Altus Group is selling its property tax business to Ryan LLC for C$700 million + C$5 million/year subscription.
“The C$700 million total cash consideration represents a 10.1x 2023 Adjusted EBITDA multiple for the business segment and over 16x 2023 Free Cash Flow* (over 14x net proceeds). After taxes, fees and restructuring expenses, net proceeds are estimated to be approximately C$600 million.”
*Altus Group uses certain non-GAAP financial measures including total of segments measures such as Adjusted EBITDA; capital management measures such as Free Cash Flow; and supplementary financial and other measures such as Constant Currency, Adjusted EBITDA margin, Organic Revenue and Recurring Revenue. Refer to the “Non-GAAP and Other Measures” section in the Company’s most recent MD&A report for more information on each measure and a reconciliation of Adjusted EBITDA to Profit (Loss) and Free Cash Flow to Net cash provided by (used in) operating activities.
What is the “Property Tax” business?
Minimization of property tax liability and management of clients’ property tax portfolios. Altus describes it as:
Principal activities
- Property tax is influenced by government-assessed asset valuations and often represents the largest operating expense in CRE property ownership after debt service.
- Property tax obligations and processes vary significantly between jurisdictions, requiring regional and asset-specific expertise.
- Clients are helped to proactively manage this expense and their complex appeal processes through technology-enabled expert services and software to help minimize the tax burden.
Key revenue streams
- Core services include conducting property tax assessment reviews for clients’ commercial properties, based on which selective appeals with government agencies are pursued to minimize clients’ tax liability.
- Key technology solution is itamlink, a property tax management tool that provides clients with a comprehensive overview of their portfolio’s tax liabilities, including assessments, appeal status, and other taxation information.
Revenue model
- Typically between 70% to 80% of revenues are derived on a contingency basis, where a percentage of the savings achieved for clients is received.
- Contingency revenues are recognized only when settlements are made, which in some cases could span multiple years.
- The remaining Property Tax revenues are based on fees charged on a time and materials basis and itamlink software which is sold on recurring subscription contracts.
- This business has an element of cyclicality in the U.K., its biggest geographic market. Unlike the North American practice where a client is billed once for the savings achieved for them for an entire tax assessment period, in the U.K., clients are billed annually based on savings per year.
- Annuity billing occurs every second quarter except for the first year of a new cycle (as the first year is not considered an annuity bill).
- Revenues from the annuity billings generally grow over the cycle as more clients are added and as more cases are settled with the volume of billable clients increasing concurrently with case settlements.
Key geographies and foreign operations
- Property Tax services are offered in Canada, the U.S., and the U.K.
- Operations in India where employees provide data intake and other supporting roles for Property Tax services.
Key customer segments
- Key client segments include proprietors in the high-touch segments in North America (where the property tax obligations are with landlords and owners) and largely property tenants under the scale segment in the U.K. (where the property tax obligation rests predominantly with tenants).
Primary revenue growth drivers
- Revenue growth is primarily driven by increasing both the volume and value of the appeal settlement pipeline and leveraging data and automation to scale successful client outcomes.
- Market share gains drive volume, and value is driven by expertise and data which allows selective pursuit of appeals that have a high probability of successful client outcomes.
- Ongoing digitization efforts support revenue growth by helping scale, better identify high-margin opportunities, and increase sales productivity.
Specialized Skill and Knowledge
- Property tax professionals require significant CRE industry and asset-specific expertise as well as deep knowledge of property tax appeal laws, policies, and processes which vary significantly by market and asset class.
- The business requires talent from various professional backgrounds in business, CRE, and technology.
- Talent is drawn from various professional backgrounds in the industry, technology, and business in general, spanning a wide range of functions across sales, marketing, information technology, research and development, legal, and human resources.
Competitive Conditions
- Competition comes from local, regional, and national firms, large and small, that offer similar services.
- In some markets, smaller firms compete on assignments where the real property is geographically proximate.
- Larger firms with a national and international base also compete for larger clients with multi-jurisdictional and multi-service professional real estate service needs.
- Competitors include specialized property tax firms, accounting firms, law firms, tax software providers, and real property brokerages.
Intellectual Property
- Own or have rights to Marks used in connection with the operation of the business, which are believed to enjoy significant brand recognition.
- Marks specifically used for the Property Tax business include Rethink Solutions and itamlink, in addition to certain Marks referred to above (e.g., Altus, Altus Group).
- Proprietary technology includes Rethink Solutions’ itamlink property tax management software.
- Technology (including itamlink) is protected through a combination of intellectual property protection such as copyright and trade secrets, in addition to confidentiality procedures and other contractual arrangements.
- Property Tax practice uses information systems in Canada, the U.S., and the U.K. to manage property tax appeal processes and make an assessment of the property tax applicable to a particular property or portfolio of properties.
Seasonality
- Property Tax experiences stronger second quarters driven by the annuity billings in the U.K., starting in the second year of a new U.K. cycle.
- In the U.S., where market cycles are annual, higher volumes of settlements tend to be experienced in the second and third quarters.
- Property Tax tends to experience more quarterly variability due to timing of contingency settlements and other factors, such as the wide-ranging variety of tax cycles across various jurisdictions (ranging from annual to several years).
- Since a higher portion of revenues come from contingency contracts, the front-end of a cycle typically requires a ramp-up period in preparation for the appeals, resulting in lower earnings than later in the cycle when more settlements are made and a high majority of those revenues flow directly to the bottom line.
- These seasonal and cyclical factors have historically been relevant, but given the evolution of the businesses through growth and acquisitions, this pattern should not be considered a reliable indicator of future revenue or financial performance.
Employees
- As of December 31, 2023, there were 875 employees in the Property Tax reportable segment.
Financial performance
Annual gross revenue has averaged C$265 million the past three years:
Adjusted EBITDA was C$69 million in 2023 and C$88 million in 2022, which is a decline of 21%.
For Q1 2024 ending March 31, 2024:
Source: Investor Relations | Altus Group
Who is the acquirer, Ryan LLC?
Ryan is a tax service business. In 2023, Ryan had 4,800 global team members in 87 office locations in 14 countries across the world delivering approximately $1.094 billion in revenue.
The acquisition will allow Ryan to expand its scale in its European operations through the establishment of UK property tax services, while providing more expertise and capabilities throughout Canada and the United States. Ryan to Acquire Altus Group’s Property Tax Services Business
Altus wants to divest this business line so it can focus on its other business lines that can deliver faster company growth.
Valuation multiple
The purchase price is 2.6 times revenue. Ryan claims to be valued at $2.5 billion (Ryan to receive new investment from Ares management and continued investment from Onex partners), which would indicate it is worth 2.3 times revenue.