the point of synergies, as you heard from Henry and Baer, there are -- we do view enormous opportunities on upside both within their business, but also across MSCI more broadly. There are some efficiencies in it, but this is not meant to be an efficiency play. This is a long-term value-creation play. And like all uses of capital, in particular, M&A, we look heavily at the returns that we can generate, including specifically the cash ROIC and IRRs relative to other uses of capital. And as you know, a key driver of those returns is growth potential of the opportunity. And in this case, we're very excited about the growth opportunities we see in this business and plan to continue to invest in the business. And importantly, we see opportunities across all of MSCI. And so we believe we can help open opportunities in both their franchise and then drive growth across many parts of MSCI with this business.

Our next question comes from Alex Kramm of UBS.

Another kind of bigger-picture question here. Henry, on the recent earnings call, it became apparent again that you have all these organic opportunities and, obviously, bringing up expenses because you want to go after all these opportunities. So it almost seems like you've been a little bit capacity-constrained. So the question is why did you feel like now is the time to do a deal when it seems like you already have all these other opportunities ahead of you? And hopefully not getting distracted here with something else, if you get the gist of my question.

Yes. No, good question, Alex. We -- the first comment really is that we see enormous opportunities across our entire franchise of MSCI. And we have grown significantly as a company. We have grown and matured significantly as a management team in which we can now divide and conquer. We can now have many parts of our team and the people that work for them very focused on specific areas of our business. So in the case of real estate, a lot of the people that manage this business at MSCI are fairly dedicated to MSCI real estate and can tackle an acquisition of this nature in addition to some of the work that they're doing organically. So I think that's important to keep in mind. We do not see the RCA integration as a distraction at all from everything else that we're doing. If anything, it's an accelerator, especially in the area of climate risk solutions in that space. So I don't worry about that. The second part is that the -- we are extremely focused on organic investing. That is the primary focus of the company. But for sure, we will be making bolt-on acquisitions that will accelerate our entry into specific areas such as private assets and ESG and climate, and those are examples of things that we talked about in the past. So when we saw this opportunity, we went after it with everything we had because we believe that this is a major area of expansion for us that could only be achieved inorganically. It will be impossible to build these databases on a short-horizon basis and obviously, the client base associated with it.

Okay. Great. And then just a very quick one, and I'll jump back in the queue. But Andy, you made this comment about corporate allocations will be redistributed. Can you just flesh it out a little bit? It sounds like that's a general change. It doesn't really have anything to do with this deal. Or maybe I'm misreading something here, just curious what brought this on and kind of what to expect here more holistically.

Yes. Well, as you know, our segment expenses and segment margins are -- add up to 100% across the company. And so we allocate the shared cost, if you will, of the organization across each of our segments. And some of those shared costs are allocated based on head count, based on office usage, technology usage. And so when our real estate segment is going to be changing here or private asset segment is going to be changing here, there will be some redistribution of those shared corporate costs across all of our segments. And so I just wanted to plant the seed, so everyone is aware of that. We're going to be working through those details over the coming month or so, and we'll be able to provide you with more granularity around the impact to each margin -- each segment's margin with our 3Q earnings release. But it's not bringing in additional cost to the organization. This is just a redistribution.

Our next question comes from Toni Kaplan of Morgan Stanley.

I was hoping you could help us understand the difference between the data that Real Capital Analytics has versus what Costar or others have, for example. Is it that this is more transactional and more for the asset manager end market versus property-specific data? Just hoping to understand better the competitive landscape within the commercial real estate side of this.

Yes. Well, it is -- the chief distinction is precisely that this is a business that is entirely -- I mean, there's some very minor exceptions in smaller markets, but it's entirely aimed at the professional investor. So there is no retail component in here. There's no domestic component in terms of residential, and it has complete -- RCA has complete global reach as well. So I would say that its primary defining characteristics, which are very much in line with what we have at MSCI, I would say, generally as a firm and already in MSCI real estate is that it's global and it's aimed at professional investors.

Great. And maybe you can also help with where does the data that they use come from? How proprietary is it versus like third-party data collection? Is it when there is a transaction that takes place, the parties both call Real Capital Analytics, and that's the only source that they use? Like I just want to understand the proprietary part of this.

Sure. So first of all, it's not a monolithic model. There's a variety of different sourcing methods. There are -- these are typically very market-specific. In certain instances, RCA has acquired either a specific data vendor or has used broker data in a given market. In some cases, those are long-term contracts in place. And in others, like one of the subcomponents of this business is a Scandinavian business called Datscha, the data is sourced locally in the country. So there's not one answer. There's a variety of sources, and we feel like it's a pretty resilient model.

Our next question comes from Ashish Sabadra of RBC Capital Markets.

So as you highlighted, it's also the data provides the platform to build on analytics, indices and climate risk solution. And my question there was you've, obviously, talked about real estate growth improving from mid-teens to high teens, but how do we also think about the synergy from this data asset into these other 3 multibillion-dollar opportunities that you're chasing? And how should we think about the revenue synergies on that front?

I'm sorry, just to clarify, what are the specific multibillion-dollar opportunities you're referring to?

Sorry, I was just talking about the analytics indices and the ESG...

I see. Yes, yes. Sure. Sure.

How does the data help you further enhance there? And how do we think about revenue synergies on that front?

Absolutely. Yes, of course so look, I think the first opportunity here is, clearly, to just broaden and expand the business that we've acquired based on MSCI's global footprint, our relationship with investors, et cetera. We clearly believe that there is a very large opportunity in indexes and benchmarking. Today, we're largely dependent upon appraisal pricing and being able to move to transactional pricing in a variety of markets gives us significant competitive advantage. Equally, as Henry highlighted in his introductory comments, in private assets, getting to the pricing source of the data is a significantly more valuable thing in and of itself and provides significantly greater opportunities to create accuracy, for example, in all of our risk analytics, in looking at asset allocation, et cetera. And it's also fundamental in any work that we do in climate as we're actually looking at market transactions rather than evaluated pricing or smooth pricing as there is in several markets. So I think the combination of all those things really mean that we have significantly more credibility with investors. And notably, by grounding -- this entire business is grounded in the basis of transactions, i.e., what people actually buy and sell. So all of that, I think, is a great opportunity across all those categories that I mentioned.