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. Should you require any assistance during today's call, please press star then zero, and an operator will assist you offline. 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.com. We're so glad you're joining us today. Before I turn the call over to Andy Florance, 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 can 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-K 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, 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 conference 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 re-queue. 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.com. As you saw in our press release issued earlier today, I'm very happy to announce we've agreed to acquire ForRent.com from Dominion Enterprises for $350 million in cash and $35 million in CoStar stock. The acquisition is expected to close during the fourth quarter and to bring increased scale and profitability to our apartments business. ForRent.com's revenue for 2017 is expected to be approximately $100 million, and EBITDA is estimated to be approximately $15 million based on financial results from the first half of 2017. With post-integration, we believe ForRent.com will add approximately $75 million-$85 million of revenue. The reduction will occur as we eliminate certain non-core revenue streams and will also expect to incur some losses because of duplicative ad buys.
After integration, we believe EBITDA margin for ForRent.com will increase to the range of 45%-55%. The investments we've made in building a massive renter audience for Apartments.com can be leveraged to dramatically increase ForRent.com's margin. You don't need two large marketing budgets. When we combine ForRent.com with our existing advertising and information revenues from the multifamily industry, we expect to approach $400 million revenue run rate by the end of 2017. We believe that in combination, we will have over 43,600 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 it would take 10 years to achieve $550 million 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 three years since CoStar Group acquired Apartments.com, I believe we built the strongest online marketplace for leasing apartments and homes. Our apartments network averaged 42 million 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.com can bring to Apartments.com network 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. ForRent.com is headquartered in Norfolk, Virginia, close to CoStar's headquarters in Washington, D.C., and approximately one hour away from our new research center in Richmond. ForRent.com has 475 employees located in 38 offices around the United States. ForRent.com and Apartments.com have largely similar geographic coverage. ForRent.com's primary service is digital advertising for multifamily properties.
It's a great URL. 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.com 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.com 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.com, CorporateHousing.com, and ForRentUniversity.com. A little depressing when I realized I was the target market for After55. Adding ForRent.com to our Apartments.com network will expand our multifamily reach by adding millions of new renters. Through the first six months of 2017, the ForRent.com sites generated over 47 million visits and an average of 3.5 million unique monthly visitors, according to Comscore.
Similar to Apartment Finder, we plan to run ForRent.com as a separate website with its own distinctively different website experience and user interface. It is obviously valuable to have multiple leverage consumer brands in the apartment rentals website space. Renters like to visit multiple sites when searching for an apartment. We can customize each site to cast a wider net to attract varied potential renters. Though 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.com 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. ForRent.com advertisers' properties will be featured on Apartments.com after the transaction closes, increasing their potential exposure by approximately 500%. Just like Apartment Finder, we're not planning to do a specific branding campaign for ForRent.com as we did with Apartments.com with Jeff Goldblum. We plan to focus on online marketing for ForRent.com. There's no doubt that the advertising and brand work for Apartments.com will benefit ForRent.com because it gives our salespeople better access to buyers because of the power of the unprecedented Apartments.com marketing reach.
We have an exceptional head start on the integration of ForRent.com, since much of the infrastructure we have built for Apartments.com and Apartment Finder can be used for ForRent.com. As we did with Apartment Finder, we plan to consolidate all of ForRent.com's content, billing, and CRM into our existing back-end systems. This will reduce costs. With this acquisition, we gain more than 135 experienced senior sales professionals. This team will join with our existing 230 Apartments.com 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. Because of the enormous scale of the apartment industry, our sales team could only meet with 20% of our prospects during the second quarter.
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 $3.5 trillion, with over 117 million renters. As homeownership rates drop to record lows, renting households have grown from 35 million in 2004 to 46 million today. Most striking is that renters now pay an estimated $763 billion in annual rent payments, up 50% from 2007. That is a spending increase of almost a quarter of a trillion dollars in the past decade. We are very excited to take the online lead in the segment with such spectacular growth.
As we integrate ForRent.com, we believe that we can offer their prospective renters access to the most complete and accurate inventory of apartment availabilities with more than 1 million 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.com. 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.com 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 After55.com CEO.
Well, technically.
Andy Florance.
Technically 54.
We're going to just change that name.
It's like AARP. They start mailing to you at 40.
We'll start a new site called notquitefiftyfive.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.com's business with Apartments.com. The acquisition is structured as a stock purchase agreement with a total purchase price of $385 million, which includes $350 million in cash and $35 million in restricted stock. We expect the deal to close in the fourth quarter, subject to customary closing conditions, including Hart-Scott-Rodino review. As Andy noted, ForRent.com is expected to generate approximately $100 million in revenue and $15 million in EBITDA in 2017. When we combine ForRent.com with Apartments.com, we expect to generate an additional $25 million 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 10x after synergies. We're hard at work developing our integration plans for the two businesses, which benefits greatly from the experience we've gained in both the Apartments.com and the Apartment Finder integrations. While ForRent.com 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.com 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.com 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 million-$20 million for the fourth quarter of 2017. We expect the transaction to be slightly dilutive to CoStar's non-GAAP EPS in the fourth quarter 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 to 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 million-$85 million in annual revenue, with EBITDA margins in the range of 45%-55%.
The incremental EBITDA margins will initially be below the expected post-integration levels through the first half of 2018, 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 ForRent.com 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.com 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 at a 10x post-integration EBITDA multiple, it's a great value for CoStar. With that, we will open the call for questions.
Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, for questions or comments, it's star one at this time. 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.
Go ahead, Pete.
Two quick ones. First, the expectations for the company to reach 40% EBITDA margins toward the end of next year, is that still intact with this deal? I guess my second question would be if you could talk to some of what's been the growth of the ForRent.com franchise in recent years, and how do you see that going further in tangent with the Apartments.com franchise?
Hey, Pete. The 40% goal at the end of 2018 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.
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.com 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.com over the last year or so. ForRent.com 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.com advertisers and run them through the Apartments.com network, in addition to the ForRent.com network, allows us to really stabilize that network.
We believe we'll be able to offer more value to the Apartments.com advertisers, more value to the ForRent.com 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. An apartment owner gives you the information once. There's no incremental cost to run on multiple sites, but there are more renters, so you're bringing the value up. We think we'll stabilize that revenue at ForRent.com, 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.com 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. There are 100,000 of those smaller communities out there. What ForRent.com has proved is that those folks need marketing solutions just like the large communities. With a larger sales force, we're going to be actively going after the small communities, the midsize communities, and the traditional large communities. That's more than you were looking for. I'm sorry.
Thank you. 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 very much, Brett.
Question on pricing or multiples. As I recall, Apartments.com was a 6x EBITDA kind of deal, and Finder was an 11x kind of deal. This is a 10x kind of deal. I recall thinking that you guys had changed the industry such that these assets were kind of facing some tough times. 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. I think Apartments.com was 17x 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. Yeah, certainly, going into the deal, if you were to maintain the full cost structure to maintain two separate companies, it's a pretty high multiple. We fully expect to be able to get down to a number that is 10x or less, which is very accretive. In any one of these transactions, you have to have a willing seller and a willing buyer. 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.
That factors in the negotiation. Now, in the 40 negotiating sessions we held with a seller over four years, that was bandied around from time to time. We did eventually come to something I think that is very good for our shareholders, and that we think this will be ultimately a 10x 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. 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 expound a little bit on kind of what your view of the multifamily TAM is today. If you have an updated market share goal or revenue goal now that it looks like $500 million is attainable. 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. 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 2025, looks like it's around the corner. It's a little bigger than we thought. A couple 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. The price per property that we're getting, there's more elasticity there than we thought. Another big one that I mentioned that ForRent.com 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. They are a target market. That moves the TAM up over $1 billion. There's 2 TAMs in our view.
One is the straight sort of lead generation marketing solutions, and the 2nd is derivative products. 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 billion searches and 75 million rent updates a year. That's another TAM, which I think is in the $hundreds of millions. Then, secondarily, tools like facilitating the leasing processes. There's still a lot of money there. If I am an agent finding a renter for someone's property. It's not atypical that I might take 5% of the rent. That then becomes $tens of billions of opportunity if you can effectively connect renters with owners over the Internet. That's something that I think is aligned with the owners. That's something they would like to see happen.
That is a $multi-billion TAM, but we're really focused on the direct proven TAM, the $billion TAM that we think is there. Yes, we're having success in, 2nd part of your question, we've been having success. The apartment sector is growing really well for us. 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 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. It also brings in more content for the renters more quickly.
It brings in more data for the information products more quickly. It allows you to convert those ForRent.com advertising clients to much higher margin clients rapidly. I think speed matters when you're trying to be the first to scale.
All right. Our next question comes from the line of Sterling Auty of JPMorgan. Your line is open.
Yeah, thanks. Hi, guys. I want to circle back, make sure I'm really clear. Andy, you mentioned ForRent.com going down to 70-unit properties. Where's the bulk of their revenue come from? Where is the sweet spot in the marketplace for them, and how does that overlap with what you already have?
Sure. The bulk of their revenue is going to be in properties with more than 120 units. What's important to me is the tremendous growth that both Apartments.com and even to a greater degree, ForRent.com have achieved in 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 ForRent.com site that was valuable to them, and they were getting additional valuable leads from the Apartments.com network.
There's no reason to believe that those people would want fewer leads once these two companies merge. 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, though, 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. 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 11,000, 12,000 properties.
That makes sense. 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 extra? In other words, there's going to be some sort of package deal. A completely separate question, are you going to leave the headquarters where it is, or will they get assimilated into the new research center?
Okay. If you're on ForRent.com, you'll flow into the Apartments.com network. If you're only on ForRent.com, you'll flow into the Apartments.com network automatically. If you're on Apartments.com and not on ForRent.com, that will be an upsell. It flows one way; it doesn't flow the other way. In terms of the headquarters, ForRent.com is dispersed all over the country, and there's a lot of infrastructure for ForRent.com 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. There'll be no large headquarters presence of ForRent.com. 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 two offices where ForRent.com, maybe two or three offices where ForRent.com has a handful of staff where we don't have an office, and we will use their office. I think there'll be ForRent.com personnel in maybe 50 U.S. offices of CoStar.
Thank you. Our next question comes from the line of Bill Warmington of Wells Fargo Securities. Your line-
Hello, [Mr. Johnson].
Hey. I was hoping you could provide some extra color on the timing and synergies. What will you focus on first there? Then also, is there any breakup fees on either side of this deal?
Yeah. Bill, the timing of the synergies, obviously, we're early in the planning on this, you typically will see in the first instance, we're obviously going to get with the company and work through detailed plans, then over the first six months, it'll take to do a lot of the technology infrastructure and work. We expect that's kind of the heavy lifting of the integration will be in the first six months, then following that, really as we get towards the second half of 2018, we'll probably have most of the integration work complete. Yeah, the second part of your question, yeah, there is a breakup fee in the deal.
Thank you. Next we'll go to the line of Pat Walravens of JMP Securities.
Oh, great. Thank you. 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. If you would talk a little bit about direct competition like RentPath, but also the other options from the sort of Facebook's and Google's and Craigslist of the world. I think that's.
Sure. Well, there's no question that we are the handsomest, most attractive competitor out there. Other than that, yeah, 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. Within this space, we think there is no antitrust issue here. Obviously, we respect the process, you go through the process, ultimately that's up to the regulators what happens. You've got RentPath out there, a very significant player with two major sites with Apartment Guide 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.
Then you have roll, you basically do your own SEM, which is pretty significant, you have social as an emerging area. 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. Signs on the building or referrals and renewals are probably half of the flow into these buildings. It'd 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, it gives us an edge, it doesn't in any way destroy competition in the marketplace.
Thank you. Our next question will come from the line of Sameet Sinha of B. Riley & Co.
Hey, guys. How are you? Thanks for taking the question.
Thank you.
On the last earnings call, you talked about how much more efficient of a lead generator Apartments.com is compared to ForRent.com. I believe the number you gave was nine leads per each customer versus about 16 for ForRent.com. Given that, and now that you've also acquired the ScreenPros and ForRent.com's probably going to become a more efficient lead generator, could you talk about the potential pricing and revenue upside you would expect post-deal once ForRent.com essentially starts generating leads at the same rate of Apartments.com?
Sure. First of all, good work on remembering all those numbers. When you brought them, "Okay, what are the exact numbers?" You gave them to me. Thank you. Yeah, we would work with the ForRent.com software developers to pursue more of our philosophy of trying to filter out folks that are not qualified for a community, and we're not going to measure our success by the number of leads, but by the leases we generate. 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 ForRent.com 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 to retain the business and signing up new folks into the network. One of the things that's 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 new business you achieve. When we acquired Apartments.com, 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%. That has a dramatic impact on your ability to grow, and that's what we're focused on by giving those ForRent.com customers more value.
Okay. Thank you.
I hope that answered the question. Did that answer the question?
Absolutely. Thank you. I'll turn it over.
Okay.
Thank you. At this time, there are no further questions coming from the phone lines.
Great. Well, thank you very much for joining us. I have to say that What was it? The special meeting? The special meeting, yeah. Special announcement? Special announcement. Special announcement sounds awful lot like kindergarten. This is much more serious than that. Thank you very much for joining us on the call. If you have, we're happy to answer additional questions, and we look forward to updating you on the next earnings call. We look forward to working with our new colleagues at ForRent.com 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&T Executive Teleconference service. You may now disconnect.