Prior to the recession, Gary Yeoman thought that cracking the professional real estate services sector in the United States was the unlikeliest of ambitions.
The business - which includes services such as property tax planning, cost consulting and appraisals - is intensely local and it is difficult for a new player to gain a foothold. Takeovers were out of the question, since established businesses commanded too high a price for the chief executive officer of Altus Group Income Fund to consider.
But the recession changed all of that. The commercial real estate market has been hammered in the United States, and the collateral damage spread from landlords and banks to the professional services companies that served the sector.
Markets that were once out of reach are suddenly prime expansion sites for the Toronto-based Altus, which has steadily increased in size over the last five years by acquiring its smaller rivals. When Mr. Yeoman phones, other companies are much happier to take the call than they may have been two years ago.
In the last month Altus has bought Brazos Tax Group and PricewaterhouseCoopers' U.S.-based real estate appraisal management group. The income trust plans to use the acquisitions to start consolidating the professional services industry in the United States, which right now is dominated by brokerages and smaller local players.
"There's now a certain amount of humbleness in the United States," he said. "They're extremely capable and they have great businesses, but there has been a realization that no one is infallible so there's more opportunity today for us to become an aggregator."
There's an advantage to be enjoyed by a company that ties together a national network of offices. By its nature, the tax and appraisal business generates a lot of data. With enough offices, that local data can be repackaged and sold to companies hungry for market metrics.
"The bottom line is the United States market could be 15 times larger than Canada for us," he said. "The impact on revenue will be significant. It will be absolutely dominant. This absolutely, in my opinion, has the opportunity to have a huge impact on Altus and to be strategically successful."
Mr. Yeoman knows about consolidation. After leaving Magna International, where he handled the auto part giant's real estate portfolio, he helped create Altus in 2005 by merging three Canadian companies (including his own property tax consultancy) under the Altus banner.
The company is now in 60 cities in 15 countries, and has taken over more than a dozen local professional services companies in the last five years. Altus typically waits until a rival expands to about 100 employees, and then makes its overture. It has about 1,600 employees.
"These are companies that get in the range of $1-million to $5-million in EBITDA and that's about as big as they can grow," he said. "To reach the next step, they need significant investments in technology and infrastructure."
As an income trust, the company was limited in how it could expand internationally because there are limitations on foreign ownership. So a deal that a corporation could make with stock instead of cash would be problematic, as would compensating management with anything other than cash.
With the tax benefits of income trusts vanishing at the end of the year, Altus proactively decided to convert to a standard corporation. It will mark a new phase in the company's growth, Mr. Yeoman said.
"Being an income trust was basically going to limit us into being a Canadian company so the change was in many ways inevitable," he said, although he bristled at the notion of having to change structures to appease changing government rules.
"It's never a favour when [the government]gives you the privilege of paying $1-million in legal and accounting fees to convert. But ultimately it's probably something we would have had to change corporate structure anyway to meet our needs."
The analysts who follow the company have been generally upbeat about the recent moves, particularly its decision to maintain its distribution in the form of a dividend once it converts to a corporation.
"We anticipated a 20-30 per cent distribution cut given Altus's 81 per cent trailing payout ratio and its desire to continue to grow through acquisitions," wrote Canaccord Genuity analyst Yuri Lynk. "The board's decision to maintain the current distribution implies it sees an improvement in underlying business fundamentals."