Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Special Announcement Conference Call. At this time, all participants are in a listen only mode. Later, there will be an opportunity for questions with instructions being given at that time. As a reminder, today's conference is being recorded.
I'd now like to turn the conference over to our host, Rich Simonelli. Please go ahead, sir.
Thank you very much, operator, and welcome to CoStar Group's call to discuss the acquisition of ForRent. We're so glad you're joining us today. Before I turn the call over to Andy Florence, CoStar's CEO and Founder and Scott Wheeler, our CFO, I have some important facts to convey to you. Certain portions of our discussion today may contain forward looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in our September 12, 2017 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 at the CoStar of the date of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's call is being broadcast live and in color on our website, where you can also find CoStar's Investor Relations page. Please refer to our press release today on how to access the replay. Remember, one question, make it a good one, you can always read too. I'd like to now turn the call over to Andy Florance.
Andy?
Thank you. Welcome and thank you for joining us today to discuss CoStar Group's acquisition of ForRent. As you saw in our press release issued earlier today, I'm very happy to announce we've agreed to acquire ForRent from Dominion Enterprises for $350,000,000 in cash and $35,000,000 in CoStar stock. The acquisition is expected to close during the Q4 and to bring increased scale and profitability to our apartments business. ForRent's revenue for 2017 is expected to be approximately $100,000,000 and EBITDA is estimated to be approximately $15,000,000 based on financial results from the first half of twenty seventeen.
The post integration we believe ForRent will add approximately $75,000,000 to $85,000,000 of revenue. The reduction will occur as we eliminate certain non core revenue streams and incur and we'll also expect to incur some losses because of duplicative ad buys. After integration, we believe EBITDA margin for ForRent will increase to the range of 45% to 55%. The investments we've made in building a massive renter audience for Apartments dotcom can be leveraged to dramatically increase ForRent's margin. You don't need 2 large marketing budgets.
When we combine ForRent with our existing advertising and information revenues from the multifamily industry, we expect to approach $400,000,000 revenue run rate by the end of 2017. We believe that in combination, we will have over 40 3,600 advertised properties, up dramatically from the 18,000 properties advertised on Apartments.com at the time of that acquisition. You may recall that in February 2015, we estimated that it would take 10 years to achieve $550,000,000 in revenue in our multifamily business. We are clearly significantly ahead of that pace as our execution in this space is generating extremely positive financial results. Over the 3 years since CoStar Group acquired Apartments dotcom, I believe we've built the strongest online marketplace for leasing apartments and homes.
Our apartments network averaged 42,000,000 visits per month in the second quarter. While we continue to compete with a wide range of apartment leasing lead generation sources, we believe that the additional lead flow that ForRent can bring to Apartments dotcomnetwork can position us for the first time as the number one lead source for our advertisers among all lead sources. This includes online and offline lead sources such as signs, walk ins, referrals. 4Rent is headquartered in Norfolk, Virginia, close to CoStar's headquarters in Washington, D. C.
And approximately 1 hour away from our new research center in Richmond. ForRent has 475 employees located in 38 offices around the United States. ForRent and Apartments dotcom have largely similar geographic coverage. Forrent's primary service is digital advertising for multifamily properties. It's a great URL and we feel it's valuable to cover the keyword term rent in addition to the keyword term apartment for which we already have phenomenal coverage.
ForRent has a strong 35 year history with great brand name recognition across the apartment industry. They have built lasting relationships with thousands of loyal customers. ForRent has 17,000 advertised properties on its network of multifamily sites. In addition to the primary site forrent.com, they also offer targeted sites after55.comcorporathousing.com and forrentuniversity.com. Little depressing when I realized I was the target market for After 55.
Adding forrent to our apartments.com network will expand our multifamily reach by adding millions of new renters. Through the 1st 6 months of 2017, the 4 rent sites generated over 47,000,000 visits and an average of 3,500,000 unique monthly visitors, according to Comscore. Similar to Apartment Finder, we plan to run ForRent as a separate website with its own distinctively different website experience and user interface. It is obviously valuable to have multiple leveraged consumer brands in the apartment the cast a wider net to attract varied potential renters. The different looking to the renter, the sites will leverage much of the same technology and content that we use for Apartments.com and Apartment Finder.
As a result, we plan to continue to leverage our platform and offer multiple competitive sites for a fraction of the unleveraged cost. Because renters visit multiple sites, property managers like to advertise on multiple sites. Their properties will be visible across 12 sites in the Apartments dotcom network. We believe we offer the best way to optimize apartment marketing spend for our customers. All of our advertisers are expected to benefit from our unmatched leads to lease conversion ratio that helps our clients manage their costs and protect their brands.
For rents advertisers properties will be featured on Apartments.com after transaction closes, increasing their potential exposure by approximately 5 100%. Just like Apartment Finder, we're not planning to do a specific branding campaign for ForRent as we did with Apartments.com with Jeff Goldblum, we plan to focus on online marketing for ForRent. However, there is no doubt that the advertising and brand work for Apartments.com will benefit ForRent because it gives our salespeople better access to buyers because of the power of the unprecedented marketing apartments.com marketing reach. We have an exceptional head start on the integration of ForRent since much of the infrastructure we have built for Apartments.com and Apartment Finder can be used for ForRent. As we did with Apartment Finder, we plan to consolidate all of ForRent's content, billing and CRM into our existing back end systems.
This will reduce costs. With this acquisition, we gained more than 135 experienced senior sales professionals. This team will join with our existing 230 Apartments dotcom Professionals, giving us one of the largest, most effective sales forces in the industry. We have a very productive apartment sales force that has met with more than 30,000 different clients this year. But because of the enormous scale of the apartment industry, our sales team could only meet with 20% of our prospects during the Q2.
The larger sales force this combination creates should allow us to reach the majority of our prospects each quarter and accelerate revenue growth. There is an enormous opportunity in front of us to provide services meeting the vital marketing and information needs of the apartment industry. Multifamily is a huge asset class in the U. S, valued at over $3,500,000,000,000 with over 117,000,000 renters. As homeownership rates dropped to record lows, renting households have grown from $35,000,000 in 2,004 to $46,000,000 today.
Most striking is that renters now pay an estimated $763,000,000,000 in annual rent payments, up 50% from 2,007. That's a spending increase of almost $250,000,000,000 in the past decade. We are very excited to take the online lead in the segment with such spectacular growth. As we integrate ForRent, we believe that we can offer their prospective renters access to the most complete and accurate inventory of apartment availabilities with more than 1,000,000 rentals spanning apartments, homes and condominiums. Property managers along with investors, lenders and others relying on CoStar for multifamily information analytics are also expected to benefit from the further strengthening of our information offering with the addition of the properties and data that come from ForRent.
Our apartments network draws on CoStar's massive multifamily database, which contains detailed information on 500,000 apartment properties and we believe the largest research ever conducted to document the U. S. Apartment industry. In summary, the acquisition for ForRent strengthens our offering and brings increased scale and profitability to our apartments business. After integration, the acquisition is expected to be very accretive to our margins.
I will now turn the call over to our exceptional Chief Financial Officer, Mr. Scott Wheeler.
Why thank you, exceptional after 55 CEO. What type of Andy Florins? Technically 50. We're going to change that name to It's like
AARP, they start mailing to you at 40.
We'll start a new site called notquite55.com. You can participate there. All right. Thanks, Andy, and thanks, everyone, for joining us on relatively short notice to discuss today's announcement. As Andy mentioned, we're excited at this opportunity to combine ForRent's business with Apartments dotcom.
The acquisition is structured as a stock purchase agreement with a total purchase price of $385,000,000 which includes $350,000,000 in cash $35,000,000 in restricted stock. We expect the deal to close in the 4th quarter subject to customary closing conditions including Hart Scott Rodino review. As Andy noted, ForRent is expected to generate approximately $100,000,000 in revenue $15,000,000 in EBITDA in 2017. When we combine ForRent with Apartments dotcom, we expect to generate an additional $25,000,000 of EBITDA in annualized synergies within 24 months of closing. Based on the acquisition price, this expected combined EBITDA implies a purchase price multiple of a little under 10 times after synergies.
We're hard at work developing our integration plans for the 2 businesses, which benefits greatly from the experience we've gained in both the Apartments.com and the Apartment Finder integrations. While ForRent is larger than Apartment Finder at the time of acquisition, both in terms of revenue and staff, this integration should be operationally simple as ForRent recently completed their transition away from the print business and now runs a predominantly digital advertising services platform. We are confident we can integrate these companies to enhance the value we provide both Apartments.com and ForRent customers, while at the same time streamlining the cost structure and improving the efficiency of our combined operations. Our preliminary financial outlook for the acquired business assumes an October close date and a revenue contribution to CoStar's results of approximately $17,000,000 to $20,000,000 for the Q4 of 2017. We expect the transaction to be slightly dilutive to CoStar's non GAAP EPS in the Q4 due to integration efforts and purchase accounting adjustments.
The exact timing of the closing, of course, may impact our estimates. After the acquisition closes, we'll complete a more detailed forecast of the impact of CoStar's consolidated estimates and we'll share those with you on our regular quarterly earnings call in late October. After completing the integration, we expect the acquired business to add approximately $75,000,000 to $85,000,000 in annual revenue with EBITDA margins in the range of 45% to 55%. The incremental EBITDA margins will initially be below post integration levels through the first half of twenty eighteen as we absorb one time acquisition related costs for retention, severance, transaction fees and other items. The preliminary estimate of the expected revenue contribution is below current for rent revenue levels as we're still in the early stages in developing and validating customer integration plans and whether or not to continue certain non core revenue streams.
Overall, the ForRent acquisition is a great fit with CoStar. We have depth and experience with this type of integration. The combination provides added scale to our apartments business and increased profitability. This transaction fits directly in our strategy to continue expanding our multifamily portfolio
and that
a 10 times post integration EBITDA multiple, it's a great value for CoStar. With that, we will open the call for questions.
And our first question will come from the line of Peter Christiansen of Citi. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my question.
Hello, Peter.
2 quick ones. First, the expectations for the company to reach 40% EBITDA margins towards the end of next year, is that still intact with this deal? And I guess my second question would be if you could talk to some of what's been the growth of the foreign franchise in recent years And how do you see that going further in tangent with the Apartments dotcom franchise?
Hey, Pete. The 40% goal at the end of 'eighteen is still very much intact and this in no way detracts from that goal or pushes it around or anything. We're still expecting to be meeting that objective. Yes. And the
I think if anything, there was nothing before this acquisition that was moving us off that goal. And I think if anything, this creates a tailwind to that goal. The Apartments dotcom brand and our investment in marketing, which was really game changing in the apartment industry, Definitely allowed Apartments.com to pull some share from ForRent over the last year or so. So the for rent in recent months has been roughly stable, but it had been falling prior. It was very profitable.
So it had the ability to operate for an extended period of time even had some falling revenue. Once this deal closes and our ability to take all the ForRent advertisers and run them through the Apartments dotcom network in addition to the ForRent network allows us to really stabilize that network. So we're going to be we believe we'll be able to offer more value to the Apartments.comadvertisers, more value to the for rent advertisers, just more renters overall coming to these sites in combination and your costs don't go up. Once you're electronically moving the content, there's no material cost to it. So a renter gives you the an apartment owner gives you information once.
There's no incremental cost to run on multiple sites, but there are more renters, so you're bringing the value up. So we think we'll stabilize that revenue at ForRent and I think we will be in a position to grow the revenue by virtue of having the larger sales force and the ability to see more of the prospects. One of the things that ForRent has done well in the last several years is as there was more competition at the 120 unit plus community size, the bigger apartment communities. They grew into the smaller communities like the 80 unit community, the 90 unit community. And there are 100,000 of those smaller communities out there.
And what ForRent has proved is that those folks need marketing solutions just like the large community. So with the larger sales force, we're going to be actively going after the small communities, the midsize communities and the traditional large communities. It's more than you're looking for. I'm sorry.
Thank you. And next we'll go to the line of Brett Huff with Stephens. Please go ahead.
Good afternoon, guys. Congrats on the deal.
Thank you very much. Thanks Brett.
Question on pricing or multiples. As I recall, Apartments dotcom was a 6 times EBITDA kind of deal and Finder was an 11 times kind of deal. This is a 10 times kind of deal. I recall thinking that you guys had changed the industry such that these assets were kind of facing some tough times. So curious why this purchase was near the higher end of that range rather than the lower end and if there's anything special that we need to know about or kind of what your thoughts were on that?
Thank you.
Right. So those I think apartments.com was 17 times EBITDA, somewhere around that neighborhood when we acquired them and then we achieved synergies. Same thing with Finder, the number we acquired them at and then the number we achieved within a year or so relative to cost synergies made it much more favorable. So yes, certainly going into the deal, if you were to maintain the full cost structure to maintain 2 separate companies, it's a pretty high multiple. But we fully expect to be able to get down to a number that is 10x or less, which is very accretive.
And in any one of these transactions, you have to have a willing seller and a willing buyer. And the seller might be sophisticated and have staying power and be fully aware that you can achieve a very favorable purchase price after a year of integration. And that factors in the negotiation. Now in the 40 negotiating sessions we held with a seller over 4 years, that was bandied around from time to time. And but we did eventually come to something I think that is very good for our shareholders and that we think this will be ultimately a 10 times EBITDA deal, which I think we're all
very
happy with. And it's not so much what we take away from them, but what we give to our shareholders.
Thank you. And our next question comes from the line of Andrew Jeffrey of SunTrust. Please go ahead.
Hey, guys. Thank you for taking the question today.
Andy, I wonder if
you can just expand a little bit on what your view of the multi family TAM is today? If you have an updated market share goal or revenue goal now that it like $500,000,000 is attainable? And then I guess maybe also expand a little bit on your comments in the context of the buy versus build decision here given how strong your momentum has been in multifamily in the last several quarters.
Sure. So again, as we we are obviously, our view of TAM is larger than it was 2 years ago since we're closing in on the TAM that we thought we could achieve in 20 25 looks like it's around the corner. It's a little bigger than we thought. A couple of big changes there. The average price point that we've been able to achieve for higher quality leads that convert better is higher than we thought.
So the price per property that we're getting, there's more elasticity there than we thought. And then secondly, another big one that I mentioned that ForRent has been good at is we are finding that sort of the obvious, which is someone with a 70 unit community is not too small to advertise their target market. So that moves the TAM up over $1,000,000,000 And there's 2 TAMs in our view. 1 is the straight sort of lead generation marketing solutions and the second is derivative products. So the most obvious derivative product is information, which we've really been harvesting well.
It's one of the fastest growing information streams on the multifamily information that we derive by having 1,000,000,000 searches and 75,000,000 rent updates a year. So that's another TAM, which I think is in the 100 of 1,000,000. And then secondarily, tools like facilitating the leasing processes, there's still a lot of money there. So if I am an agent finding a renter for someone's property. It's not atypical that I might take 5% of the rent.
Well, that then becomes tens of 1,000,000,000 of dollars of opportunity if you can effectively connect renters with owners over the Internet. And that's something that I think is aligned with the owners. I mean, that's something they would like to see happen. So that is a multi $1,000,000,000 TAM. But we're really focused on the direct proven TAM, the $1,000,000,000 TAM that we think is there.
Now, yes, we're having success in second part of your question, we've been having success. The apartment sector is growing really well
for us.
So but we again think this is a huge opportunity and speed is important. We're able to acquire a company at a very accretive level. We're able to bring in some valuable personnel to accelerate our growth. It pains me when we don't when you don't reach every prospect you should be able to reach during the course of the year. Having a larger sales force will allow you to address it more effectively.
And then it also allows us to brings in more content for the runners more quickly. It brings in more data for the information products more quickly. And it allows you to convert those for rent advertising clients to much higher margin clients rapidly. So I think speed matters when you're trying to be the 1st to scale. All
right. And our next question comes from the line of Sterling Auty of JPMorgan. Your line is open.
Yes, thanks. Hi, guys. I want to circle back, make sure I'm really clear. Anne, you mentioned for rent going down to 70 unit properties. Where's the bulk of their revenue come from?
So where is the sweet spot in the marketplace for them? And how does that overlap with what you already have?
Sure. So there is the bulk of their revenue is going to be in properties with more than 120 units. But what's important to me is the tremendous growth of both Apartments dotcom and even to a greater degree for rent have achieved in units from 20 apartment buildings with 20 to 120 units. That was something that just wasn't something people were selling into before. It's a massive market and we're both selling well there.
Now, there are duplicative accounts, people that advertise on both services that are in the 120 unit and up category. Now those are people who before the companies intended to merge, were feeling they were getting one lead flow from the for rent site that was valuable to them and they were getting additional valuable leads from the Apartments dotcom network. There's no reason to believe that those people would want fewer leads once these two companies merge and we believe they're likely to want to keep buying exposure on both sites. In fact, it will be easier for them to do that because they'll be able to feed the content or data to us once and be serviced on multiple sites. In addition, we have a very detailed plan on how we're going to approach each of these folks and make sure we solidify these relationships with all due haste.
For competitive reasons, we won't go into that in detail. But we feel that we will add about 6,000 buildings we've not seen before onto our overall network and we'll grow our relationship with another 11000, 12000 properties.
That makes sense. But you said earlier that you'd be able to purchase and have your apartment seen on 12 different sites. Are you saying now that to get those 12 different sites, you'd have to pay So in other words, there's going to be some sort of package deal. And then a completely separate question, are you going to leave the headquarters where it is or will they get assimilated into the new research summit?
Okay. So that's if you're on for rent, you'll flow into the Apartments dotcomnetwork. If you're only on for rent, you'll flow into the Apartments dotcomnetworkautomatically. If you're on Apartments.com and not on FortRent, that will be an upsell. So it flows one way, it doesn't flow the other way.
And then in terms of the headquarters, ForRent is dispersed all over the country. And there's a lot of infrastructure for ForRent in Norfolk that's embedded into Dominion. That will not continue the way it is the same way. As you know, we have almost 1,000 employees in Virginia where they are. So there'll be some blending there.
But there'll be no large headquarters presence for rent. Our main headquarters for the apartments business is Atlanta, Georgia, but we have a huge presence in all the locations. I think there's only 2 offices where ForRent maybe 2 or 3 offices where ForRent has a handful of staff where we don't have an office and we will use their office. But I think there'll be for rent personnel in maybe 50 U. S.
Offices of CoStar.
Thank you. And our next question comes from the line of Phil Warmington of Wells Fargo Securities.
Hi, it's Bill Johnson on for Bill Warmington. Hello, Mr. John.
Hey. So I was hoping you could provide some extra color on the timing of synergies. What will you focus on first there? And then also, is there any breakup fees on either side of this deal?
Yes. So Bill, the timing of synergies, obviously, we're early in the planning on this. But typically, we'll see in the first instance, we're obviously going to get with the company and work through detailed plans. And then over the 1st 6 months, it will take to do a lot of the technology infrastructure and work. So we expect that's kind of the heavy lifting of the integration will be in the 1st 6 months.
And then following that, really as we get towards the second half of twenty eighteen, we'll probably have most of the integration work complete. And yes, the second part of your question, yes, there is a breakup fee in the deal.
Thank you. And next we'll go to the line of Pat Walravens of JMP Securities.
Great. Thank you.
Can you talk about Hi, Andy.
Can you just talk a
little bit for us about the competitive environment and how it fits into thinking around antitrust. I think people are a little sensitive to that given the whole second request that RealPage got on LRO. And if you would talk a little bit about direct competition like RentPath, but also the other options from the sort of Facebooks and Googles and Craigslist of the world? Sure.
Well, there's no question that we are the handsomest, most attractive competitor out there. But other than that, yes, I don't think that there's a comparison between the sort of scrutiny that RealPage got on that transaction because that was a pretty small space that was being consolidated. There is within this space, we think there is no antitrust issue here. That's obviously we respect the process and you get through the process and ultimately that's up to the regulators what happens. But you've got RentPath out there, it's a very significant player with 2 major sites with ApartmentGuide and Rent.com.
You've got Zillow seeing that as a major growth vehicle. You've got Craigslist as what used to be the biggest player, still a major player in a number of markets. And then you have role basically do your own SEM, and which is pretty significant. And then you have social as an emerging area. And then you have a number of apartment communities that believe their own website is the single most effective Internet strategy.
Now all the online strategies combined probably are responsible for less than 50% of the lead flow into a community. So signs on the building or referrals and renewals are probably half of the flow into these buildings. So it would be very difficult for anyone to make a case that this particular transaction redefines the competitive landscape or damages competition in the space. I think it helps us grow faster than some of our competitors, but it gives us an edge, but it doesn't in any way destroy competition in the marketplace.
Thank you. And our next question will come from the line of Smedes Mustafi of B. Riley and Company.
Hey, guys. How are you? Thanks for taking the question. Thank you. So on the last earnings call, you talked about how much more efficient of a lead generator Apartments dotcom is compared to ForRent.
I believe the number you gave was 9 leads per each customer versus about 16 for ForRent. So given that and now that you've also acquired the Screen Pros and ForRent is probably going to become more efficient lead generator, Can you talk about the potential pricing and revenue upside you would expect post deal once ForRent essentially starts generating leads at the same rate of Apartments dotcom?
Sure. So first of all, good work on remembering all those numbers like when you brought them like, okay, what are the exact numbers and you gave them to me? Thank you. So yes, we would work with ForREN software developers to pursue more of our philosophy of trying to filter out folks that are not qualified for community and we're not going to measure our success by the number of leads, but by the leases we generate. And those are some pretty easy technical changes that we'll pursue pretty quickly.
Once you do that and you also give people greater exposure, the 4 right people greater exposure on apartments.com, you're going to be giving them a lot of value. And one would believe that there was the ability to achieve more for the additional value you're providing. That's not our primary focus. Our primary focus is we believe that there's 100,000 apartment communities we can get into our network that that's our top priority is to focus our salespeople and retain the business and signing up new folks into the network. But one of the things that is very valuable is the business you don't lose is as important as the business you sell.
In fact, I'd say the business you don't lose is more important than the business that you new business you achieve. When we acquired Apartments dotcom, they churned or lost 5% of their business each month. And now we've reduced that down to just, I think, a little bit over 1%. So that has a dramatic ability a dramatic impact on your ability to grow and that's what we're focused on by giving those ForRent customers more value.
Okay. Thank you.
I hope that answered the question. Did I answer the question?
Absolutely. Thank you. I'll turn it over. Okay.
Thank you. And at this time, there are no further questions coming from the phone line.
Great. Well, thank you very much for joining us. I have to say that what was it, the special meeting? Special meeting, yes. Special announcement.
Special announcement sound awful lot like kindergarten. This is much more serious than that. But thank you very much for joining us in the call. And if you have, we're happy to answer questions and we look forward to updating you on the next earnings call. And we look forward to working with our new colleagues at ForRent once we get the go ahead to close from the regulatory authorities.
Thank you very much.
That does conclude our conference for today. Thank you for your participation and for using the AT and T Executive Teleconference Service. You may now disconnect.