Ladies and gentlemen, we'd like to thank you for standing by and welcome to the CoStar acquisition of STR. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions being given at that time. And as a reminder, today's call is being recorded. We would now like to turn the conference over to our host and facilitator, Mr.
Rich Simonelli. Please go ahead, sir.
Thank you, operator, and welcome to CoStar Group's call to discuss the acquisition of STR. We're so glad that you're with us today. Before I turn the call over to Andy Florence, CoStar's CEO and Founder, who is joining us from London, England today and Scott Wheeler, our CFO, is in our Washington, D. C. Headquarters, I have some important and interesting facts for you.
Certain but can cause actual results to differ materially from such that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's October 1, 2019 press release and in our filings with the SEC, including our most recent annual report on Form 10 ks and quarterly report on Form 10 Q under the heading Risk Factors. All forward looking statements are based on information available to CoStar on the date of this call. CoStar assumes no obligation to update these statements whether as a result of new information, further events or otherwise. As a reminder, today's conference call is being broadcast live and then colored on multiple continents on our website, where you can also find CoStar's Investor Relations page.
Please refer to today's press release on how to access the replay of this call. Remember, one question each, however, time permitting, you can line up again in the U. S. Or rejoin the queue in the U. K.
For a second question. I'll now turn the call over to Andy Florence. Andy?
Thank you, Richard. Welcome and thank you all for joining us today to discuss CoStar Group's acquisition of SPR. As you saw in our press release issued earlier today, I'm happy to announce we've agreed to acquire STR for $450,000,000 in cash, subject to adjustment and definitive agreements. We expect the acquisition to close during the Q4 of this year. Founded in 1985, the STR team has created the global industry leading benchmarks and analytics that are the primary information tools hotel management investors rely on to monitor and optimize their assets.
This is an extraordinary company that is a valuable partner with the hotel industry. While we tend to think of hotels as branded operating companies, hospitality is in fact a massive commercial real estate asset class. Ultimately, the cash flow intelligence STR provides is the fundamental value driver in the 3 dollars hospitality sector of commercial real estate. The industry needs information to effectively develop, finance, appraise and transact hospitality properties. We are bringing together the leading provider of commercial real estate information and analytics in online marketplaces with a gold standard in the global hospitality industry for premium performance benchmarking and revenue forecasts.
We're excited to add this world leader as it extends the depth and reach of our comprehensive CoStar platform. Today, STR aggregates data from over 65,000 hotels worldwide, representing nearly 9,000,000 guest rooms in over 180 countries. Hotels electronically submit their revenue and occupancy data to STR on a weekly basis. STR's flagship product, the Star Report, provides hotel brands, owners and management companies with vital performance benchmark information with more than 1,200,000 reports distributed each month. CoStar currently provides a different but complementary data set of building information on 80,000 hotels, 45,000 hotel sale comparables and 4,500 hotels currently offered for sale.
We plan to integrate the STR aggregated data within CoStar to create exciting new products that provide building data, income and occupancy information, sales comps and for sale information. SDR expands our global footprint. Upon closing, CoStar Group will have over 4,400 employees in 17 countries with over 500 working outside the United States. We look forward to welcoming the 353 STR employees doing business in 15 countries around the world. Once closed, CoStar will pick up our first offices in Singapore, Australia, China, Colombia, Brazil, UAE, Indonesia, Italy, India, South Africa and Japan.
SDR will continue to be led by its experienced management team with Amanda Heit, their President Elizabeth Winkel, the Chief Strategy Officer and Robin Rossman, the Managing Director for STR Global. We believe the combined international presence of STR and CoStar will create opportunities for further penetration of STR and CoStar around the world. One of the things I'm most excited about is that in combination, there's a clear opportunity to utilize the CoStar sales force to reach thousands of additional potential clients. We believe the STR product line fits perfectly into our strategy to further penetrate the CRE marketplace. In the way that CoStar's acquisition of apartments.com enabled CoStar to extend valuable new services to investors and services providers in the multifamily real estate, we believe that STR will complement CoStar's existing offerings and empower CoStar to provide viable new services to investors and service providers in the hospitality industry.
It will bring substantial benefits to our existing customers and will result in the sale of more CoStar subscriptions to investors, brokers, appraisers, lenders and developers who can use the information to understand investments and assess potential new developments and support property purchase and sale decisions. This combination will continue to extend the breadth of our one stop information, valuation and analysis platform for commercial real estate professionals. STR has exceptional expertise in all aspects of benchmarking, which we plan to extend to other commercial real estate a significant CoStar data assets will allow for creation of new benchmark products for commercial leases and multifamily operating metrics that would be extremely valuable to owners and brokers and property managers. Our combined technology design and development capabilities will accelerate STR's product development pipeline. In addition to enhancing its current online products, CoStar plans to invest in and grow STR's net operating income and forecasting products.
Smith Travel brings an unrivaled reputation within the global hospitality industry for their data integrity, reliability and strict confidentiality. And we look forward to continuing to build on these core values in the next chapter of Smith Travel's growth. The integration of STR data into the CoStar product will maintain that confidentiality and reliability while also allowing property owners, investors and service providers in the hospitality space a more holistic aggregated view of the hospitality industry at market levels with super accurate data. STR revenue for 2019 is expected to be approximately $64,000,000 and adjusted EBITDA is estimated at approximately $16,000,000 for an EBITDA margin of 25%. CoStar expects that within the next 3 to 4 years, the investments in new products and growth focus of the combined business will generate annual revenue growth above 20%, approximately 2 times the current growth rate and profit margins in line with CoStar's long term goal of 40% adjusted EBITDA margins by 2023.
The transaction is subject to HSR review. We do not anticipate issues there since the companies are completely complementary and have never competed for business either retrospectively or prospectively. In summary, the acquisition of Smith Travel strengthens our mission critical utility subscription information product offerings and positions CoStar as the information and analytics leader for the $3,000,000,000,000 hospitality commercial real estate sector. At this point, I will turn the call back to Washington for Scott Wheeler, our Chief Financial Officer.
Great. Thank you, Andy. Sound good from across the pond. Thanks again, everyone, for joining us on such short notice for today's announcement. As Andy said, we're very excited for this opportunity to bring STR alongside CoStar to expand our capabilities and serve the hospitality and the hotel industry.
Our acquisition is structured as a stock purchase of 2 companies that collectively make up STR. 1 is STR Inc, which operates the business in North America and the other is STR Global, representing the international operations of STR. STR Inc. Is approximately 70% of the revenue and 65% of the personnel of the company, while the global operations represent around 30% of revenues and around 35% of the STR team. Total purchase price of around $450,000,000 will be paid from our available cash balance, which will leave us with approximately $1,000,000,000 in cash at the end of 2019, assuming the deal closes in the Q4.
As Andy mentioned, STR is expected to generate approximately $64,000,000 in revenue and $16,000,000 in EBITDA in 2019 on a standalone basis. Our preliminary financial outlook for the acquired business assumes a November close date and a revenue contribution to CoStar's results of approximately $3,000,000 to $4,000,000 for the Q4 of 2019. SDR renews and invoices and collects most of their recurring revenue in the first quarter of the year, which creates a deferred revenue accounting adjustment that impacts the CoStar recorded revenue in 2019 and into 2020. We expect the transaction to be slightly dilutive to CoStar's non GAAP earnings per share in the Q4 due to the integration efforts and purchase accounting adjustments. The exact timing of the close may impact those estimates.
After the acquisition closes, we will complete a more detailed forecast of the impact to CoStar's consolidated estimates. We'll share that with you on our regularly quarter earnings calls.
That's about all there is
to say on the financial side. So with that, shall we open the call to questions, Rich? Let's do that. Excellent.
Our first question will come from Andrew Jeffrey, Fawn Trust. Please go ahead.
Hi, guys. Good morning. Appreciate you taking the question. There were this is obviously a big category. Andy, I'm sure you've given some thought, and Scott, what kind of revenue TAM do you think exists here?
And maybe both and maybe you can touch on the share that STR currently has and where you
think you can take that share?
I'll start with answering the by the way, Andrew, you put the fund back in SunTrust, but the I will I will let Scott handle the TAM. We're just looking at that to sort of try and quantify that in rough numbers. STR share for providing benchmarking analytics and hospitality would be in the very high double digits of those people purchasing. They are well saturated in the United States. The overwhelming majority the overwhelming vast majority of hotels in the United States contribute their operating data to SDR.
Outside the United States, they've been very successful and are profitable, but they're probably 1 5th as penetrated as they are in the United States, but that penetration is growing. But we're going to be selling to there's revenue growth in launching new products like the forecasting that they've begun to produce as well where you're tracking forward bookings and forecasting as well as extending into net operating income numbers for the hospitality sector. And then one of the biggest opportunities is moving their content into CoStar on an aggregated basis so that when someone is evaluating a site or a property or hotel investment or transaction, they can see super accurate and timely occupancy and revenue data costar. And we see a lot of our traditional customers buying that from STR and renewing at super high renewal rates in the upper 90s. But STR hasn't had a sales force that really is big enough to address that opportunity.
It's a very small sales force. So a lot of growth that would just be providing that information to the commercial real estate space. And then we also expect to be able to generate
we hope to be able
to generate revenue by extending the benchmarking methodology into some of our other segments in commercial real estate. But I'll let Scott give you some more color there. Yes.
On the quantification, we're trying to figure out how big is this opportunity, obviously, as we look through the acquisition. We think there's about $500,000,000 of addressable market, both counting domestic and international opportunities. On the penetration question, they've done a phenomenal job in growing this business. And as Andy mentioned, there's a lot to do still internationally. We think there's probably 3x the size of the current business still available in penetrating the international and domestic hotel markets.
And then all the new product areas that we've talked about, what the new products with travels building or building our analytics into CoStar to sell to more hotel clients or selling to the non hotel prospects, that has at least $300,000,000 to $400,000,000 we believe of opportunity in that sectors. So all told, early estimates, it's $500,000,000 or so. And as Andrew, as you've seen, as we get into more sectors like we did in the apartment sector, we have initial view of the market opportunity. And then we're expecting that as we get closer and closer to this business and we start to build out more products and services, that these TAMs will expand just like they did in apartments. We started with an initial $2,000,000,000 TAM and now we're up to $8,000,000,000 to $10,000,000,000 in opportunity in that sector.
Not saying this sector is that big. We don't know. But we certainly think this is an early good start to the opportunity we see, and we'll want to build on that as the businesses come together.
Our next question will come from the line of George Kong of Goldman Sachs. Please go ahead. Hi, thanks. Good morning. Can you discuss the competitive landscape for hotel data analytics and how much larger STR is versus its next largest competitor?
Sure. I would say for the next largest competitor is not public, so the information is an educated guess. But the 2nd largest competitor is probably 1 40th the size, maybe 2% to 3% the size, maybe 5% the size and is I do not believe at this point they're profitable. So STR is orders of magnitude larger.
Our next question will come from the line of Mayank Tandon of Needham and Company. Please go ahead.
Hey, good morning. This is actually Kyle Peterson on for Mayank. Thanks for taking the questions.
Just wanted to get see if
you guys could add a little color on the expansion opportunity. I know you guys mentioned STR opens up a lot of new markets for you guys. Just want to see if you guys could dive into kind of maybe which of those markets you guys are eyeing more closely or you see the biggest opportunities in?
So when you ask that question, you are referring to the global elements of places like Singapore. Is that what you're referring to? Or you're referring more to the product side?
Yes, yes, more of the global Singapore and Australia.
So it is advantageous to gain more scale in our international operations. So as you gain more scale, especially in our London headquarters, our European headquarters in London, it allows you to examine more of the opportunities. You're out there and probing more corners of the earth. But we're we are in a mode where we are researching and studying the nature of each of these different commercial markets. And through our acquisition of Riala, we're looking at building sort of lighter models of entering these new markets using automated data research on the Internet and some other things.
And so we aren't we're not really we're not announcing any specific market, but we know that we want to research intensely which markets pose the best opportunity at the lowest cost with the highest probability of success. And you would expect to see us continue to sort of bring more markets online. So right now, we have 5, 6 international markets in the CoStar and the commercial real estate pure commercial estate offering, we expect to be adding 1 or 2 a year as we go. One of the real milestones that we'll be looking for is moving all of our European information platforms into 1 CoStar software platform so that you have our clients have the convenience of moving through one platform to access multiple countries.
We have a question from the line of Brett Huff, Stephens. Please go ahead. Good morning. Congrats on the deal.
Thanks, Brett.
Can you talk a little bit about how this fits into the way you guys are thinking about adding products generally to your platform? Over the years, you've taken the data and built analytics on top of the suite data, then you've expanded and bought new analytics and new data and new processes to get multifamily, etcetera. It seems like this is a step in the right direction similarly with new proprietary data and adding on analytics. But where do we go from here? Is this the kind of thing that we should expect you guys to keep doing buying proprietary datasets and things like that?
Or is it are there different ways that we should expect you to deploy capital when you do M and A? Thanks.
So I think in the past, we've talked about looking for closely related adjacencies, in particular, in commercial real estate where we have an information advantage, where we have existing resources and distribution channels that we can use to leverage that new data stream, and this certainly fits in that model. So the fact that we have a lot of hotel comparable sale information, properties for sale base building data, connecting that and integrating it with STR will allow us to build a really robust best in class information utility for folks playing in the hospitality sector. There are some additional segments in real estate that we would keep our eye on. But I would expect to continue some of this, but then also look for some geographic expansion. And I would probably say it probably you probably don't run out of adjacencies at any point.
Like you can keep on extending that CoStar platform sector by sector by sector. So we can probably keep doing that for another decade or so.
Bill Warmington, Wells Fargo. Please go ahead.
Good morning, everyone, and congratulations on the deal.
Thank you, Bill.
So you talked about selling more CoStar Suite into the hospitality sector. So how penetrated is CoStar already in the hospitality sector?
We do sell to so what we're trying to sell to is we do currently sell comparable sale data, what's for sale, that kind of information. We don't sell any revenue data or any occupancy data. But companies like Marriott, Hilton, Hyatt, Wyndham, DoubleTree, those folks are clients today, but only probably about 28 hotels, 30 hotels are customers. The bigger opportunity are is for the people who really build hotels, appraise hotels, lend money to hotels, buy and sell hotels. Those folks today, CoStar doesn't come to mind as a must have for that sector.
Those folks are often buying an ad hoc report here or there from STR. But once we put these two companies together and we take the data assets CoStar Scott with the data assets that STR has, we think that it will be a very compelling offer. And when I look at the STR existing customer base and with minimal effort selling into service providers like CBRE would be a client for SDR or a number of large banks would be clients. They're exactly the sort of folks we sell to, but they only have STR only has about 4% 3% or 4% penetration into that space. We can extend that penetration dramatically.
So if I'm a significant investment sale player in Denver, a developer in one of those markets or an appraiser or a government agency, I would be a great target for this planned connected hybrid product. I think it would give you really invaluable insight.
We have a question from the line of Sterling Auty of JPMorgan.
Great. Thanks. Good morning, guys. This is Jackson Nader on for Sterling. Good morning.
Question
on the benchmarks maybe being folded into the existing CoStar Suite. So either extending it to commercial real estate or multi family, do you think that this will be something that you'll explicitly charge for? Or will this just be rolled into an existing subscription and really used for better retention?
I think that it's probably a little early to say that. We would definitely be targeting significant new revenue streams from that, and it'd be an assessment of will this allow us to reach significant additional penetration or will this be a new product? My sense of it on the, say, the retail side or on the corporate user side, it would all be about penetration. We would be able to round out our offering to that marketplace where we could give them really high quality information on what other retailers are playing and other tenants, office tenants are paying along with lease abstraction and project management software along with market data. And then on the hotel side, I mean, on the multifamily side, I think it would also be a penetration We're still we've been very successful selling information products into that sector, but we're probably only 5%, 10% penetrated there.
So I think it would likely be penetration, but opportunities for both. We wanted to do that for a while. Like this has been a priority for us for a while.
Stephen Sheldon of William Blair.
Good morning. Wanted to ask about the
buy versus build decision here. You have a lot of resources at your disposal, could have tried to potentially recreate the value STR is providing. So what made you go with the buy decision here and made STR attractive? And along those lines, how much did STRs establish trust with hotel participants in getting them to share data in the historical data set factoring to your decision?
Yes. I love your question. I love your question a lot because it is the easiest question I've ever gotten. The of all the acquisitions we ever look at, this is the least likely to ever want to build and the most likely to want to inquire an established player. So the work that Randy Smith and his wife did over the years building this company is phenomenal.
The trust they've garnered with the industry, the quality of the time series, the work they've done, I believe it would be a nearly insurmountable hill to try to build this on your own. I don't think there'd be really a point to it. It would take so long. So this one was a clear no brainer acquire versus build. It would have been brutal.
And we have a question from the line of Ryan Tomasello of KBW. Please go ahead.
Good morning, everyone. In terms of the planned growth initiatives for STR and doubling the growth profile, can you just try to frame your priorities among these major initiatives between international expansion, the cross selling of the new products? And what gives you confidence that doubling the growth profile for this mature company is achievable? And then as a follow-up to that, what level of investment do you think will be needed over the next 3 to 5 years to achieve these growth targets? And how long do you think that STR might be a drag on the company wide margin recognizing that this is a relatively smaller deal as a percentage of EBITDA today for the business?
Yes. So I would say it would be just a couple of years of small drag on the margin that donut we no way would anticipate this thing going negative. And then we believe it would, by 2023, be up to 40% margin contribution. The for me, there's multiple levels here. 1, international expansion for STR is already underway, and business overall.
And I believe we'll just be supporting that. And I think our international scale will help them achieve faster growth there. But there was a moment in due diligence where I felt highly confident about the deal, and that was when you were looking at the non hotel names buying the products, and it basically was just a sample of exactly who we currently sell to today. But it was just a secondary market. They weren't delivered in a way that was entirely relevant to that marketplace.
And that's basically banks, appraisers, local government. So local government needs to appraise a hotel property. Banks need to appraise it. They need to underwrite it. They're lending money to it.
Commercial real estate brokers are buying and selling it. And if I'm looking at a parking lot in Columbus, Ohio and trying to figure out what it is, I need to figure out it's going to be a hotel and office building or apartment building. Smith Travel's penetration of that market is low single digit. Through our sales force and by integrating the products into CoStar, I believe we can move that We can really move the dial at relatively low cost and investment. It's basically using our existing sales force, and it's using a lot of our existing software resources.
Now we will invest in the business, but that one to me, like I love doing a deal where you've got 4 or 5 good reasons for doing the deal and you only have to be right about 1 or 2 of them to make the deal make sense. And that one of being able to extend their information into the traditional commercial real estate market is the most obvious one to me. Secondarily, there is clear demand in my mind for the forecasting component of the business where you are gathering forward information and forecasting future demand in the market and future pricing. And also, there's clear demand, I believe, for the net operating income where you bring in the hotels benchmark their expenses as well, which is a great opportunity for the hotels to not only reflect on their competitive performance or their comparative performance on occupancy and revenue, but also be able to reflect and optimize on their comparative performance and expense. So this mature business has done a great job getting to where it is, but it has 2 clear it has 3 clear growth vectors on its own that just need to be sort of focused on and funded and nurtured plus for the traditional CoStar sales force, huge great opportunity being able to extend it.
Now the other thing is when we go to meet with a bank or an appraiser or a private equity firm, whoever it might be, the more sectors we can represent in the CoStar platform, the more appealing we are. So the more we can be a one stop platform covering all the different places people can invest in commercial real estate, the more appealing we are. So this drives penetration into people who may have a portfolio
of mostly office with a little
bit of hotel or it really sort of makes us appeal to more people out of the convenience elements. A little bit like the way Bloomberg isn't just one module, it's multiple modules, and that's part of its appeal.
We have a follow-up question from the line of Bill Warmington of Wells Fargo.
I just wanted to ask about the a couple of questions about the revenue base in terms. So it sounded like most of it is subscription, but you did mention some ad hoc usage. So I wanted to ask about just what percentage of the revenue actually is subscription and also if there was any revenue that you plan to or needed to discontinue?
Hello, Bill. This is Scott. Let me take that. The primary product that they sell, the Star Report, is a subscription product and that's around half of the revenue and that's 100% subscription. They also do a number of trend reports, which are more customizable as far as what people want to get in those trend reports.
But those also have exactly the same characteristics as one in a long term subscription where people can get those through the platforms over time. We don't necessarily call them subscription now, but I think those have the right characteristics to be there. When you look at all of the things that are subscription, we're looking in the 70% to 80% of their revenue. So that covers those. And we expect, obviously, that we'll continue to build on that model and wouldn't prioritize some of the more ad hoc level areas in the business.
But until we get into those a little further and understand those products, we'll decide which ones we can build into subscription products with the company and which ones will continue to support clients but won't be a focus of our future growth. So more to come on that. We don't have a specific view yet.
And as well, the Scott, correct me if I'm wrong, but the renewal rates on the subscription products are in the upper, upper 90% range.
Yes. Yes, that's correct, way upper 90% range.
Okay. Is there any revenue you might need to discontinue?
Well, we don't see anything at this stage, Bill, that would say we'd discontinue. We'll look at that further and see which ones we focus on for growth and which ones don't have quite the scaling characteristics. But right now, it's all great products, and we're going to continue building the business.
Due to time constraints, our last question will come from the line of Mr. Ryan Tomasello of KBW. Please go ahead.
Hi, guys. Thanks for taking the final follow-up. Just again on the revenue mix, I think you've alluded to it. What percentage of the revenue base is coming from these stereotypical clients of hotel brands, owners and management companies versus the institutional clients that seem to be the more attractive cross selling opportunity? And then as a follow-up to that, not sure if you gave the specific percentage, but what percentage of the client base of STR today is already subscribing to CoStar Suite in some fashion?
Thanks.
I would say the percent of again, this is an educated guess. It's not a definitive number. The percentage of folks who are subscribing to SDR, they're also subscribing to CoStar currently is probably 20 some percent, 20 some percent. Scott, do you want to handle the other part of that question, percentage that is the traditional hotel side?
Yes. I don't have a specific percentage for you, Ryan, but it is the vast majority of the business is sold into the directly into the hotels. There's certainly a great perspective of different groups that they've started to sell into, as Andy mentioned, with the banks and the brokers, other service providers. And they do sell to some of the larger ones in those classifications, but still the vast majority of the sales are into the directed into the hotels and hospitality space.
Great. Thanks, everyone, for joining us on short notice. I'm sorry to take an hour out of your morning, but I hope it was helpful. And we look forward to updating you on our progress here, and we look forward to closing this deal shortly, subject to appropriate HSR review. Thank you very much.
Ladies and gentlemen, that does conclude our conference call for today, which will be available for replay from today at 11:30 am Eastern Time until November 1, midnight of that day. You may access the recording by dialing 1-eight hundred-four seventy five 6701 and entering the access code 4,72,856. If you're dialing from an international location, please dial 320-365-3844 and the same access code of 4,72,856. Once again, that does conclude today's CoStar acquisition of STI Teleconference call. We'd like to thank you for your participation.
Have a wonderful day. You may now disconnect.