Altus Group Ltd

TSX:AIF

Earnings Call Analysis

Modest Revenue Growth Amidst Robust Strategic Investments

Amidst one of the slowest transaction levels in over a decade, the company saw modest revenue growth and an impressive 480 basis points year-to-date margin expansion. Adjusted EBITDA dropped by 13.8%, although profit rose by 31.8% year-to-date. This quarter's free cash flow increased by 96.5% year-over-year to a record $34.1 million, aided by a new ERP system. The Analytics segment experienced a 4.6% revenue rise and a 9.2% uptick in recurring revenue. Both the REVS and Forbury acquisitions are expected to bring advanced analytics capabilities and are in line with the company's strategic focus. The firm intends to deleverage to a target 2 to 2.5x range by the end of 2025 and is on track to complete the cloud transition by the end of fiscal 2024.

Transition to the Cloud and Acquisitions Drive Growth

The company is successfully transitioning customers to ARGUS Cloud, with a notable increase in adoption from 55% to 72% over the prior year. This move is part of a broader strategy to reinforce their cloud-based services, expected to be largely completed by the end of fiscal 2024. Executives highlighted recent acquisitions—REVS and Forbury—as pivotal to expanding their capabilities in valuation software, especially in the Asia Pacific market, and their Valuation Management Solutions (VMS), contributing positively to their recurring revenue base. These acquisitions are seen as highly strategic, integrating seamlessly into client workflows and promising to strengthen the company's offerings in advanced analytics. Furthermore, the company boasts of high retention rates, with net retention over 100%, indicating a strong, loyal customer base.

Financial Stability with Managed Debt and EBITDA Leverage

The company is managing its finances prudently, affirming that its funded debt to adjusted EBITDA leverage ratio will stay below the 4.5x maximum capacity limit, with a targeted deleverage to the 2x-2.5x range by the end of 2025, reflecting their focus on sustainability and growth.

Understanding Business Synergies and Cost Strategies

The acquisition of REVS not only enhances the company's VMS capabilities but also introduces significant potential for operational synergies. There is an emphasis on the integration of global service centers and technology that embed within client workflows, which are fundamental to the company's high-margin, sticky business model. Their strategy focuses on expanding the client base for their advanced analytics offerings, leveraging the new acquisitions as platforms for this growth initiative.

Growth Trajectories and Market Leadership

The company reports steady double-digit top-line growth across key acquisitions. REVS, in particular, has exhibited growth rates in the double-digit teens over the past years, reflecting a strong performance trajectory similar to the company's overall growth. This growth is expected to be additive to the company's revenue, underscoring a significant complementarity to the existing business. The Forbury acquisition gives the company a strategic foothold in the Asia Pacific region, and they plan to leverage Forbury's strong regional presence without drastic changes to client experience, instead focusing on data integration and connectivity using technology acquired from Reonomy.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altus Group Q3 2023 Results Conference Call and Webcast. [Operator Instructions]I would now like to turn the call over to Camilla Bartosiewicz. Please go ahead.

[Camilla Bartosiewicz, executive]

Thank you, operator. Good afternoon, everyone, and welcome to Altus Group's Third Quarter Results Conference Call and Webcast for the period ended September 30, 2023. The news release announcing our results was issued after market close this afternoon and is posted on our website and SEDAR profile, along with our MD&A and interim financial statements. A presentation to accompany our prepared remarks has also been posted to our website under the Investor Relations section.Joining us today are CEO, Jim Hannon; and our CFO, Pawan Chhabra. We'll start with some prepared remarks, and then we'll move right into the Q&A session. If we miss any questions, please contact me directly by e-mail.Some of our remarks today on this call may contain forward-looking information. Forward-looking information is based on assumptions, and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. These assumptions, risks and uncertainties, are detailed in our forward-looking statements disclaimer in today's materials.Please be reminded that Altus Group uses certain non-GAAP financial measures, non-GAAP ratios, total segments measures, capital management measures and supplementary and other financial measures as defined in National Instrument 52-112. We believe that these measures may assist investors in assessing an investment in our shares as they provide additional insight into our performance.Readers are cautioned that they are not defined performance measures and do not have any standardized meaning under IFRS and may differ from similar computations as reported by other similar entities, and accordingly, may not be comparable to financial measures as reported by those entities. These measures should not be considered in isolation or as substitute for financial measures prepared in accordance with IFRS. An explanation of these measures is detailed in today's IR materials, including the news release, presentation, MD&A and in our other filings with the Canadian securities regulators.I would also like to point out that unless otherwise specified, all growth rates we refer to on this call today will be on a constant currency basis over the same period in 2022.Okay. Over to you, Jim.

[Jim Hannon, executive]

Thanks, Camilla, and thank you, everyone, for joining us today. I'd like to take a minute to discuss our recent M&A activity, which occurred subsequent to the close of the third quarter. I'm very pleased that this week, we were able to announce the acquisitions of REVS, formerly part of Situs RERC, and Forbury, 2 highly regarded players in commercial real estate. Not only have we complemented the breadth of our offers for our clients, but most importantly, we have expanded the Altus team with exceptional talent from both Forbury and REVS. We are excited to have them join the smart, dedicated and passionate folks already here at Altus.Commercial real estate valuation is at the core of what we do here at Altus Group. Over the past several years, we've been quite selective with our deployment of capital towards acquisitions. We have consistently messaged that we're focused on opportunities in our core businesses and in our core geographic markets, which include Canada, the U.S., U.K., France, Germany and Australia. And we have stated that we would be looking for the opportunities that are quickly accretive and that allow us to delever back to the low 2s in about 2 years. Finally, we look for businesses led by teams that see the power of working together with Altus Group to offer clients the best expert services, technology and data available in the industry. Both of these acquisitions meet our criteria.With that as context, Pawan will now walk you through the results in the quarter, and then I'll come back on and provide some perspectives on performance and strategy. Over to you, Pawan.

[Pawan Chhabra, executive]

Thank you, Jim, and good afternoon, everyone, on the call. Our financial performance in the third quarter was steady, underscoring the stability of our business model. Beginning with our consolidated third quarter results, pointed out, unless specified, the growth rates I will be referencing are on a constant currency basis.Our consolidated revenue experienced a modest increase over last year. Analytics continues to exhibit steady growth even as we proceed through one of the slowest commercial real estate transaction levels in over a decade. Appraisals and Development Advisory are maintaining stable performance. And following the strong performance in the first half of the year, Property Tax growth slowed but remained strongly positioned for long-term growth.Adjusted EBITDA was down 13.8%. Profit was $0.9 million, marking a 31.8% increase year-to-date, however down sequentially on modest revenue growth and higher financing costs. Adjusted EPS came in at $0.33. Free cash flow stood at $34.1 million, our highest level on record and representing a 96.5% year-over-year increase. And there is a function of catch-up in our Q3 results from our higher working capital balances in the first half with our transition to our new ERP system. We are fully operational on our new ERP system and our record results highlight our ongoing focus on driving higher free cash flow conversion of EBITDA.Turning to our business segment performance. In Analytics, we continue to deliver top line growth and margin expansion. Total revenue was up 4.6% and recurring revenue was up 9.2%. Growth in Analytics continues to benefit from our ongoing transitioning at cloud subscriptions, Valuation Management Solutions asset expansion and new bookings. Adjusted EBITDA is growing, driven by higher revenues and improved operating leverage.Our recurring revenue base continues to steadily build year-over-year. At $87 million in the quarter, recurring revenues were up 9.2% and now represent 90% of the total year-to-date revenues. This provides us with a stable revenue base, even in this current macroeconomic environment. As you're aware, many of our solutions are considered mission-critical with relatively high switching costs.With the year-to-date commercial real estate transactions down 55% versus 2022, we are pleased with the resiliency of our recurring revenue model. We continue to invest in our business to drive operational efficiencies and build skills so that we're well positioned for when the market conditions improve. With respect to the sequential change from Q2, this primarily reflects some seasonality at Valuation Management Solutions.Now turning to margins. We remain focused on optimizing our cost structure to drive sustainable improvements across the business. Our margins continue to expand, up 60 basis points over last year and up 480 basis points year-to-date. The improved run rate reflects our focus on achieving our target operating model across all P&L line items.Turning to Property Tax. Our revenue came in 4.1% below last year. The U.S. and U.K. practices posted year-over-year revenue growth, offset by a decline in Canada where the Ontario cycle selection -- extension is impacting growth. With the postponement of the Ontario reassessment for the 2024 year, growth in Ontario is expected to be muted through 2024. Our U.K. backlog of high-quality appeals continues to grow throughout the year and will drive additional revenue in Q4 and throughout 2024.The Valuation Office Agency is working through a bottleneck of checks and challenges associated at the end of the 2017 list. We are deploying technology from our itamlink software to drive efficiency in the U.S. Additionally, we've increased our service delivery capacity by expanding our global service center in India. Property Tax adjusted EBITDA reflects lower revenues as well as increased expenditures related to compensation and investments in our technology infrastructure to improve our property tax processes and drive future margin expansion. And finally, Appraisals and Development Advisory revenue was steady in the quarter. The Appraisals practice was in line with last year and Development Advisory was nominally down.Turning to our balance sheet. We finished the quarter with a cash position of $44.7 million and with $314.1 million in bank debt. The funded debt-to-EBITDA leverage ratio, as defined in our credit agreement, was 2.08x, well below our limit of 4.5x. Applying our cash, the net debt to adjusted EBITDA leverage ratio was 1.98x. As Jim discussed at the opening of the call, in relation to the upcoming acquisitions of REVS and Forbury, we have obtained a commitment from our lenders to amend and increase the borrowing capacity under the bank credit facilities as required. Regarding our capital allocation priorities, we will continue to invest in organic growth via technology service delivery and go-to-market investments, pay down debt and maintain financial flexibility for M&A and stock repurchases as demonstrated in Q3.With that, back to you, Jim.

[Jim Hannon, executive]

Thanks, Pawan. The Altus team continues to improve the fundamentals of the business as we proceed through a protracted pullback in commercial real estate capital deployment. We've rebalanced investments across business units and P&L line items. We continue to invest in improving our operations to increase productivity and drive operating leverage.Our cash flow from operations significantly improved in the third quarter with the deployment and adoption of our new ERP system. We've returned capital to investors through the repurchase of our shares as we believe our own stock represents a compelling investment opportunity. And this week's acquisition announcements demonstrate our focus on expanding core capabilities in core markets.Now focusing back on our key performance indicators. Our ongoing transition to ARGUS Cloud is tracking to plan. We ended the quarter with 72% of our ARGUS Enterprise users contracted on the cloud, a steady improvement from 55% a year ago. The adoption percentage will move in step functions as several major clients convert to cloud in line with the termination date of their existing contracts. The cloud conversion should be substantially complete near the end of fiscal 2024.Turning to new bookings. This metric captures incremental new business growth. Unlike recurring revenue, the timing of bookings can fluctuate, particularly in this current macroeconomic environment. That said, though down from prior peaks, we're still adding new business in this market. New bookings are holding steady in the low $20 million range in line with 2021. As a matter of fact, slightly better than 2021.While there is significant cash on the sidelines that has been raised for CRE investments, bid-ask spreads are still high and transaction activity is still muted. CRE investors are still in price discovery and aren't deploying capital at the same levels as recent years. The commercial real estate industry is navigating a cycle not seen in over a decade. And now with additional geopolitical conflicts, uncertainty remains regarding the global economy as we head into next year. Our revenue models have proven to be resilient, but organic growth is tied to capital deployment.Now let's discuss the REVS and Forbury acquisitions with some more detail. To offer a bit more background on the 2 transactions, Forbury will provide us with a CRE valuation software that addresses capabilities required in the Asia Pacific region. Forbury is complementary to ARGUS Enterprise and the software is widely adopted in the region and serving over 200 firms and over 2,000 users. The REVS acquisition will expand our Valuation Management Solutions capabilities and adds to our recurring revenue base. REVS has been consistently growing its top line in the double digits and expects to generate approximately CAD 63.6 million of revenue and CAD 19.5 million in normalized EBITDA for fiscal '23. That's based on their projections. Together, we believe we're creating a best-in-class valuation intelligence.REVS will add significant talent and with market expertise and credentialed value professionals to our team, including a sizable service delivery hub in India where we too have been growing our global service center. This will fast track our productivity at a lower cost to serve and provide us with built-in scalability to support our existing and new clients as the market recovers. We are confident in our investment thesis on both of these acquisitions. First, we believe both will elevate the value we deliver to our clients; second, strong strategic fit, both are in the CRE valuation, both in our Tier 1 geographic markets, both have recurring revenue models with solutions that are deeply embedded in client workflows.Additionally, both businesses bring significant asset intelligence, which, as you know, is core to our long-term growth strategy to deliver advanced analytics. With the Altus Performance Platform foundation in place, we can now more efficiently integrate new capabilities. Finally, each brings a sizable installed base, the type of buyer personas we're targeting for advanced analytics. There's attractive cross-sell and upsell opportunities with both REVS and Forbury.Post close, our funded debt to adjusted EBITDA leverage ratio will be well below our 4.5% maximum capacity limit. Given the expected growth in existing strong cash flows, we have a path to steadily delever to our target 2 to 2.5x range by the end of 2025. To wrap up, while we cannot control macro market forces, we are managing what is under our control. That includes driving towards operational excellence, maximizing our operating leverage and strategically positioning ourselves for the opportunity to serve the industry with advanced analytics. Our year-to-date results in this dynamic market speaks to our execution.Analytics recurring revenue is up 15.7%. Analytics margins are up 480 basis points. We're adding over $20 million each quarter in new bookings and analytics. We're delivering on our cloud transition plans. Net of the impact of the U.K. annuity reset in Q2, tax is up 9.8% and profit is up 31.8%. Our improved operating foundation sets us up for strong cash generation. This fuels organic investments as we continue to enhance the Altus Performance Platform, invest in Altus Labs, improve service delivery and deploy technology to improve our own processes, and it funds our capital deployment strategies, including M&A.The market will eventually turn, and when it does, it will also coincide with heightened demand for advanced analytics. As capital deployment increases, CRE professionals will need extra advice and data-driven intelligence to drive faster, better decisions. We will continue to prudently invest to capitalize on the opportunities ahead.Okay. Let's open it up for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Daniel Chan with TD Cowen.

[Daniel Chan, analyst]

Jim, it looks like the REVS acquisition comes with a fairly sizable team. How much of their revenue would you say is tied to technology versus consulting services associated with labor outsourcing?

[Jim Hannon, executive]

The REVS business is very analogous to our VMS business in Analytics. So that said, it's heavily reliant on technology. Clients have had significant input into the technology road map at REVS as well as in Altus. So they are completely tied together, those 2 elements.

[Daniel Chan, analyst]

Okay. That's helpful. And it sounds like they have a lot of institutional customers. So just curious, you mentioned that you're expecting a lot of revenue synergies. Is it from new customers, complementary sets of customers coming in? Is it services? Just any thoughts on what's going to drive or accelerate some of that double-digit growth that they're already experiencing.

[Jim Hannon, executive]

Sure. It's -- they were exploring a similar path that we were, except that we had, as Altus create significantly more asset level data in ARGUS Enterprise across all of ARGUS Enterprise. So it just widens the installed base. There are complementary customer sets that the REVS team were successful in penetrating and they've established so well with lenders. And the REVS team is particularly skilled at daily valuations, which is something that we do, but not at the same scale. So it's extremely complementary.

[Daniel Chan, analyst]

Great. And just one more, if I may. The recurring -- the new bookings were down year-over-year. How much of that is due to strong VMS bookings in the year ago quarter? And maybe can you just comment on how the software new bookings are holding up on a year-over-year basis?

[Jim Hannon, executive]

Right. We don't break out the bookings other than recurring. But yes, there is -- it's the slowdown in the capital deployment and the capital raise. So again, as a theory, as an investment area, continue to raise capital in Q3, not at the same pace as Q2, but there still is new capital flowing in. So that is really what's driving the bookings is as our clients take a pause and get their -- the significant amount of dry capital that they have on the sidelines deployed before they go raise new funds.

[Pawan Chhabra, executive]

Yes. And Daniel, just maybe add to Jim's comment, what we're really looking at this year is consistency in our bookings and the fact that we're maintaining an above $20 million range kind of the demarcation. As you know, as we've talked about several times, bookings is accretive to a recurring revenue model when you have low churn. And so it's a positive indicator for us, at least. In fact, in light of the market and in light of what we're seeing happening across the sector, we're maintaining a very consistent level of bookings.

[Daniel Chan, analyst]

That's helpful.

[Operator]

Your next question comes from the line of Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, analyst]

Just back to the REVS acquisition. I mean the last few acquisitions you've made have been very focused on bulking up your analytics and data offering. And this one -- maybe I'm wrong, but this one appears to be more of a professional service business with maybe some tech. So my first question is, is there any change in strategic tact here with this acquisition? And secondly, just in terms of valuation, I mean, it seems, based on what you paid for it, that would be at the very low end in terms of the valuation multiple that most people put on the analytics business. So how do we think about that going forward?

[Jim Hannon, executive]

Right, the REVS business and the VMS business, the incremental contribution margin from both sides, so whether it's our legacy base or the new base is it looks a similar profile to data analytics margins. So these are very tech-heavy expert service businesses, which allow for significantly higher margins than other types of services business because of the amount of leverage we get out of the tech. And as we've been saying, and as the REVS team has demonstrated, there's leverage in acquiring not just wage arbitrage with a global service center approach, but really talented people in those markets to complement our teams. So it's that combination of GSC and technology deployment and that technology being embedded in the client workflows that make these businesses very sticky, mission-critical and high contribution margin. So for every incremental dollar, a significant amount drops to the bottom line.

[Yuri Lynk, analyst]

Okay.

[Jim Hannon, executive]

Okay. So Yuri, to your point on the multiple that we paid, that's why we are -- we feel quite good about this acquisition. It was the right timing in the right market conditions to pick up an absolutely fantastic asset. And as far as strategic change, there's absolutely no strategic change. It's selling advanced analytics into the most sophisticated investors in commercial real estate, and that is our installed base for VMS, and that is the REVS installed base.

[Yuri Lynk, analyst]

Okay. How did you come across REVS? Were they a competitor? Was this a business that was put up for sale? And any color on that? Was it a competitive auction type situation?

[Jim Hannon, executive]

REVS has been a formidable competitor for years. The teams have known each other. My team has -- the legacy team has had great respect for the REVS team over the years. And as we said, they've been able to take parts of the market that have been complementary to us. So we've had our swim lanes. But yes, it's complementary. We've known the business for quite a while, and they were running through -- they did run a process to sell it out of Situs to [indiscernible].

[Yuri Lynk, analyst]

Okay. I'll turn it over.

[Operator]

Your next question comes from the line of Kevin with Scotiabank.

[Kevin Krishnaratne, analyst]

Just another question on REVS. I know you run across them quite often. They -- I'm trying to think of some of the differences, though, daily valuation. Do they target different types of CRE assets in any way, different verticals? Is there anything in their business that might VMS has some seasonality in your business? Is there anything in their business model that might sort of smooth out some of that seasonality? I was trying to think of any other differences of them versus you.

[Jim Hannon, executive]

The REVS team, [indiscernible] the markets that they've been winning in and pension funds is a specific area where the REVS team has been quite successful versus Altus. The daily valuation, again, is skill sets that we have been automating and they've done a great job building out. As far as the asset types, there's overlap because we both focus on everything other than really residential, except where residential represents a commercial real estate asset thesis. So -- and we -- but besides that, there's overlap, our court, if we look at our top, let's say, 30 clients, and we look at their top clients, there is a different asset mix in the client portfolios. But the way -- the fundamental of performing valuations, both companies cover that.

[Kevin Krishnaratne, analyst]

Okay.

[Pawan Chhabra, executive]

And Kevin, they're having recurring revenue model as well, too, that have long-term contracts with clients as well to address your issue in regards to smoothing out seasonality.

[Kevin Krishnaratne, analyst]

Okay. That's helpful. Kind of to my next question, just -- so does their recurring revenue then -- like your recurring revenue is a mix of ARGUS and then VMS. So theirs would look like essentially like your VMS business, what you would define as recurring revenue in that regard, correct?

[Jim Hannon, executive]

Correct, which is long-term contracts. On the seasonality, the question there is you still -- like the REVS will have a similar profile where you have your annual valuations that will provide a spike in Q4, let's say, versus the Q1. And then the second quarter -- the June 30 quarter, you have your semiannuals. So you can follow the quarters and see year-end and midyear, and you are going to -- we will have higher volumes. So as we've talked about the business, we've talked about price times volume times frequency, and frequency for both businesses increases in Q2 and Q4.

[Kevin Krishnaratne, analyst]

Q2 and Q4. Okay. And then, I guess for modeling, if we're looking at the recurring revenue line, it was sort of down a little bit quarter-over-quarter as we think about to your next point there on Q4, some seasonality. Does that -- should it tick up? I guess another way to think about this question is, is there a way for us to think about your recurring base to split between ARGUS and then VMS? Just trying to get some comfort around sort of how to think about like a good base for the business and then you layer on VMS on top of that. Any color there?

[Jim Hannon, executive]

Yes. The ARGUS looks like a typical SaaS business where it's straight ratable by month. And the Q4 is exactly the answer to the last question, which is, in Q4, we're going to see frequency spike up for VMS.

[Kevin Krishnaratne, analyst]

Okay.

[Jim Hannon, executive]

The thing to keep in mind is as there's seasonality -- so these are fully recurring revenue models. They do have seasonality, but the retention, the stickiness of these offers in VMS, whether it's our VMS business or the REVS' new business, these are highly, highly sticky businesses with net retention rates over 100%.

[Kevin Krishnaratne, analyst]

Got you. Okay. Understood. Just the last one for me then. As we look to 2024 and the cloud migration, you've got about just under 30% of the way to go. How do we think about just the strict uplift, just strictly from the remainder moving to the cloud in terms of any sort of pricing, this is before upsells or the other data analytics offers on top? Just is there any benefit? Can you help us understand how much more you could get in 2024 just on the migration of cloud alone?

[Jim Hannon, executive]

The cloud migration for a standard client, so if they're paying basic maintenance, we've had maintenance pricing increasing over the years. So they're probably in that $1,500 to $2,000 range per user and the cloud will drive -- again, depending on the life cycle of the client. At this point, it will drive about a 50% increase per user for -- so mathematically you can do it, but 30% less. But Kevin, what I'm trying to not do though, we're not giving guidance for '24. So I'm trying to give you as much color on that. But obviously, we have the adoption curves worked out when the crossover -- when the slowdown in growth from cloud lifts. But as I said in my earlier remarks, that transition will take us towards the -- all the way towards the end of 2024.

[Kevin Krishnaratne, analyst]

And do you think -- are the big chunkier ones closer towards the second half? Is that how to think about it?

[Jim Hannon, executive]

Yes, they're spread out some -- there's a couple that the contracts expire in 2025, but those clients are already talking to us because they're partners in their ecosystem, many of them -- most of them have moved already, so they get compatibility issues. If they're in -- they can't get the same collaboration functionality that they get if they're not in cloud, they can't collaborate with others in the ecosystem as efficiently. So we expect that, like I said, the majority of it will be complete in 2024.

[Kevin Krishnaratne, analyst]

Okay. Got it. That's helpful. I'll pass the line.

[Operator]

Your next question comes from the line of Stephen with BMO.

[Stephen MacLeod, analyst]

Great. Lots of great color so far. But I just wanted to follow up on a couple of things, specifically, as it relates to REVS. I was just wondering if you could give just a little bit more color around strategically, what parts of the market does REVS give you access to that you otherwise wouldn't have been able to conquer on your own, given the strength of your existing VMS platform? Like I'm just trying to understand what sort of the client crossover is, or more specifically, what part of the market you can get to? You mentioned pension funds, but I thought you already had a handful of pension funds -- pension fund clients already. So just hoping to get some more color on that.

[Jim Hannon, executive]

Yes. So Steve, the key takeaway here is that, as I said, our VMS business, the REVS' VMS business is extremely sticky because it's in the workflows of those clients. As they're building out their -- the REVS team has a fantastic road map for technology going forward that we'd say right now -- I'd say we have the advantage. They're building out a platform. We're building out the [indiscernible]. There's opportunity in there to converge to get some synergies out of the 2 businesses. But it's some of the functionality like we talked about, such as daily valuations where they are ahead of us. And when you get into some of the state-run pension funds, those types of areas, the REVS team has an absolutely fantastic reputation. It's hard to displace them or overcome that on new business. And it was -- to the earlier question, we got, given the multiple on the business and the synergies, it was the right time to try to put these businesses together.

[Stephen MacLeod, analyst]

Okay. Okay. Are you able to give a better sense of what the revenue synergies could look like?

[Jim Hannon, executive]

It's -- as we said, it's the -- I'm not going to give the exact number that we've baked in to our thesis. But if you just go to our overall strategy, the advanced analytics strategy that we've been discussing is targeted at the -- our VMS client base. So this gives us a broader base to take the new capabilities that we're building and cross-sell into. So this is -- the REVS client persona is the exact persona for advanced analytics. As separate companies, we wouldn't necessarily been offering the advanced analytics to the REVS client base, although many of them are ARGUS Enterprise clients. So there's a synergy there in the Altus Performance Platform. But this is all about expanding our client base so that we can bring the advanced analytics into both customer bases.

[Stephen MacLeod, analyst]

Okay. I see. I see. Okay. And then just in terms of the funding behind the deal and just some of the math. Can you just give a little bit of color or maybe something off-line, but just around what kind of rate that's associated with the incremental leverage you're taking on? And then do you have a number for what your pro forma on net debt-to-EBITDA might look like? I know you said it's below a certain level, but I'm just wondering if you can -- if there's anything to be more specific.

[Pawan Chhabra, executive]

Yes. So we have a very strong syndicate partner group associated with our covenant. So our pricing remains relatively similar to what we have existing for the duration of our term, which again speaks to the confidence that the lenders have in our model and the partnership that we have with them. So it was very favorable on our part to be able to maintain existing contract through the duration of the contract.

[Stephen MacLeod, analyst]

Okay. And then [indiscernible] pro forma, not to do that, like we're looking at a number kind of in 3.5x range, is that reasonable?

[Pawan Chhabra, executive]

Yes. As Jim mentioned, our covenant allows us to go to 4.5x. And even when you factor in our own working capital requirements in Q1, we're going to be well below the 4.5x. We're going to continue to have our focus on free cash flow generation. We have a very strong organic growth model. The acquisitions are accretive to our growth. And so we're going to be able to deleverage very quickly back to roughly the levels that we're sitting at now in -- over the course of the next 18 months.

[Stephen MacLeod, analyst]

Okay. Great. And then I'm just going to shift gears entirely to tax. And just wondering if the Ontario cycle timing sort of weighed on the numbers this quarter, and it sounds like it's going to continue. Can you just remind us how big Ontario is of the tax business?

[Pawan Chhabra, executive]

It's about -- it's a good portion of the Canada revenues and it's a portion -- at least a double-digit portion of total tax revenues. With that said, we have a position across many different provinces across Canada, which allows us to balance off the offsets that you may see in a particular cycle. But for sure, it is a meaningful part of our Canada number. And -- but we've got a very strong position in the U.S. There's a lot of white space for us to continue to grow there. And obviously, as we get deeper into the new cycle within the U.K., we're going to continue to build on that base as well, too. So from a portfolio perspective, despite the fact that Ontario is being pushed out, we do have offsets across the portfolio that give us comfort to be able to manage it from a global tax portfolio perspective.

[Stephen MacLeod, analyst]

Okay. That's great.

[Jim Hannon, executive]

Steve, the other thing we've done is, we -- our folks in Ontario have been fantastic about working across the other provinces, right? So as we're seeing growth in -- particularly in Western Canada, we've been able to accordion our resources up and down based on the cycle that any one of those provinces is in at any given time.

[Stephen MacLeod, analyst]

Okay. Great.

[Operator]

Your next question comes from the line of Richard with National Bank Financial.

[Richard Tse, analyst]

Yes. I had a question on the bookings. Last quarter, when you had the nice rebound in bookings, I got the impression here that you felt reasonably confident that the business sort of had normalized a bit. So I'm just trying to understand what has sort of happened that we've seen a bit of a reversion in that bookings. I get that there's a bit of volatility, but it seems to be a bit more pronounced than we had been expecting.

[Jim Hannon, executive]

I think if you go back and you look at my and Pawan's comments, you'll see that we -- there was -- we think Q1 completely was an overreaction. In Q2, there was a lot of exuberance that we were absolutely saying, it's still -- it's the same market, guys. And in Q3, it's the same market. There's lumpiness to big contracts in the timing, so that when you do the quarter-over-quarter versus the prior year, right, this is kind of going back to the old world of term contracts in software where, boom, you'd have a big 3-year contract then you wouldn't, then you'd have a big 3-year or a 5-year contract then you wouldn't. That's kind of the bookings story here. We feel like we've been in the same environment since March. Like clearly, March with [ SVB ] changed the trajectory of CRE. But in Q2, we said it feels the same as it did in March, and we're saying in Q3 feels the same. So we're in that price discovery mode. Bookings are lumpy. And that lumpiness gets masked when there's a tremendous amount of capital flowing into commercial real estate as an asset class. When there isn't a lot of new capital coming in, you can see the lumpiness a little more clearly.

[Pawan Chhabra, executive]

Yes. And maybe just to add to that, again, just as a point of reference, I think that it's the consistency in our bookings number that we've seen over the course of the 9 months that gives us confidence that clients are still committing pricing, locking in resources for our services. And so it's really the consistency in our total bookings levels that continues to be the level of comfort, again, in a recurring revenue model where you have a high level of client retention and you have mission-critical solutions that you're offering clients. Bookings are additive. It's just a matter of timing of deployment.

[Jim Hannon, executive]

Right. We don't publish a backlog number, but the way to academically think about this is our backlog for VMS continues to increase nicely.

[Richard Tse, analyst]

Okay. That's helpful. Obviously, we're still trying to get a better understanding of the REVS business. Is there -- or can you talk to any degree of customer overlap? Because obviously, you've got a broad portfolio. So -- and I know that part of the strategy or the revenue synergies potentially, but maybe talk about that.

[Jim Hannon, executive]

If you're asking is there revenue breakage because of overlap? There's not. Other than REVS itself was a smaller ARGUS client because ARGUS is the standard in the industry, as you know. But the client bases are very complementary. Do we have common clients? We do where we might serve different portfolios at the same client. But again, the revenue is all additive.

[Richard Tse, analyst]

Okay. And then what's been sort of the growth rate of REVS over the past, call it, 3 or 5 years? If we can kind of get a run rate just to get some historical perspective on that business.

[Jim Hannon, executive]

It's double-digit teens.

[Richard Tse, analyst]

Okay. So basically the current run rate that you published?

[Jim Hannon, executive]

Yes.

[Richard Tse, analyst]

Okay. All right.

[Jim Hannon, executive]

Clearly, like, as capital was flowing in, they had peaks as well, but their business is growing similarly to ours.

[Operator]

Your next question comes from the line of Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

I just want to switch gears to Forbury for a couple of questions. Could you -- there's no disclosure on the size. Can you just sort of put the magnitude of it in perspective for us?

[Jim Hannon, executive]

Yes. Paul, it's a smaller acquisition, gives us a nice ARR bump. But this way, it's below the materiality threshold is what we would disclose.

[Pawan Chhabra, executive]

I think we published there about headcount of around in the 30s. So it gives you the relative size and scale, but they've got a pretty good base of clients in the Asia Pacific, Australia region that was very attractive to us.

[Jim Hannon, executive]

It's a similar profile to our Rethink acquisition on the tax side.

[Paul Treiber, analyst]

Okay. That's helpful. We can ballpark it. This strategy, so it gives you the Asia Pacific footprint. How do we think about like the product integration strategy? I mean would you migrate those customers eventually over to ARGUS Cloud? Would you run it separately? How do you think about that?

[Jim Hannon, executive]

The [indiscernible] allows us to take various applications and tie the data sets together. So that where we have the data rights with clients, we will be able to ingest the data into the [indiscernible]. One of the features that has made Forbury successful in the region is a simpler user interface. So you can think of it AE and Forbury kind of like Excel, where I'm sure Microsoft could make changes to the interfaces of Excel, but you have so many users who -- they know how to go in and work with the application. So we're not going to be forcing clients to make any drastic changes other than through our knowledge graph technology, which we picked up with the Reonomy acquisition, we'll be able to connect the data across the various applications.For the last -- I've been here now going on 3 years when I came into the Analytics business, each year, we've looked at the investments required to have a fit-for-purpose product, making AE fit-for-purpose for the Australian market. And each year, we've deprioritized because Forbury was so formidable in the region that by the time we did the development, built the functionality, built to go to market, go through the sales cycle [indiscernible] Forbury, this has made tremendously more sense to just acquire the leader in the market.

[Paul Treiber, analyst]

That's a good perspective. Just last question. Just in regards to REVS, just trying to look up more information on it. Is that the same business that Situs acquired in 2014, the one that was founded in 1931?

[Jim Hannon, executive]

I don't have that history at my fingertips. Sorry, Paul. As you guys can see, it's been a busy week here.

[Camilla Bartosiewicz, executive]

Yes, it would have been founded about 20 years ago, but it's been in the market for about a decade.

[Paul Treiber, analyst]

Okay. That's helpful.

[Camilla Bartosiewicz, executive]

I'll send you the link to the website if that helps.

[Paul Treiber, analyst]

Yes. I'll pass the line.

[Operator]

Your next question comes from the line of Gavin Fairweather with Cormark Securities.

[Gavin Fairweather, analyst]

Just on REVS. Curious, when you modeled it, to what extent were other kind of cost synergies between the 2 organizations or enhancing the margin of your existing VMS business through kind of scale and their efficiency. Like to what part of -- to what extent was that part of your investment thesis?

[Jim Hannon, executive]

There are synergies, particularly in system development. As I said, some of the REVS future road map is absolutely fantastic. And we're looking forward to bringing that together as the REVS team was building out what they call VMS Next. And as we were building out the next-generation of the VMS platform on the [indiscernible] for us. So there's absolutely synergies there. This will accelerate our GSC because they, again, built a fantastic team there. So that brings us forward as far as having scalability, and we're leveraging the GSC across all of our businesses, particularly the tax business has a special focus for us right now on leveraging more offshore capabilities.

[Gavin Fairweather, analyst]

Got it. And just a quick maybe clarification. Can you just help us understand kind of the process to close? I think you said first half of next year.

[Jim Hannon, executive]

Yes. So again, one of the things -- so we have our own estimates, this deal obviously is going to need regulatory approval. So there's no joint planning that we can do with the REVS team until we clear regulatory hurdles. Even to the point where the client data, we had to keep it in a clean room. So where our market-facing folks and even myself and Pawan can't really through their client base. But our VMS team on an anonymized basis will be able to go through all of that. And obviously, our legal teams have been through all of the customer contracts at a name basis. But we're not at the point where we can do joint planning on synergies or go to market until we get that regulatory approval behind us.

[Gavin Fairweather, analyst]

Got it. That's it for me.

[Operator]

Your next question comes from the line of Christian with Eight Capital.

[Christian Sgro, analyst]

I'll ask one more question on REVS. You just touched on the acquisition closing in your first half of next year, some of the planning to occur after that. But as we think about the integration, the business models, the pricing strategies, is there a big lift to get everything under one umbrella at Altus? Is that the plan to integrate branding to go-to-market? Or do you envision keeping the entities sort of separate owning their own domains portfolios for the first bit until there's a more natural sort of integration?

[Jim Hannon, executive]

Great. Thanks, Christian. It's again from -- we can't really lay out go-to-market plans, certainly are not factoring in pricing at this point until we get through regulatory approvals and then we can start looking at those types of items. What is really attractive to us, again, is being able to upsell the REVS base with advanced analytics.

[Christian Sgro, analyst]

Okay. That's helpful. And I'll ask one more question on the core business. When we think of the model, price times volume times frequency and zero in on volume there. Is it safe to assume the number of assets is flattish with the lack of transaction activity or slightly down quarter-to-quarter? Or how has that trended? Is there any color you could provide around that direction there?

[Jim Hannon, executive]

Our number of assets are up because we do have bookings from earlier in the year and prior years that has -- those assets are coming online. So it's not at the same growth curve that it was over the last couple of years. But the number -- the total number of assets that we're servicing in the quarter is up and on an annual basis is still up significantly.

[Christian Sgro, analyst]

That's great to hear.

[Jim Hannon, executive]

Said differently, our revenue continues to grow based on prior bookings, and we'll continue to do so for the foreseeable future because we are still adding bookings each quarter.

[Pawan Chhabra, executive]

Christian, you see your price times volume times frequency is really a frequency implication as it related to this quarter.

[Jim Hannon, executive]

Versus last quarter.

[Pawan Chhabra, executive]

Versus last quarter, correct.

[Jim Hannon, executive]

Correct. You have the mid-year valuations that you don't get in Q3, we expect that to pick up in Q4, just from a volume and a frequency basis.

[Christian Sgro, analyst]

Understood.

[Jim Hannon, executive]

So Christian, hitting that from a different angle, when transactions aren't occurring, our clients are also not taking their asset accounts down, right? There's natural attrition, puts and takes, as our clients trade portfolios. But in general, this is way we use the word resilient so often around our revenue model as the clients aren't reducing ARGUS seats. They're not adding at the same level, but they're not reducing. We have the cloud conversion that will continue through '24. And on the VMS side, as clients hold those assets, they need valuations on them. In some cases, frequency valuation is going up as LPs want to understand the market better.

[Christian Sgro, analyst]

A lot of factors at play. And good to see volume trending in the right direction.

[Operator]

Your next question comes from Scott Fletcher.

[Scott Fletcher, analyst]

Margins at REVS look like they're strong at over 30%. Can you give us an idea of how those levels compare to your VMS business? And if they are stronger, what do you attribute that strength to? And can you replicate it going forward?

[Jim Hannon, executive]

Our -- we have more scale in our business, let me put it that way. So our margins are a bit better. What I really focus on -- what I've been focused on with the Analytics business since I got here is incremental contribution margin leverage. And that's what I'm saying when I look at that from my history in data analytics and the deployment of technology that we have. Our incremental leverage looks like your standard P&L. So think about standard gross margins for a data and analytics company. That's what the VMS margin profile looks like. So there's opportunities to combine, lift the margins, absolutely. And as the market comes back, that's where we'll see accelerated margin expansion.

[Scott Fletcher, analyst]

Okay. And then I just want to finish by reasking a question earlier in the call that I think I might have missed. Can you give us an idea on a pro forma basis, how much of the Analytics recurring line is VMS versus the ARGUS Enterprise business?

[Jim Hannon, executive]

[indiscernible]

[Scott Fletcher, analyst]

Okay.

[Operator]

Your last question comes from the line of Stephen again with BMO.

[Stephen MacLeod, analyst]

Great. I just had a quick follow-up. Just in terms of the purchase price you talk about, there's an acquisition-related tax benefit. Is that something you expect to realize immediately? And I guess, how much visibility do you have into that coming to fruition?

[Jim Hannon, executive]

That's a present value number that we -- that we're showing. So that -- it's EBITDA is not exact proxy for the cash flow implications of this deal, which is why we thought it was important to at least give a flavor for what the tax step-up benefit was going to be for us.

[Stephen MacLeod, analyst]

Okay.

[Operator]

That concludes the Q&A session. I will now turn the call back over to Jim.

[Jim Hannon, executive]

All right. Well, we appreciate everyone being on the call. It's been an exciting week here at Altus Group. For our new colleagues, I'd like to say, welcome. We're really excited. We're looking forward to getting both of these acquisitions closed. Great set of questions from the analysts tonight. Thank you. And I hope you appreciate that we do have a regulatory hurdle to clear, and then we'll be able to provide additional clarity once we get past that, and we can really start joint planning with the REVS team. On the Forbury side, it's not just the recurring revenue that we picked up, it's that absolutely fantastic reputation in the Asia region. It's a lot of our existing North American clients have operations in that region and use Forbury. So we're really excited to pick up that team. And it's not just the financials, but it's a great product team that will complement the skill sets of the great technologists that we already have in Altus. So thank you very much for your time, and we look forward to speaking to all of you soon.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.