Welcome to the new Apartments.com launch. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. Should you require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Richard Simonelli. Please go ahead.
Thank you, operator, welcome to our discussion of the relaunch of Apartments.com along with our 2015 guidance. Thanks for joining us today. As you know, certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's February 17, 2015 press release and in CoStar Group's filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. All forward-looking statements are based on information available to CoStar Group 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 also being broadcast live and in color over the internet at www.costargroup.com, where you can also find CoStar Group's investor relations page. An audio recording of the conference call will be available for approximately after an hour after the call is completed and will remain available for a period of time following the call. To access the recorded conference call, please dial 800-475-6701 from U.S. and Canada, or 320-365-3844 from all other countries, and use the access code 353-862.
The webcast replay will also be available in our investor relations site for a period of time following the call. As a reminder, in order to give everyone a chance, to ask a question, please limit yourself to one question, which we'll do at the end after, both Andy and Brian's comments. You can rejoin the queue for additional questions, and we'll take as many as time permits. I'll now turn the call over to Andrew Florance. Andy?
Good morning and welcome. Welcome and thank you for joining us this morning. I'm pleased to announce that over the holiday weekend, we relaunched Apartments.com with a completely new website that dramatically improves the online experience for the 100 million Americans that rent their homes. Multifamily is a huge asset class valued at over $3 trillion, with approximately 30 million renters moving annually. Renters pay, in aggregate, approximately $440 billion in rent each year, or about a third of their income. Approximately 70% of all real estate moves are in the multifamily sector, and the multifamily sector is expanding rapidly. Over the last five years, the number of renting households grew 12.6% in the U.S.
This year, over a quarter of a million new rental units are expected to deliver in the U.S., and we're forecasting about 2.9 million rental households being formed over the next 5 years. Even at a quarter million new housing units, that is barely keeping up with demand. The Echo Boomers are now 25 years old, and with their peak birth year of 1990, they're almost as large of a cohort as the baby boomers. They're loaded with student debt. They got early earning career incomes, and after the financial devastation they witnessed their parents and during the housing crisis, they often do not view homeownership as a path to financial stability. Homeownership rates in this group have dropped dramatically, 21% in the past 10 years, from 44%- 36%.
Across the board, homeownership rates are dropping and rental activity is increasing. As a result, we believe the multifamily sector will continue to expand for the indefinite future. Unlike the residential resale market, where lead generation websites sell ads to brokers who generate leads for house sales that may generate commissions, Apartments.com sells directly to the property owners who realize the majority of the value of the transaction. Comparing the two, the average U.S. house sells for $209,000, and the agent buying the ad typically keeps one quarter of 6% or $3,135. Our client, who's often the apartment owner, captures approximately 10 times that value from the transaction, with 36 months of rent, typically at $850 average or $30,600.
A 2011 study estimated that apartment managers spend $2.8 billion annually marketing their apartments. We believe that the majority of that will eventually be spent online, and in fact, we believe that the online spend already exceeds $1 billion. Today, CoStar and Apartments.com are generating revenue and meeting the commercial real estate industry's online marketing, analytics, and information needs. We believe that within the next 10 years, CoStar Group can achieve $550 million in annual revenue and $250 million in annual adjusted EBITDA, providing these services to the apartment industry. Our market research indicates that both renters and owners are dissatisfied and frustrated with the current first generation of apartment search websites.
Many of those websites are in the process or have recently migrated from providing those print apartment directories you see at the checkout counter at the supermarket to online websites. These legacy websites generate hundreds of millions in revenues each year. We asked renters and focus groups from across the country to rate their experiences using legacy renter websites, and they gave them an average grade of D-. Today, consumers are finding easy-to-use, actionable, and comprehensive information online when they search for anything from flights to dinner reservations. The current apartment search websites fall way short of consumers' modern online experiences. Most apartment websites, or ILS as they are known in the industry, primarily supply only the listings that property owners pay to advertise. They often serve up results that don't even remotely match what the renter was looking for.
These results generally do not even indicate if the rental is actually available or what the actual rents would be. This puts the burden on the renter to painstakingly contact each and every apartment to inquire about availability, rents, and fees. In the process, renters do not get what they want, and owners are flooded with bad leads. Our research shows that despite paying billions to generate leads, owners are only answering the phone in their communities 30%-40% of the time when a renter calls, and that's because they're overwhelmed with bad leads. The ILS's goal appears to be generating a lead to the community, even if today, sometimes that gets in the way of the owner effectively signing a lease because of the low-quality leads. We designed the new Apartments.com around the needs of the renter.
The site uniquely gives renters comprehensive information with actual availabilities, rents, and accurate search results. We believe in doing so, we have created a site that will generate the highest traffic, and we expect consumers will overwhelmingly prefer the new site. We believe that owners will prefer to advertise on the highest volume site that generates informed, qualified leads. We recently demoed our new site to both owners and renters in numerous focus groups, and they have gave Apartments.com an average grade of "A−" . We believe they gave us an A because with approximately 680,000 rental options across the U.S. on our site, we believe that Apartments.com has more apartments than any other website and uniquely presents information on actual availabilities and rents to save renters valuable time in their search.
The site also offers innovative search tools to help renters find the apartments that best meet their needs. The new website draws on CoStar's massive multifamily database, which contains detailed information on over 450,000 apartment properties and the largest research effort ever conducted to document the U.S. apartment industry. Over 1,000 CoStar researchers have done a great job gathering information that we believe will provide renters with more apartment choices than any other apartment listing site. In addition to multifamily apartment buildings, similar to Craigslist, people with houses, condos or garage apartments can post their rentals for free on Apartments.com. We have visited and photographed over 400,000 properties prior to relaunching Apartments.com. CoStar researchers and shoppers make over 1 million calls per month to continually update rental units, rents, concessions, and the other fees renters pay.
CoStar has developed software that searches approximately 40,000 apartment websites each day for rents and rental availabilities. Apartments.com also integrates directly with many property management companies' back-end systems to pull real-time availability and rents for their properties. In total, the new Apartments.com is powered by up to 90,000 rental updates each day. Apartments.com also offers in-depth information on neighborhoods, including restaurants, nightlife, history, schools, and other important facts. We believe we are the only company doing this type of large-scale data collection for the multifamily industry, and quite frankly, we're probably the only company in the multifamily sector that can do this on this scale. In just nine months since acquiring Apartments.com, our awesome technology team has created an outstanding website with a great user experience and has built the back-end systems to support it.
The site is available in addition to web browser on responsive mobile, iPad, iPhone, and Android devices. I encourage you to see for yourself and go check out www.apartments.com. Make sure you try out the polygonal and commute tools. Our team was the team that have initially invented the polygonal search tool on the map, probably five, seven years ago, today, probably 10 years ago. I feel we have the best technology team in the broader industry, bar none. Property managers and owners are motivated to advertise on the site with the most renter traffic, but they appear to be equally interested in the CoStar Multifamily information analytics tool we have previewed for many of them. A high volume of great leads can be combined with great competitive rent intelligence to optimize an apartment community's revenue.
Apartment owners need tactical information to effectively position their properties and analytics solutions to understand critical market dynamics such as supply, demand, vacancy, rental rates, and sale prices. There is a significant cross-sell opportunity to sell CoStar information services to apartment owners and managers who are already buying Apartments.com for lead generation. This is similar to the successful cross-sell that occurred when we acquired LoopNet. Last week, we introduced these new products to our 500 sales professionals at our annual sales conference. They're very excited about the opportunity to sell both marketing and information solutions to the multifamily community of owners and property managers. Our sales team has been given the tools to sell CoStar, LoopNet, and Apartments.com solutions.
They've been given quota to sell all three services, and they have been given lucrative sales incentives in the near and medium term that we believe will positively drive sales aggressively throughout the year. There is no question in my mind that our sales team is highly motivated and ready to go out there and sell. This is an enormous opportunity that is right in front of us for the taking. What do you do when you have the best site, a huge competitive advantage? Powered by an unprecedented amount of proprietary data and a sales force that's chomping at the bit and ready to go. To us, the obvious course of action is to maximize the opportunity before us and launch an aggressive marketing campaign that we expect will significantly shift industry market share to Apartments.com.
Owners pay somewhere around $10 per lead for incoming inquiries. Typically, there'll be 10 leads per renter, $100 some. They'll pay $100 some per tour and pay up to thousands of dollars per renter that an apartment broker brings to their community. Each renter that we can win the loyalty of is really quite valuable. We're going to market the new Apartments.com aggressively in 2015, investing approximately $1 per U.S. renter. The campaign represents an incremental investment of $75 million over Apartments.com's 2014 annualized marketing spend since the close of the acquisition. I believe this investment will generate massive brand awareness and site traffic for Apartments.com and quickly position Apartments.com as the number one destination for renters and advertisers alike.
The advertising campaign is expected to reach 95% of all adults aged 18 - 49 via thousands of high-profile TV spots running on prime time and late-night network television, local TV, radio advertising, sports, online digital advertising, social media, and out-of-home ads. The multi-channel media campaign is scheduled to kick off March 1st and run throughout the year. This media blitz is reinforced by what we believe is the largest search engine marketing program in the industry. Jeff Goldblum, who's been featured in so many great films such as The Big Chill, Jurassic Park, Independence Day, will star in the ad campaign conceived and executed by RPA, a prominent Santa Monica-based ad agency. The marketing strategy will also contain an aggressive B2B campaign that launches in the next week.
In 2014, we looked at potential acquisitions in the multifamily real estate or ILS space in aggregate totaling approximately $2.5 billion. After careful consideration, we passed on each deal because we believed it would be dramatically more effective to spend less than 5% of all that potential $2.5 million into this organic investment in building, marketing, branding the new Apartments.com. We believe that organic investments in research, software, SEM, SEO, marketing, and branding will enable us to capture a significant share of the revenue we would have otherwise acquired at a much higher cost through acquisition.
We believe this organic investment in growing the Apartments.com business faster is a prudent use of capital and an excellent investment with a good ROI. I believe that we're taking steps that will continue to put us into a position to drive revenue growth rates in the mid-teens with high margins for CoStar Group. I remain very confident that we'll reach our goal of $1 billion in revenue and 40% adjusted EBITDA margins in 2018. At this point, I'm gonna turn the call over to Brian Radecki, our Chief Financial Officer.
Thank you, Andy.
It's all yours.
Thanks, buddy. Appreciate it.
No problem.
As Andy mentioned, we believe the new Apartments.com website and the related investment in marketing branding will prove transformative for consumers searching for rental apartments, property managers and owners advertising availabilities, and for CoStar Group as well. We expect this marketing investment will establish our brand with consumers, driving significant traffic to the new Apartments.com website, which we expect will result in more leads for our customers, higher renewal rates, accelerating sales growth, and increased revenues for many years to come. Obviously, all this won't happen overnight, but we expect traffic and leads to begin significantly increasing in response to our marketing campaign and to position us to demonstrate extraordinary value to property managers and owners who pay to advertise on Apartments.com.
With the launch of the campaign on March 1st and the heaviest marketing in the following six months, we expect to see sales activity increase in the back half of 2015, translating to meaningful acceleration in Apartments.com revenue growth to the 25%-30% range in 2016 and beyond. Before I get into our 2015 outlook, I want to mention 2014 year-end results. We still expect to announce financial results for the fourth quarter of 2014 following the market close on Wednesday, February 25th, and hold our standard conference call to discuss the results at 11:00 A.M. on Thursday, February 26th. At this point, we've completed our work and are confident in our numbers. We expect that revenue and earnings will meet or exceed the top end of our previously communicated guidance range.
Since the auditor's schedule was set for months ago, we'll let them finish their work as planned. Apart from what I've already said, we will not be discussing any further details today on the fourth quarter or full year 2014. On to 2015. We expect revenues of approximately $655 million-$660 million for the full year 2015, with approximately $157 million-$159 million for the first quarter of 2015. We've incorporated our unaudited Q4 sales and revenue performance into this range. I don't expect to update the numbers on our call on February 25th, about a week plus from now. The revenue range also includes the decision to discontinue or de-emphasize certain non-core services we talked about last quarter, totaling $14 million-$20 million in annual revenue.
We're continuing to test multiple scenarios. I think the range of impacts are still about the same as what we communicated last quarter because we have control over how fast and when we make these transitions. For the full year 2015, we expect non-GAAP net income per diluted share in the range of $1.95- $2.05. This outlook includes the impact of the increased marketing for Apartments.com, as well as the research investments we discussed previously for 2015. The 2015 impact on Apartments.com marketing and branding investment is expected to be an increase of approximately $75 million in incremental spend or approximately $1.45 in non-GAAP net income per diluted share. This increase is compared to the run rate marketing levels reported in the second and third quarter, as well as the upcoming Q4 earnings.
For the first quarter of 2015, we expect non-GAAP net income per diluted share of approximately $0.18-$0.22. In terms of timing, the marketing and branding is expected to be much heavier in the first half of 2015 to coincide with the peak rental season. We currently expect the impact to non-GAAP net income per diluted share of approximately $0.60 in each of the first and second quarters of 2015. In addition to this marketing investment, the investments in research that started to ramp up in the fourth quarter of 2014, we also expect the typical seasonal first quarter of 2015 expenses of approximately $0.10-$0.15, which is consistent with prior years.
At this point, much of the incremental of $75 million of marketing and branding is committed in 2015, but this level of spending is discretionary in future years and can be adjusted based on the response we experience with the new website and the marketing campaign. Obviously, we're planning for success. We believe these investments can accelerate revenue, drive traffic, and grow Apartments.com into the leader for revenue among multifamily ILS providers, while positioning us to better cross-sell CoStar information services into the multifamily property management and owner customer verticals, similar to the very successful LoopNet cross-sell effort we've seen in the past few years.
As Andy stated, we believe these investments better position us to meet or exceed our overall goal of $1 billion in revenue and 40% adjusted margins in 2018. As always, I look forward to sharing our progress towards these goals with you in the coming quarters. Now I'll open up the call for any questions.
Our first question comes from the line of Andre Benjamin from Goldman Sachs. Please go ahead.
Thank you. Good morning.
Morning.
My first question is, you've laid out an Apartments.com revenue goal of $550 million, I believe, by 10 years from now. In the 2018 target of $1 billion, what level of Apartments.com revenue should we be assuming in that? If you're so much more confident that you're gonna get that growth from Apartments.com, why not take that number up?
Yep. Andre, it's Brian. You know, I think obviously, we've got this year's guidance out there. We believe that Apartments, you know, as the marketing gets out there in the rental season, our sales force will really be selling that in the second half of the year, and it should translate to acceleration in 2016. I think you can plan to see that level of 25, you know, plus percent revenue growth through 2018.
I don't think we're gonna take the 2018 number up right now, but obviously, it gives us a lot more confidence that we're gonna get there. I think as this rolls out over the next few, you know, two, three, or four quarters, we'll continue to talk about that, and we'll address that as we get up there. Clearly this, you know, we believe clearly this pushes us towards those numbers and puts us in a much better position.
Okay.
Our next question comes from the line of Sterling Auty from JP Morgan. Please go ahead.
Yeah, thanks. Guys, I'd be curious. When did you decide to make this incremental $75 million investment in apartments? On the sales side, you talk about the quotas and the compensation. Can you remind us what portion of the sales force is being quoted to sell this? How do you make sure that you keep the proper balance of focus across the entire sales force?
The decision to increase the spend incrementally at this level has been an evolving one that really finalized in the last week or so. Focusing on the sales force, you know, we just finished our annual sales conference, and it was probably the last critical piece to the Apartments.com launch, was feeling confident that the sales force was ready and capable of carrying the product out there to take advantage of the incremental marketing spend. They've been through intensive training over the last a month or so on selling for the Apartments.com salespeople to sell CoStar information products to multifamily.
For the CoStar salespeople, traditional CoStar people who have experience selling advertising solutions through LoopNet, training them to be able to sell Apartments.com. We completed that, we pulled together what would be the largest sales force in the industry by a factor of two, I believe. We pulled them together for a great conference, showed them the newest products and services. They are very fired up, and I believe they're gonna do a great job teaming together where appropriate, or going at it alone with some of the smaller accounts and fully exploiting this opportunity in 2015.
Now one of the great things about this is as we explore potential customer reaction to these new products, that is the Apartments.com site you see on the consumer side or the CoStar CMA solution that you see, that you don't see, it's the professional information tools that give you the rental rates to owners and the analytics, the forecast, the comparable sales, all that kind of professional tools. The person buying these leads and the information are the same person. It's not that our sales force is going out just to sell advertising on Apartments.com, they're going out to sell CoStar information solutions in the same meeting as they're selling CoStar, Apartments.com advertising solutions. That's a really nice sale for us.
The bigger ones, they'll be teamed with a traditional Apartments person doing it with a CoStar person, and the smaller ones, they'll do it one-off. Either one of those takes, and I think they'll both take, either one of those takes, you've got a big success. Now, at the same time, in order for our salespeople to hit their highest commission rates, they have to be selling into all three buckets. The plan is set up such that they're, once they hit a target in the LoopNet sales, they move to a commission level. Once they hit a target in the CoStar sales, they move up commission level. Once they hit a target in the Apartments area, they'll move up a level.
I feel pretty darn good about it, and I gotta say, as I looked across that room day after day, and I saw, you know, 550 people in that room are charged up and ready to go take this product out there, I felt really good about our ability to not only have the best apartment website in the industry, but also capture competitive market share.
Our next question comes from the line of Brandon Dobell from William Blair. Please go ahead.
Thanks. Good morning, guys. Andy, maybe to address your comment in there about some of these dollars going towards the B2B side. I'm assuming that's just around selling more of the database products, but maybe you can kind of break out how the spending works on the, let's call it consumer-facing and B2B-facing and what you hope to gain from the B2B spend.
Right. I would say that it's probably roughly 10% going to the B2B side, 90% going to the B2C side. The nice thing here is that it's if I take the primary prospects on the B2B side, it's the top prospects is roughly 30 companies per salesperson. It's really B2B to support the salespeople, build messaging around the salespeople as they go in to have face-to-face meetings with these prospects. We want to communicate the transition of the website from sort of old world model to a much more consumer-centric, renter-centric model, what we're doing with that. Wanna communicate the advantages our information tools offer over anything else that they can get out there.
We want to be ready to highlight our advantage in traffic and our advantage in cost of running our ad on our site versus how much traffic we have. It's mostly going to B2C. Again, it's basically $1 per renter that we're spending to create awareness with the website. I believe the website is the best website out there for finding an apartment online, the most comprehensive, and that if renters do consider it in response to this media campaign, we will get return traffic and sustainable traffic advantage. Did I answer your question at all?
The next question comes from the line of Sara Gubins from Bank of America Merrill Lynch. Please go ahead.
Sure. This is David Ridley-Lane for Sara. Do you expect to continue the print and TV advertising in 2016? Have you already switched over the pricing grid that you had talked about? Is that planned for a later date? Any early results about owners' willingness to upgrade their level of spend on apartments? Thanks.
Thank you. The initial priority is to create brand awareness. This is a space where when you pull renters into a focus group and ask them what they use, they name just about nothing. And when you give renters in a focus group the names of the top six sites and ask for reactions, there's real brand confusion. It's amazing for an industry this big, nobody has ever done any kind of even remotely meaningful B2C brand building. When you're doing initial brand building, you have to spend more than you would to maintain an established brand. We're initially spending more aggressively to launch the brand, create awareness around the brand, and then you move into more of a maintenance mode. We do not anticipate having to spend at the same levels over time.
We think that the spends will come down pretty dramatically. Remember, unlike other industries or related industries, we're building proprietary content here. We don't have 10 competitors with the same content we do. We should have a pretty defensible position once we create the brand and the ability to create a moat to protect that brand in proprietary content. In terms of, we're rolling out the new pricing in 16 minutes ago. Most of the U.S. is socked in with snow, so we have absolutely zero information about reaction to the new pricing. I think we'll have literally 1,000 meetings this week with our sales force. We'll know shortly.
I can say that we did show the product in depth in controlled environment focus groups in four or five cities with 50, 60 big players in the multifamily space, and they gave the new website on average an A, and they gave the new information tools on average an A, and said particularly, we asked them to rate the probability that they would or the desirability of being able to purchase bundled packages of information and marketing in one buy. On a scale of one-five , they gave that a five. They're very responsive to what we've proposed here, and they like the idea of getting information and lead generation from one place.
The buy makes sense for these folks because first you have to bring the leads in the door, which is what Apartments.com does, and then you have to get the highest possible rent, which is what CoStar information services help you to understand what the market will bear. They like the person who's responsible for managing revenue in the site, is the person with the biggest need for both leads and marketing. We think We're feeling pretty good about the pricing plans, and, you know, we'll obviously adjust as we need to as we go out and get reaction.
Our next question comes from the line of Bill Warmington at Wells Fargo. Please go ahead.
Good morning, everyone.
Good morning, Bill.
A question for you on how much incremental revenue we could expect to get from the analytics products, and I'm assuming we're using that against 18,000 customers. A housekeeping question. The 450,000 buildings, that was a number I was familiar with. The rentals option number of 680,000, just wasn't familiar with that number. Thanks.
Sure. Okay. On the 450,000, I think the actual number is inside of CoStar Property, the information service, we're tracking 459,000 apartment buildings in the United States of America. The 680,000 is the number of rental units available on Apartments.com right now. That would include condos, townhouses, homes, individual rental units within apartment buildings. One is physical buildings, the other is things that a renter can go online and sign a lease on in the next 60 days, basically.
Got it.
The $680,000 is the stuff the renters care about, and the $450,000 is what a bank doing underwriting cares about. The incremental revenue, we obviously believe it's very substantive. When we look at the very small players that are out there currently trying to service that market, they're probably running in the $50 million-$70 million of existing revenue right now, providing solutions that we feel are pretty weak, and I think the owners feel are kind of inadequate. We're confident the size of the market is in the hundreds of millions of dollars for information to multifamily players. Initially, what we're doing though is the huge budgets.
You know, there's, you know, very, very roughly, I look at our prime prospects in 2015 for these solutions we're launching, and I believe they have somewhere around $800 million, $880 million in the budget in 2015 for competing products to what we're offering. Most of that money that's in the budget for 2015 is on the advertising, online advertising side of the ledger. What we're trying to do is put proposals in front of people that allow them to capture or take advantage of our information products at discounted levels when they're allocating larger components of their marketing budget to Apartments.com.
There'll be a little bit of an artificial allocation going on as to what's information and what's marketing. We don't care. We just wanna have a big piece of their budget. It'll be a little murky as to what goes into what bucket, and that's where we're going. We're excited about the fact that you got that big a target to attack here.
Is that $600-
For the sake of Bill.
Is that $600 incremental to the $2.8 billion level of spend you quoted, or would that be considered as part of that?
The $2.8 billion in spend is an estimate of a third party, the overall size of the market. That, you know, that's probably about $1 billion online right now. Then of the $600 million, $700 million I'm talking about that we're looking at in 2015 being in an apartment owner's budget to spend with competing sites that we feel are inferior, that is part of that bigger number, that $1 billion online.
Our next question comes from the line of Brett Huff from Stephens Inc. Please go ahead.
Good morning, Andy, Brian, and Rich.
Morning, Brett.
Hey, Brett.
Question on Brian, you had mentioned just trends that you guys saw in the core business that you were happy about, just stepping away from the Apartments.com thing for just a minute. Can you give us any sense of what you're talking about? I think you said that the 4Q would come in behind the guidance, and you didn't wanna talk any more about the 4Q numbers specifically, I don't think. Can you give us some color on those trends and why you feel they're strong, you know, the core info business? Core LoopNet business, that kind of thing?
Yeah. I mean, I'll do it anecdotally 'cause as I mentioned in the prepared remarks, you know, we want the auditors to sort of finish their prescheduled audit. We'll be talking a lot more detail about it next week. Obviously, you know, we already have the numbers. I mean, I already have the numbers in front of me right now. We're sort of respecting their process. You know, we feel pretty confident the numbers came in great, will be at the high end or above the end of the top end of the range, as I said in the prepared remarks and in the press release. I think overall, you know, all facets of the business were running well, you know.
We'll get into all the details next week on that. You know, the business continues to run well, renewal rates are running well, sales are running well. You know, obviously, we feel pretty good about where that is, and I've rolled that into the guidance numbers. I'm not gonna update it a week later. You know, these are sort of the numbers we'll move forward with 2015. Right now, things seem to all be moving well in all directions.
Our next question comes from the line of Phil Stiller from Citi. Go ahead.
Hi, thanks. I guess I just wanted to ask, I mean, is this something you guys thought about when you made the acquisition initially that you might have to do or want to do? As we think about the forward spending into 2016 and beyond, I guess, how much of this $75 million would you guys consider to be kinda launch costs versus kind of run rate of the business? Thanks.
I think I would say that a significant part of that $75 million is launch cost. Of incremental $75 million is launch cost. A significant piece of it. We'll know more about that, you know, next year, obviously. It's much more expensive to launch a brand that really doesn't exist in the consumer mind than it is to build and develop a brand. Obviously, the Apartments.com brand exists, but it doesn't have the super strong positive characteristics that you'd wanna put a delve into people's minds or an aggressive branding campaign.
Most of the spend, a lot of the spend is going to be launch. You know, to be honest with you, we did not go into the acquisition of Apartments.com thinking that we'd be making this aggressive a commitment to the space at this point. Our priority was to rebuild the site and to build much stronger content offering and present a new business model that is more appropriate for the opportunity.
We've done that. When we look at the site, when we look at our competitive positioning, also after having considered acquisition of a number of other players, we felt that we had a very strong competitive hand, that we are a generation ahead of the competing sites in this space, and we didn't wanna waste that opportunity, so we became, we took a more aggressive stance as we successfully built the new site out and the new content. It's something that really evolved as we felt like we were in a stronger position.
Our next question comes from the line of Peter Lowry from JMP Securities. Please go ahead.
Yeah. Hi, guys. Can you talk about how your $75 million investment may impact other investments you were thinking of making, in particular, if it has any impact on your acquisition profile?
That's a good question. Certainly at this point, we have a lot on our hands, and we're lucky. We've got a lot of really good organic initiatives out there. We still have a lot of revenue upside with LoopNet, some exciting new products coming out there. CoStar, we're just launching the new Lease Comps module this month. Continued growth opportunity there. We've integrated portfolio strategies into CoStar property, creating CoStar Market Analytics. We've got Apartments.com. I still think we have a tremendous opportunity with the rural real estate space. We've got a lot going on, and whatever comes down the road in terms of acquisitions has gotta have a very attractive valuation on it in order to step off of these other great opportunities we've got and focus on something else.
I think that, you know, continuing consolidation in the apartment industry online will likely happen over the next two years, but we'd like it to be based on valuations after we take greater share. I think that answers that. Yeah. I mean, Peter, just to add to that, I mean, I think, you know, clearly we've done 20+ deals in the last 20 years. You know, Apartments was about nine months ago. You know, this is a pretty big release for us. It was a carve-out, there was a lot of back-end work that our dev teams had to do a lot more than, I think, more than any other acquisition we've had, safe to say, Andy? Stunning amount of work. Yeah. It's amazing that we rebuilt everything about this website in nine months.
Yeah. I think that we are. Obviously, all that's out the door now, and a big piece of this is the marketing, selling and marketing campaigns and getting that rolled out. We're definitely, you know, excited. I think we've got the balance sheet for it. If you know any good deals at a good valuation, let us know. We're still active in the marketplace. You know, I think clearly over the next few years, CoStar will continue to be as it has been in the past, you know, an acquisitive, you know, company for the right deals that will, you know, integrate well into the platform. What you're saying is if you've got a special line into selling with a defensible position, growth industry, great margins, and they're selling for a third of the appropriate valuation cost? Yes, absolutely. Thanks, Peter.
Our next question comes from the line of Oscar Turner from SunTrust. Please go ahead.
Good morning. Thanks for taking-
Morning, Oscar.
You mentioned that future Apartments.com marketing spend will depend on the return that this incremental 2015 investment generates. We're just wondering, how are you guys going to assess the ROI for this incremental marketing investment?
We know that the ROI, the potential ROI on this investment, outside of the incremental marketing spend is obviously very significant. We've said that we believe that we can generate $250 million of EBITDA out of the space over the next 10 years, and, you know, make significant progress towards that goal within five years. The ROI is very high. One of the things this spend does is it reduce the risk involved in getting to that goal, because obviously, in the context of that goal, this investment makes is obvious, right? It's risk reduction. It is competitive position consolidation.
In year one, as you establish the brand, especially when you've got such a dramatic change in the product from the old version to the new version, and you have such a dramatic contrast to some of the other platforms out there, is a launch cost. In the future, I think this is much more ROI evaluation, where you look at the cost of acquiring each renter and then the revenue you enjoy for bringing that renter to the site and the lead generation fees you pull from owners. I think in later years, you're doing much more traditional customer acquisition ROI analysis.
Our next question comes from the line of Michael Huang from Needham & Company. Please go ahead.
Thanks. Good morning, guys.
Michael.
Just a quick question for you. You know, can you remind us again, I apologize if I missed this, you know, how many of the 450,000 buildings that are in your database now, like how many are being advertised against? What's the target penetration opportunity realistically, you know, both with respect to marketing and information kind of across these buildings?
Sure. 18,500 are currently advertised of the 450,000 we've got in the system. We would like to see 50% advertised. We can identify at least 35,000 communities that are not advertising with us that have very significant marketing spends on websites that we believe have dramatically less traffic and lower lead, quality lead generation than we've got. You know, we're particularly focused on the, gosh, $half a billion being spent on other websites that's not being spent, being spent on communities that's not being spent with us currently, and we feel that we have a very compelling story to tell those folks.
You know, we'll be very aggressive in the ROI we show the owner, but we think we have a very compelling story that we're a better marketing solution than other alternatives right now. Just to add to that, I don't want half, I want all of it, Andy. I know I'm a little greedy. Obviously, when you look at, you know, $18,000 versus $450,000, this is a massive market opportunity. You know, we're gonna go after a lot of the competing revenue that's out there directly. Clearly, over the long term, you know, we are putting together packages that can actually sell up and down that whole spectrum, which doesn't exist in the industry right now.
I think this is one reason why I think that, the for us, the size of the TAM can be much larger than what's out there today. I think that will become evident over the next two years as we roll this out and sell this. We're obviously very excited about this.
We have a follow-up question from Andre Benjamin from Goldman Sachs. Please go ahead.
Thank you. Good morning. My follow-up question was, I think some investors are a little concerned about the potential competitive response and how you would think about the marketing spend and that reaction. I was trying to get some context around how much you think you'd be willing to spend longer term and whether you'd be willing to maintain the $75 million spend or something higher if a formidable competitor were to decide that they were willing to also spend big to get awareness and share.
Well, it's important that Good question. Very good question. It's important that if you spend a lot of money on marketing to drive people to your website, it's important that you've got a website worth going to once they arrive, or else you're spending a lot of money telling the world that they should find a different website. Right now, there is, and to best of our knowledge, there is no other website that provides a solid experience overall in the United States and driven largely by the quality of proprietary content we've built here.
This is nothing like the residential resale market for homes, where the competitors are all using roughly the same content that's derived from MLS systems and that they're just differentiating on the quality of their UI experience and the scale of their brand. This is something where the content is something we're collecting by making 1 million phone calls a month, by building lots of different methods and methodologies. It's also content that we've built over 30 some years. It's taken thousands of people working to build the content. We believe the content is by and large defensible. We don't think that someone can just go. You can't go to ListHub and spend $5,000 a month and then spend money on marketing and whip up a website.
You have to actually have something to market to, and I don't think that I think that there are folks out there with okay websites. Specifically, when you look at the players in the residential home resale market, you know, 90+ % of their revenue right now is coming from residential resale. They, you know, it would be difficult for them to, I think, put the overwhelming majority of their marketing spend in the area where they don't have revenue, especially given the fact that the residential resale market is still contested and people are competing in that space, and the models, I think, are still evolving.
What the big residential brokerage firms are doing to take care of themselves, what NAR is doing to take care of themselves, what Move is doing, what Zillow is doing, I think it'd be tough for them to step out of where all their revenue is and market to a place where their revenue is not. When you look at the traditional players in this space, and those are really the folks who have the $500 million of revenue that we're looking at more closely, these are not firms, in our opinion, that have strong balance sheets.
They often have a lot of debt with a lot of covenants, and doing aggressive marketing spends at this scale are simply not an option and would not make sense because their website experience is rated D by renters, and so you don't wanna drive people to a website that renters rate as a D. You know, I'm trying to, I'm trying to keep an open mind to it, but at this point, I have not figured out who would be spending. I'm not sure who is confident enough and focused enough on this space to be matching dollar for dollar. In the case of many competitors, if they did, that would be a mistake.
Thank you. I'd like to turn it back to Richard Simonelli at this time.
Well, thank you all for your questions. We'll look forward to talking to you again soon. We'll get some back to you next week on the conference call for our Q4 and year-end earnings. Thanks a lot.
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