Ladies and gentlemen, thank you for standing by and welcome to the announcement to acquire Apartments dotcom. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. Also as a reminder, today's teleconference is being recorded. And at this time, I will turn the conference call over to your host, Mr.
Rich Civanelli. Please go ahead, sir. Thank you, operator. Good morning, everyone. Thanks for joining us today.
Welcome to our conference call to discuss the acquisition of Apartments.com. We're coming to you live from our offices in Midtown Manhattan and we're delighted you joined us today. Before I turn the call over to Andy to ask some really important items for you to hear, certain portions of this discussion contain forward looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that cause actual results to differ include, but are not limited to, those stated in our March 3, 2014 press release on the acquisition on the acquisition of Apartments and in CoStar's filings with the SEC including our Form 10 ks for the period ended December 31, 2013 under the heading Risk Factors. All forward looking statements are based on information currently 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 call is being broadcast live and in color over the Internet at www.coastar.com. A replay will be available approximately 1 hour after the call concludes and will be available until April 3, 2014. To listen to the replay call 800-four 70five-six 1701 within the United States or Canada or 3,200,365,3844 outside the United States and Canada. The and a replay of this call will be available on our website soon after the call concludes.
I'll now turn it over to Andy Florence. Andy? Thank you, Rich. Welcome and thank you for joining us this morning on short notice. This morning CoStar Group announced that we have signed an agreement to purchase Apartments dotcom, a division of Classified Ventures for $585,000,000 in cash.
We expect the transaction to close in the Q2 of 2014. The apartment or multi family sector of commercial real estate is one of the largest with a value in excess of $2,000,000,000,000 in the United States. The multi family vertical is bigger than the office vertical, which is where we started many years ago. Unlike the residential resale real estate sector, which involves personal consumption, apartment buildings and rentals are income generating investments. Apartment owners are often sophisticated organizations or REITs with up to multibillion dollar real estate portfolios.
CoStar has been selling information services to apartment owners for close to 3 decades. The apartment sector represents a very important growth opportunity or continued growth opportunity for the company. Much the same way LoopNet revolutionized how owners and brokers market in the commercial real estate sectors of office, industrial and retail properties, apartments has transformed the way property owners market in the apartment building sector of commercial real estate. Over the past 10 years, Apartments has successfully migrated apartment advertising from the classified ad section advertising. Apartments customers receive cost effective targeted marketing solutions that effectively drive measurable exposure, high quality quality traffic and leads to their business.
Apartments is used by thousands of commercial real estate industry professionals and millions of apartment shoppers across the country. In total, there are an estimated 39,000,000 renter households in the U. S. And the typical renter moves about every 18 months. Apartments addition to apartments, the business operates apartmenthomeliving.comandrentalhomesplus.com.
In 2013, the 3 sites generate 114,000,000 visits in aggregate average of 7,000,000 unique monthly visitors. Apartments maintains an online database of 4,600,000 apartment units. Apartments does not compete in the highly competitive and contentious online residential resale space. Apartments is one of the most widely recognized online apartment rental brands in the United States and is a leading advertising destination for professional management companies and building owners. According to a recent study conducted by the firm, 95 percent of U.
S. Apartment owners are familiar with the Apartments dotcom brand. Obviously, Apartments dot com is the most intuitive URL for this sector. Apartments leads in SEO results for key search terms such as apartments for rent Atlanta and other city names or Atlanta apartments for rent. In data provided by Conductor Searchlight from July 12 to July I'm sorry, July 2012 to July 2013 across major search engines, apartments was in the number one organic search result position 50% of the time for that and similar key search terms.
In 2013, apartments 2013, apartments had unaudited revenue of approximately $86,000,000 and unaudited adjusted EBITDA of $28,000,000 which translates into an adjusted EBITDA margin of approximately 33%. Apartments is based in Chicago and has approximately 320 employees. 140 of these employees are sales professionals, including 75 advertising field representatives positioned across the United States. The top 8 executives led by Apartments President, Dick Burke, have an average of 13 years of online experience. All 8 of these executives will remain with the business and have entered into employment terms with CoStar that will take effect upon the deal close.
We believe that by combining CoStar Group's rich apartment information analytics with apartments Over the past 2 decades, CoStar Group has built what we believe is the most comprehensive information source covering U. S. Apartment buildings. CoStar Group collects details such as availabilities, rents, keep contacts, comparable sales, photographs, building characteristics keep contacts, comparable sales, photographs, building characteristics and other details on hundreds of thousands of apartment buildings. We believe that we have collected information on 5 times as many buildings as any other commercial real estate information provider.
We believe that CoStar's comprehensive database will add richer content to more leads for our customers. Apartments currently has information on 4,600,000 apartment apartment units or 2 70 percent more units. In addition, we believe that owners and property managers using apartments will find CoStar's multifamily information and analytics solutions valuable for their own understanding of critical market dynamics. We also believe CoStar's huge database of apartment owners and managers can be a valuable source of new leads for the apartments sales force. We believe that the Apartments sales force gives us a robust advertising field source we want that when combined with our existing sales team will be invaluable in selling advertising solutions for both apartments and Loop thereby further accelerating LoopNet's and Apartments revenue growth.
CoStar's Group's existing marketplaces are leaders in their respective 2 and 3 most traffic sites for commercial real estate in the United States. Lands of America and Land and Farm provide a marketplace for rural land and farm properties and are number 1 and 3 sites by revenue, respectively, drawing 1,700,000 unique monthly visitors in aggregate. BizBuySell and BizQuest are the leading marketplaces for small businesses for sale and the aggregate have over 1,000,000 unique monthly visitors and are number 1 and 2 business for Group's proven real estate technology capabilities will help apartments build the industry's most compelling apartment rental destination on the web. Conversely, we also expect that CoStar's multifamily information analytics solutions will strengthen as we gain valuable demand side data from apartments. We plan to leverage the combination of a leading information provider with a marketplace to create value.
Not only is our strategy in this deal similar to what we accomplished in our recent LoopNet deal, but many of the key metrics are also strikingly similar. Both are leading online commercial dollars At the time of deal signing, LoopNet had $28,000,000 in adjusted EBITDA and Apartments has $28,000,000 in adjusted EBITDA. LoopNet was growing at 10% and apartments is growing at 10%. We have since doubled LoopNet's growth rate and we similarly hope to double that we could create $20,000,000 in synergies between CoStar and LoopNet in the 1st 24 months post merger and we now believe that we can also create $20,000,000 in synergies between CoStar and Apartments in the 1st 24 months. There are some differences between the deals.
LoopNet had a 95% monthly renewal rate, but Apartments is much higher at 98%. At the time of the deal, LoopNet had 3,600,000 unique monthly visitors and Apartments has significantly more deals signing with 7,000,000 monthly. LoopNet had 8 distinct businesses within their company, but Apartments is much simpler with only 2. LoopNet operate in the less competitive sector of online commercial real estate marketplace and Apartments does operate in a more competitive one. We paid $860,000,000 to acquire LoopNet and we will pay $585,000,000 or $275,000,000 less 1,000,000 shares resulting in some shareholder dilution.
But in the Apartments acquisition, we do not anticipate issuing any shares. I'm looking forward to working with a great team at Apartments dotcom, and we welcome them to the CoStar family. We're all dedicated to building the premier online apartment platform and establishing CoStar's leadership position in commercial real estate's $2,000,000,000,000 U. S. Multifamily asset class.
At this point, I'll turn the call over to Mr. Brian Radecki, our Chief Financial Officer. Thank you, Andy. Again, I'd like to thank each of you on the call today for your flexibility as we had to schedule this call quickly in light of today's transaction. As Andy mentioned, we think the combination of these two companies unlocks the potential for exciting growth in commercial real estate's large multifamily sector.
Apartments is a division of classified ventures. The deal is structured as an asset purchase agreement. We will finance $585,000,000 of cash through purchase of combination of cash on hand and debt. We received a commitment letter from JPMorgan, Bank of America, SunTrust, Wells Fargo for a fully committed term loan of $400,000,000 $225,000,000 revolving credit facility, each with a term of 5 years.
These funds
will be available to fund the acquisition, refinance the company's existing debt and finance ongoing working capital needs of the company and its subsidiaries. The loans will bear interest of LIBOR plus a spread of 2, subject to reductions in the spread based on leverage ratio. The transaction is subject to customary closing conditions including expiration or termination of the waiting period under Hart Scott Rodino, HSR and is not subject to a financing condition. We currently expect the transaction to close in the Q2 of 2014. Apartments unaudited 2013 results include estimated revenue of approximately $86,000,000 and adjusted EBITDA of approximately $28,000,000 which equates to a 33 percent adjusted EBITDA margin.
Since 2011, Apartments unaudited year over year revenue growth has been approximately 10%. We expect the acquisition to be accretive in 2014 non GAAP earnings and adjusted EBITDA. As Andy mentioned, we believe we can achieve annualized run rate synergies of $20,000,000 over the next 24 months. This $20,000,000 of annualized run rate synergies added apartments adjusted EBITDA essentially works out to approximately 12 times purchase price multiple for the acquisition. We expect some of the cost synergies to come in over time, similar to LoopNet.
But this deal is really about taking advantage of the significant revenue opportunity created by putting these two businesses together. Gee, where we heard that before. Both management teams are very excited about the opportunities this combination brings and we look forward to a successful close and getting started on the integration to take advantage of these opportunities in the Q2. As many of you know, I've talked in the past about our long term goal of achieving a run rate of $800,000,000 in annualized revenue by the Q4 of 2017. Assuming the transaction closes as expected and based on the growth trajectories of the 2 standalone businesses as well as Surgy's, I now believe we can reach that goal by the Q4 of 2016, 1 year earlier than we previously expected.
At this point, we are currently not in a position to estimate full financial impact of the proposed acquisition until it closes and we expect to provide more detailed information in combined 2014 guidance after the acquisition closes in the Q2, so we know what all the prorations are and accounting adjustments. Also let me reiterate that we still feel great about our guidance that we provided a little over a week and a half ago. And now, we'll open up the call for questions.
And our first question in queue will come from Brandon Duvel with William Blair. Please go ahead.
Thanks guys. Good morning.
Good morning. I'm going
to get focused for the first question on what you guys think you can bring to Apartments. Com from, I guess, kind of sales and process point of view. I'm mostly focused on those kind of those customers that are not the top 50 multi housing owners or managers, but the rest of Apartment.com's, I guess, customer base, which is, I think, a lot of smaller regional apartment managers or owners. What do you think you can bring to Apartments dotcom, either increased penetration or whatever the, I guess, sales strategy might be to broaden that list?
Sure. So first of all, by combining the CoStar and Apartments dotcom sales force sales efforts, we're going to create a lot of synergy there. We'll get more scale. We'll have deeper field penetration out there across the United which is very important in these relationship advertising sales. Secondly, apartments.com has historically not had the kind of information capabilities that CoStar Group has.
So as a result, they've tended to focus on the 100 unit plus apartment communities. Well, the majority of apartment communities are less than 100 units plus and they have the exact same compartment communities that is not currently on Apartments dotcom's radar screen. So by being able to provide that sort of rich information to their team, we think that will give them a pretty broad expansion on their target market. In addition, that group is Apartments.com is managing a lot of information around these apartment communities. There's a lot of synergy there with what CoStar is doing because CoStar is doing the exact same thing just on a larger scale.
So we'll create some real efficiency there. Also, these very same folks who are managing these apartment buildings and purchasing ads also have information needs. They need to know what's happening in the market, supply demand characteristics, what's going to happen when that new building delivers down the road, it creates new competition, what our competitors charging for rents. CoStar Group's products provide just that. So building stronger relationships or leveraging the apartments relationships with these building owners, we believe will bring a lot of cross selling synergy just like the LiveNet deal did.
And then one kind of follow-up, I guess. Does this change maybe the effort that you would expect to put against your multifamily, let's call it a vertical effort either in terms of sales force that you would expect to, I guess, to focus on from the CoStar information platform side or the change number of researchers you want to put against this effort? I'm trying to figure out how, I guess, how broad this effort may get now that you've got kind of a different way to go to market with the information.
Well, I don't think this will change. I think this creates efficiencies in our sales force deployment. So the that there's someone who might have a 10 year relationship with a community manager out there at Apartments.com is going to help us sell information service to them much more efficiently. So I don't think it's going to really change and dramatically change the picture on overall sales force headcount. It may change the composition and the organizational structure.
On the research side, we already have a pretty significant complement that we've been awful lot of maneuvering room. The only area where we might have some growth or just is creating neighborhood content, but I don't think it will really be visible on your radar screen.
Okay. Thanks a lot. Appreciate it.
Thank you. Our next question in queue will come from Andrew Jeffrey with SunTrust. Please go ahead.
Hi, guys. Good morning.
Good morning. Thanks for taking the
question. Good morning.
Really in San Francisco, when I think about the apartment market and multifamily market, and Andy, I think you referenced it with regard to smaller units. PrairieSource seems to be the leading player for both landlords as well as tenants. How does apartments.com sort of slot into the market? And is there an ability to expand the footprint and maybe go after what seems to be sort of a ubiquitous alternative for smaller properties and perhaps for individual property owners?
There sure is. I'm pretty excited about the opportunity that I think Craigslist presents. So you're right, San Francisco where you are is the strongest market share for Craigslist. And in fact, I rented an apartment off of Craigslist in San Francisco last year. But when we talk to apartment owners and we talk to folks who use Craigslist, there's a fair amount of frustration with that.
Apartment owners have to continuously repost all sorts of properties every other day to try to keep it in the flow of Craigslist and it's a real frustration for them. We actually envision we've done a lot of work pre deal on modifying the strategy, the go to market strategy for Apartments.com to try to take share from a Craigslist, specifically handling those smaller one off condo units and the like. So we've put a lot of thought into it and we think there's a great opportunity there to take an awful lot of mind share and consumer demand from that space to the benefit of our customer base. So we're pretty excited about that opportunity. You just take a look at what's there and you can see that that's a pretty good opportunity.
Do you anticipate that that will require incremental marketing similar to what you've talked about for marketing spend on the emerging CoStar platform in the early part of 'fourteen? And I guess is that is incremental marketing perhaps included in the synergies? Or is that something that might offset of those synergies?
At this point, we don't have any detailed plans for incremental marketing. But remember that what you're trying to do is you're trying to appeal to the consumer with the best possible experience showing them a rich selection of choices in whatever neighborhood they go into. That is in a I don't know, thinking of a good analogy here. But when we bring the content that CoStar Group has got into the Apartments dotcom product area, it will appear to be it will be a order of magnitude increase in the number of apartment and rental options on the site, which we think will speak for itself with the consumers. Remember, we're showing up 57% of the time in the number one SEO slot.
So we believe that you can actually leverage that position, improve the quality and breadth of content, allow people to post on the site the one off options like Craigslist, which they currently can't do for free on Apartments.com. And I don't think you have a at this point, we don't see the need for a significant incremental spend.
Okay, got it. It's helpful. And Brian, just to clarify, when you're talking about the synergies, it seems that you're speaking about the $20,000,000 as though it is entirely an expense synergy in the context of your adjusted EBITDA multiple. Should we assume also that there are some revenue synergies that you're going to garner?
Yes. No, I mean, I think it's actually a combination of both. I think we said both cost and revenue. With this deal, it's a little bit different than LoopNet. We're keeping the entire management team.
And but I think obviously there will be some cost synergies over time, so I think over the 2 years. But just like with LoopNet, I mean, and we talked about this pretty extensively when we did the LoopNet acquisition. We think there's the revenue synergies are much bigger and we're just as confident and are more confident in the revenue synergies at this point announcing the transaction than we were with LoopNet. So we feel very, very confident in that. So yes, I'm sort of including both of those in those in that number.
Okay. Great.
And just one last one. Can you talk about what the contracts look like compared to the LoopNet? Are they monthly, quarterly, annual? And what are the price points like?
Sure. They are LoopNet when we acquired LoopNet there were basically no annual contracts. They were all month to month. These are annual contracts. There are some variance in them, but typically the annual contracts, some have outs at 6 months, some go month to month after the initial term.
But these have this is nothing like the loop the initial term. But these have this is nothing like the LoopNet. There's not a big e commerce component here that has a 2 month, 3 month life on the business. So you have a 98% monthly renewal rate with Apartments.com, where you were seeing up to a 6% cancellation rate monthly with a LoopNet. So this is much more stable revenue stream.
And part of that is because the customers are much bigger organizations than the typical customer at LoopNet. So very often your customer might be some of the scale of equity residential. They're not turning off their marketing campaigns each month.
Great. Thank you.
Thank you. Our next question in queue will come from the line of Brett Huff with Stephens Inc. Please go ahead. Good morning. Can you guys hear me okay?
We sure can.
Congrats on the deal.
Thank you very much. Appreciate it.
Two questions. One is, Andy, you talked a little bit about the sales force and I'm a little confused. I think you said that you don't see a big change in the sales force. I assume that meant that you're going to add the 2 together and that you're going to leverage that, not that the number that you have on legacy CoStar will continue. But first of all, I think that's make sure that's true.
So I guess to me, the biggest thing that we're looking at here is just the sales force integration. I know you've been looking to hire new salespeople. Are the sales force folks, at least some of them, the kind of folks that you are looking to hire and will this accelerate your ability to get those folks trained up on some of the new products that you have as well in the legacy business?
Brett, you just said the biggest softball across home plate. So as you know, I love sales forces, right? And in this particular case, I've been looking to build a much stronger field presence across the United States. And that's exactly what Apartments dotcom has. They've got a 150 people in their sales organization, 75 are relationship salespeople in the market.
A lot of them are very active in the multifamily marketplace, leaders in the various associations and the like. Tenured folks, many of them came from the leasing role in major apartment communities. So also these folks understand a pretty good price point in Internet advertising or lead generation on the Internet. So they're a perfect profile for what we're doing with LoopNet and even what we're doing with, Lands of America, Biz by Sell and other marketplace verticals we've got. So when you take the CoStar sales force running at 300 and some and you've added 175, you take CoStar overall sales and marketing you're at 500 and some, sales marketing customer search you're at 500 and some.
You bring in this component you're now at approaching 700. There'll be reconfiguration of roles and structure and segmentation, but you're not looking to expand the headcount here, the overall headcount. So one of the real appeals to us, obviously, we didn't do this deal just for a sales force, but that is one of the top 3 top five reasons for me for doing deal is speed to market with the sales force.
Okay. And then the can you talk a little bit about, I guess, the share that these that Apartments dotcom has in its market? And maybe in that answer, can you talk to us about the number of paying multifamily owners that are on that just to give us a sense of the scale of the number of leads that might be there?
Sure. You are roughly estimating you probably got 100,000 apartment community folks responsible for marketing plans or owners of apartment communities. There's a little over 2000 2000, 3000 folks who are customers representing roughly 15,000, 17,000 apartments for Apartments dotcom. So you're probably 3% penetrated into the potential opportunity by headcount or by number of firms. Still has a long way to go.
Okay. Thanks, again. Thank you. And next in queue is Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone.
Good morning, Bill. How are you doing?
I'm doing alright. Thanks. Congratulations on the transaction.
Thank you very much. Thanks, Bill.
So a couple of questions. One is, what gives you the confidence in the regulatory picture that this one will get closed within the quarter, just having had such a long wait with the LoopNet transaction, what's different on this one?
We're much more experienced
now. Yes,
for sure. You have a frequent flyer planned by antitrust attorneys.
Well, I'm just saying the it has always seemed like something that's outside of people's control. And we've had another a number of transactions in this space. You've seen Nielsen with Arbitron. Right now you've got CoreLogic waiting on MSB. All those transactions seem like they took a lot longer to close not by virtue of anything within the control of the company management teams.
We're very, very confident that you're right, regulatory process is something that you have to respect that process And we believe the government will evaluate this deal and that they will see what we see, which is at this point, there are a lot of different options for folks to advertise apartment communities on the Internet. There's a pretty broad field. We would be one of a number of good competitors. And it's something where this is really in the early stages and we'd be trying to gain share that was interesting enough to ever merit attention down the road. But certainly at this point, we think it'd be extremely difficult to make the argument that we are eliminating competition here.
We in fact believe we're creating some additional competition in the space. So you're right, we don't know exactly what will happen, but we feel pretty good about this particular situation.
Okay. And then a question for you also on the sales force. You had called out the 75 advertising execs advertising sales execs within the 140. And if you could talk a little bit about how you plan to use those to help you or if you plan to use those to help you on the commercial real estate broker ads for LoopNet and LoopNet related sites?
Sure. We definitely do. And when I say 75, I also I won't go to the whole laundry list, but there are a lot of additional segmentations that are also selling as like there's 10 major accounts folks in there that are not part the 75 that deal with multi market apartment owners. So it's actually bigger than 75. And if you are based in Richmond, Virginia and you are an ad salesperson with Apartments dotcom, it is a very small evolution to go from selling someone lead selling a person selling to a person that owns 2,000,000 square feet of apartment commercial real estate, selling them lead generation for that to go into someone that owns 2,000,000 square feet of office space commercial real estate and selling them lead generation on that.
The 2 sales are very similar. It uses the same size of the brain. They're both relationship sales and geography is an advantage here. So geography scale is an advantage here. So we believe they absolutely will be selling both products.
And we believe that will give us combine these sales forces will give us revenue lift on both products. By chance, when I look at the 2 sales forces and where I see our best as salespeople in the United States, it is almost perfectly complementary. So CoStar Group is really good in ad sales in the heart of the biggest U. S. Cities in the 1st tier cities.
And Apartments dotcom's greatest strength is going to be in the second in some of the top tier cities, but it's more in the secondary cities. So we think the combination looks really good if you are the leader of that group. You've got 2 great teams to pull together. And we'll be learning a lot of stuff from each other on strategy and tactics.
Okay. And then one last question for you on the synergy. The $20,000,000 cost synergy side, given that you are keeping the management team in place and it's more of a revenue synergy type approach, where do the $20,000,000 in cost synergies come from?
We're going to lay Brian off. Hey, Bill, it's a combination
I know he's the man wielding the hatchet, but
No, I mean, we are keeping their management team. And I think over time, there will be synergies between the two firms as we sort of learn more. And obviously, we've got a lot of depth and breadth on the data collection side. And some of the LoopNet, these firms don't have big data collection capabilities. So they do data deals and they do all sorts of data trades and different things that over time I think we'll have savings there.
But the $20,000,000 is a combination of cost and revenue, which we think on a run rate basis over the next 2 years is a very achievable goal. So it's a combination of the 2 and we obviously feel very confident in that Having just gone through the LoopNet and being able to get both the cost and the revenue synergies, we feel pretty good about that And with the LoopNet, when we talked about the LoopNet cost synergies, We did not detail for investors at any point where those were going to come from. And we also we did not with investors or we did not publicly discuss where those cost synergies were going to come from. And we did not do any material layoffs at LoopNet in that whole process. So we were able to achieve those cost synergies through attrition over the time period.
So we believe that there'll be that same opportunity. And just on a side note on that, I mean, there was more public company cost to pull out in LoopNet. I mean, obviously, we don't need 2 audits now and everything else. So there's public company cost savings. But if you looked at LoopNet, they had approximately 300 some employees and today they have approximately 300 employees.
So as Andy said, it's going to be more over time.
Excellent. Thank you for the insight.
Thank you. Thank you very much.
Thank you. At this time, there's no additional questions in queue. Please continue.
I want to thank everyone for joining us on this special acquisition call for Apartments.com. And we look forward to answering any questions that may come up over the weeks months that follow. And we're very excited about this opportunity. Thank you for joining us.
Thank you. And ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT and T's executive teleconference. You may now disconnect.