Costar Group Inc (CSGP) — Q3 2021 Earnings Call Transcript

Thank you, Sadie. Good evening, and thank you all for joining us to discuss the third quarter 2021 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar’s CEO and Founder; and Scott Wheeler, our CFO, I would like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the Company’s outlook and expectations for the fourth quarter and full year 2021. Forward-looking statements involve many risks, uncertainties, assumptions, estimates, and other factors 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 press release issued earlier today 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. CoStar assumes no obligation to update these statements, whether as a result of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measure of the non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, non-GAAP net income, and forward-looking non-GAAP guidance, are shown in detail in our press release issued today, along with definitions for those terms. The press release is available on our website located at costargroup.com under Press Room. As a reminder, today’s conference call is being webcast, and the link is also available on our website under Investors. Please refer to today’s press release on how to access the replay of this call. And with that, I would like to turn the call over to our Founder and CEO, Andy Florance.

Thank you, Bill. You did an excellent job. Good evening, everyone. Total revenue for the third quarter of 2021 increased by 17% compared to last year, reaching $499 million, which is at the upper range of our guidance, nearly $0.5 billion for the quarter. Most notably, CoStar experienced year-over-year revenue growth in double digits for the first time since before the pandemic, with a 10% increase in the third quarter and 12% growth in September. We achieved net bookings of $47 million this quarter, marking the strongest sales quarter in CoStar's history, despite a weaker sales quarter for Apartments.com. Our adjusted EBITDA of $144 million surpassed the high end of our guidance by $10 million and exceeded third quarter consensus estimates. Our marketplaces delivered outstanding value to our clients, with site traffic increasing by 25% year-over-year. Our marketing efforts resulted in over 4.6 billion impressions across Apartments.com, LoopNet, and Ten-X during the third quarter. We are excited about welcoming our newest marketplace, BureauxLocaux, which we acquired on October 1st, to our growing network. The U.S. apartment market is witnessing the highest absorption rates in decades, leading to historically low vacancy rates and the highest rent growth seen in recent years. The market statistics indicate significant volatility and are outside typical ranges from the past 20 years. The initial drop in occupancy due to the pandemic has shifted dramatically, with occupancy levels and rent growth soaring after the vaccine rollout. For investment-grade properties of 50 units and more in the U.S., the average occupancy has been historically around 93%. Currently, occupancy is at 95%, well above that historical range. The average annual net absorption of apartment units over the past 20 years has been 218,000, while this year it has more than tripled to 658,000 units, with annual rent growth reaching 12.4%, the highest in two decades. While high rents benefit owners, they also contribute to a housing crisis. Investment in apartments is lucrative, with the average sales price of an apartment unit hitting $248,000, significantly above historical averages. For Apartments.com, this means many large investment-grade apartment buildings are fully leased, with 12.5% of these communities now 99% leased or more, a remarkable figure. This saturation may lead to reduced advertising needs, as communities that achieve such high lease rates may decrease their spending with us despite their strong results. Although our renewal rates remain high, many fully leased communities have trimmed their expenditures with Apartments, typically reducing by as much as 50%. I believe this situation is a temporary market anomaly that will revert to normal occupancy levels in the coming quarters. Generally, when communities are fully leased, it indicates underpricing of apartments, and managerial systems will raise rents until occupancy levels stabilize around 93%. The number of leads generated for leasing offices plays a crucial role—the more leads, the more competitive the market, allowing owners to increase rents. We are confident Apartments.com remains the primary source for these valuable leads. While the market experiences upheaval, demand for Apartments.com remains robust, and we anticipate high unit turnover in the upcoming year. A recent survey of over 20,000 renters indicated that 53% plan to move by winter, with a declining number intending to renew their leases in the same community. The shift in affordability and work-from-home policies underpins these trends. During a recent in-person meeting with a major client, they expressed immense gratitude for our partnership, emphasizing that we have been their leading source of leads and contributed significantly to their success. Although our relationship remains excellent, they have recently reduced their spending due to their communities being largely full. Despite this, I believe our collaboration will continue to develop positively over the long term. While Apartments.com sales were softer this quarter in this highly-leased environment, our platform's strength remains solid. Leases were up 39% year-over-year in the third quarter, and visits increased by 17%, aided by our most successful marketing quarter with 3.5 billion media impressions. Increased site traffic, alongside stable pricing, has provided our clients with substantial value. The average cost per lead has decreased from $9.55 in 2019 to $6.24 in 2021. In response to market imbalances, we introduced a new pricing strategy in September that segments our rates based on community size. Initial tests showed smooth implementation with average price increases of 7%. Some clients have seen significant revenue growth; for instance, a Florida client went from paying $759 to $1,399 upon renewal, a 84% increase. While these changes haven't impacted this quarter, we anticipate their effects will be felt in future periods. Acknowledging the volatility of the multifamily market, we are proceeding cautiously to preserve the long-term value of our business. We believe there’s substantial growth potential in new client acquisition, with our estimated penetration of smaller buildings below 4% and about 50% in larger properties. We maintain that the U.S. apartment market holds a revenue opportunity of $6 billion to $8 billion for Apartments.com. CoStar achieved record new bookings in the third quarter, up 57% sequentially and over 500% year-over-year, driven by our upsell program and renewed pricing strategies. From July 1st, we started providing only a comprehensive global integrated CoStar platform and began upgrading accounts that previously had limited access. This shift has already yielded $7 million in annual sales from the upgraded clients and we expect significant revenue growth from this initiative. Our recent surveys indicate positive client reception regarding the enhanced capabilities of our integrated platform. The sales team reached new highs in client acquisition, driven by productivity improvements and increased new contracts. In the first quarter of 2021, we incorporated commercial mortgage-backed security loan information into CoStar, benefiting our clients significantly. We plan to launch CMBS Analytics next month, which will aggregate loan data across various markets. The tools we are developing for lenders are on track to be released in early 2022, presenting a potential revenue opportunity beyond $300 million annually. Recently, we expanded our international reach by launching in Montreal and achieving growth in our hospitality sector through STR. P&L is showing promising progress, and our LoopNet marketplaces demonstrated a strong revenue increase of 17%. The exceptional performance continues, with substantial growth in advertising renewals and traffic, currently exceeding pre-pandemic levels. Our LoopNet marketing initiatives are in full swing, aiming for broad exposure across various digital platforms and channels. We're actively expanding our sales team dedicated to LoopNet, positioning ourselves for consistent year-on-year growth in this segment. Overall, our residential business is thriving, with Homesnap revenues experiencing significant growth and exciting developments around Homes.com. The platform now connects consumers directly to listing agents, enhancing the overall experience. Furthermore, Apartments.com listings are featured on Homes.com, expanding consumer choices and increasing traffic. Recent initiatives have shown promising results in lead generation and partnerships, including a new collaboration with the Real Estate Board of New York. Our upcoming participation in the National Association of Realtors Conference reflects our commitment to supporting residential real estate professionals. Over the past decade, we have transformed into the leader in digital real estate marketplaces, with nearly 90 million unique visitors monthly and significant revenue growth. We are eager to advance our international marketplace capabilities with strategic acquisitions, such as BureauxLocaux in France. Lastly, Ten-X reported robust performance in the third quarter, showing remarkable growth in average deal size, transaction volume, and unique visitors, while achieving a strong trade rate. This performance highlights the effectiveness of our marketplace solutions. Now, I will hand over the call to our Chief Financial Officer, Scott Wheeler, who will share more financial insights with you.

I know how much you love the riveting numbers. You’re like when you go to the Charlie Brown Show, you know, it’s the teacher, all you hear is wah, wah, wah, number, number, wah, wah, wah, number, number when you listen to me. I can tell. Anyway. Thank you, Andy, for your introduction. Great to have another strong financial quarter in the books, and of course, to see all the increasing number of product, content, and marketing investments that, as you can hear from what Andy said, are delivering such great value to all of our clients. So, it is clear that over the past few years, we have established both CoStar and Multifamily as businesses that are operating within these massive addressable markets, and each of them have multibillion-dollar revenue potential. Now similarly, our LoopNet Marketplace and now our residential business also both operate in massive addressable markets and each have multibillion-dollar revenue potential. So, this quarter, we revised how we report our disaggregated revenue to increase visibility to these $1 billion-plus potential business areas: CoStar, Multifamily, LoopNet, and Residential, each of whose revenue will now be reported individually. Each of the sectors includes both domestic and international revenue where applicable. So, the revenue sector that was formerly known as Commercial Property and Land has left the CoStar Group and is now working full-time from home on a lovely beach somewhere. We had to say farewell to Commercial Property and Land and thank them for the sector’s solid five years of performance and exceptional service. In its place, we now have a new, and I must say a very creatively titled sector that I personally named, called Other Marketplaces. Now, I didn’t spend a dime of our precious marketing spend to come up with that one, but it does include Ten-X, our Lands and our Businesses for Sale marketplace. So hopefully, I’ll remember to provide the relevant comparisons to all of you this quarter for the old grouping while we transition to the new revenue sector information, will help everyone come along with the transition. In the third quarter, revenue of $499 million was near the high end of our guidance range. CoStar and residential both outperformed in terms of revenue in the quarter, partially offset by the lower revenue than we expected in Multifamily. Organic revenue growth for the third quarter 2021 was 12%, which is in line with our expectations. CoStar revenue increased 10% year-over-year in the third quarter, ahead of our guidance, marking the highest CoStar growth quarter since before the pandemic. CoStar is definitely on a roll. Renewal rates for CoStar remained at their all-time highs and the average revenue size of our contracts has increased over pre-pandemic levels by over 20%. Both are very encouraging signs. The strong sales performance of our CoStar sales force, that Andy mentioned, is expected to accelerate the CoStar revenue growth rate in the fourth quarter to 13%. Now before the 2020 downturn, CoStar revenue growth had been between 12% and 14% on both the 10 and a 5-year compounded annual basis. So, we’re now firmly back in our CoStar comfort zone, and we expect to stay there for the foreseeable future. Keep in mind that we only recently initiated renewal pricing increases, which we expect will provide additional tailwinds for CoStar revenue growth throughout next year. Information Services revenue grew 8% in the third quarter of 2021 as our subscription revenue continues to grow in STR and Real Estate Manager. One-time report purchases and other transaction revenues were slightly behind expectations. We expect lower transaction revenues in the future as we’re now selling CoStar subscriptions to hospitality companies, following the integration of STR hospitality data that we completed earlier this year. So, over time, this is expected to eliminate the need for these customers to purchase one-time report products. This is, of course, part of the subscription model strategy that we employ and that we pursue with all of our acquired businesses. Accordingly, we anticipate Information Services revenue to grow approximately 9% for the full year of 2021. Growth in Multifamily revenue was 10%, slightly below our expectations for the reasons that Andy mentioned. Approximately half of the revenue growth year-over-year in the third quarter is from new properties advertising with us and the other half is from growth in the average rate per property. As we continue to ramp up our new price program in the fourth quarter and beyond, and considering the latest multifamily market trends that Andy discussed, we expect the year-over-year revenue growth rate for Multifamily to be in the mid-single digits in the fourth quarter of 2021. Now for comparison purpose to our sector guidance at the end of the second quarter, the old Commercial Property and Land Group of Marketplaces delivered 53% year-over-year revenue growth in the third quarter, with all the businesses in this sector performing at or ahead of our expectations. Our LoopNet Marketplace revenue sector includes the LoopNet Marketplace as well as the international Commercial Property market places. These are Belbex in Spain, Realla in the UK, and now BureauxLocaux in France. The addition of BureauxLocaux into our financial results does not have a material impact on the quarter on the LoopNet Marketplace sector. The LoopNet revenue increased 17% in the third quarter, marking the 12th straight quarter of double-digit revenue growth. Signature ads, which grew 50%-plus year-over-year, are up both in volume by 20% and revenue per property by 30%. Once again, the CoStar LoopNet sales team knocked it out of the park for the quarter. They sold over 90% of their output coming from CoStar and less than 10% went to LoopNet. This is great news overall, of course, and even with this trend heavily weighted to CoStar sales, more so than last quarter. We still expect LoopNet revenue growth of 14% in the fourth quarter and 16% growth for the full year of 2021. Revenue from the residential business was $25 million in the third quarter, with Homesnap providing the vast majority of the revenue as we wind down the legacy Homes.com products. Homesnap pro forma revenue growth was nearly 40% for the third quarter of 2021. We expect residential revenue of $20 million in the fourth quarter with Homesnap revenue growth exceeding 50%, which is higher than our previous forecast. The new direct sales force in Homesnap is delivering great momentum during what is typically expected to be a slower time of the year. We’re successfully winding down Homes.com legacy revenue ahead of schedule and don’t expect a material contribution from these products in the fourth quarter of this year. Because of this faster elimination of the Homes.com legacy revenue, fourth quarter 2021 revenue for residential in total is expected to be slightly lower than what was included in our prior forecast. For the full year 2021, continuing revenue in our residential business is expected to be a little over $60 million, which excludes the discontinued Homes.com revenue. Revenue for other marketplaces, our newest member of the revenue reporting family, includes Ten-X along with our lands and businesses for sale marketplaces. Approximately half of the revenue in the second half of 2021 in Other Marketplaces is from Ten-X. Because Ten-X revenue is transactional and recognized when the closings occur for properties that are sold through the platform, the Other Marketplaces revenue doesn’t behave in that same friendly linear fashion as our businesses that are fully subscription-based. In other words, we expect a few more ups and downs between quarters, depending on the property sale timing. Other Marketplaces third quarter 2021 revenue grew 21%, with all businesses delivering double-digit growth. There is uncertainty in the timing of when some assets will close in the fourth quarter for Ten-X, which caused a modest reduction in our fourth quarter revenue outlook. Lands and businesses for sale marketplaces are expected to deliver strong double-digit growth in the fourth quarter. The total revenue is expected in the $32 million to $33 million range for Other Marketplaces in the fourth quarter of 2021. Our gross margin came in at 81% in the third quarter, consistent with the prior two quarters and the trend we expect to continue through the end of the year. Net income was $64 million in the third quarter of 2021, and our effective tax rate was 23%, which was in line with the expectations we provided in our last call. Adjusted EBITDA was $144 million in the third quarter, up 8% from the prior year and $9 million above the high end of our guidance range. The favorability is a combination of slower ramp-ups in hiring and slightly lower marketing costs in the quarter. Adjusted EBITDA margin was 29%, 200 basis points above our third quarter forecast. Cash and investments approximated $3.8 billion at the end of the third quarter, an increase of $87 million from the end of the second quarter of 2021. Looking at some of our performance metrics, our sales force approximated 850 at the end of the third quarter of 2021, which is a slight increase from the third quarter from the prior year and down around 55 people from the second quarter of 2021. The sequential reduction in sales headcount is primarily the result of the integration of Homes.com and the reduction of the sales force that was not repurposed to sell Homesnap and Multifamily. LoopNet and Ten-X sellers increased while Multifamily sellers decreased modestly during the quarter. Contract renewal rates were 92% for the third quarter, in line with the second quarter and a 300 basis-point increase versus the third quarter last year. Renewal rates for customers who have been subscribers for five years or longer were 97%, consistent with the second quarter of this year and 250 basis points above the third quarter of last year. Subscription revenue on annual contracts accounted for 76% of overall revenue, a 1% decrease from the previous quarter because of the Homes.com acquisition. I’ll now talk through our outlook for the full year and fourth quarter of 2021. Full year revenue for the year is now expected in the range of $1.935 billion to $1.940 billion for 2021, which represents a narrowing of our guidance range, along with approximately an $8 million reduction at the midpoint. This reduction reflects the more cautious approach to our forecasting to the Ten-X property sale timing, the net impact of CoStar’s strength against lower Multifamily revenue growth, and the accelerated elimination of Homes.com revenue in the fourth quarter. This full-year range implies a fourth quarter revenue range of $498 million to $503 million, representing revenue growth of 13% year-over-year at the midpoint of the range. We are increasing our adjusted EBITDA outlook for the full year by approximately $8 million at the midpoint of the range. We now expect adjusted EBITDA to range from $615 million to $620 million, which incorporates the outperformance in the third quarter along with continued cost favorability in the fourth quarter of this year. Fourth quarter adjusted EBITDA is expected in the range of $161 million to $166 million, for an adjusted EBITDA margin of around 32%. So, that about wraps it up for me today. I will now turn the call back over to Bill and our friendly moderator to open up the line for questions.

Thank you, Scott. Sadie, would you please give instructions and assemble the roster for the Q&A portion of the call? Analysts, please limit yourselves to one really good question. Thank you.

Good evening. Thanks for the question. And thanks, guys, for the added transparency disclosures on the revenue side; I really appreciate it. I think I have to ask this question. I know we’re in just the end of October here. But Andy, I guess, as you look forward to 2022, just wondering if you had a sense on spending as you think about ramping up the residential effort? Any sense of how that will play in, whether there’s any connection there with some of the revenue weakness that we’re seeing in the apartment side? Do you have the opportunity to pivot more spending dollars from apartments over to residential? Thank you.

Yes. So, at this point, what we’re focused on with residential is growing our selling operation of Homesnap. So, Homesnap, we’re having great success there, as you can see from these numbers, good, strong SaaS revenue, subscription revenue, the concierge product. We’re accelerating that growth rate dramatically. We believe there is additional room to accelerate that growth rate of Homesnap. So, the Homesnap Pro product doesn’t have a sales force right now. That product reminds me an awful lot of what LoopNet looked like over the last 10 to 15 years when it was being sold at a $50 a month subscription level. I think it would be healthy for us to grow the community of residential agents that regularly connect and log into Homesnap and turn to us as an important marketing tool for them and an information tool for them. So, that’s our primary focus. And that does not involve large-scale consumer marketing initiatives. That’s really about salespeople and software. And secondarily, what we’re focused on doing is dialing in exactly the right formula for Homes.com and the right relationship between the professional community at Homesnap and the consumer, the buyers who are going to be on Homes.com and making sure that we’re designing the right tools there for them. So, until we have finished that software, finished those designs, fully flushed out where these two products are going, which we’re working very hard on right now, it’s premature to be looking at dramatic spending initiatives beyond adding salespeople to Homes.com and a little bit of software initiatives and the like. So, it’s still open. Now, could we dial back some of the spending on Apartments.com when so many apartment communities are full? Probably, and we’ve already had those discussions, not huge, it’s not something that is necessary to free up some initiative over on the residential side, so.

I’m on for Sterling Auty tonight. The question really is about timing of two things: expectations on maybe the timing for the Multifamily business to begin to rebound; and then, Andy, when you mentioned the potential windfall for Ten-X, with some of the distressed assets potentially coming onto the market, any expectation on when or if that timing might come to fruition? Thank you.

Sure. There are two main factors regarding Apartments.com that I want to highlight. First, there's this unusual volatility with occupancy levels reaching unprecedented heights. I'm predicting something that has not occurred before, and I expect it will start to stabilize within the next two quarters, possibly between one to four quarters. I don’t believe that experienced apartment operators will maintain such high occupancy without taking advantage of rent increases, especially with the changes in pricing and work-from-home arrangements creating a lot of turnover. I anticipate that this will resolve fairly quickly. The second major factor is that we are providing significantly more economic value to our customers than ever before. We began testing some of this in September and will continue to ramp it up into the fourth quarter and the following quarters. While we might not see any dramatic changes in the fourth quarter this year, I believe we will enter a strong 2022. I want to emphasize that our product is performing at its best, and we have likely contributed to the industry achieving its highest rental prices. As for the second question about when we expect Ten-X to benefit from distressed office levels, it is hard to provide an exact timeline. However, as I walk through various office buildings without seeing any people, I sense that there may be a problem there. Eventually, sensible CFOs will need to downsize some of these properties. I believe work-from-home models won't work effectively as long-term solutions, leading to challenges in productivity. I think this situation may unfold in 2022. I would be surprised if there isn't some distress in the market, particularly for second-generation office buildings, but Ten-X excels at selling and connecting with the largest audience possible for both unique and high-quality properties. Thus, I think we could see something happen in 2022, and these two factors could create a favorable situation for LoopNet and Ten-X, particularly with the effective 70% vacancy rate.

So, should 4Q then be the trough in Multifamily revenue, given that you get some pricing benefits and then occupancy rates can’t really go higher? Does that make sense?

That likely makes sense. And yes, it would be really odd if occupancy rates went higher.

So, apartment vacancy rates have reached the lowest level in recent history. And you mentioned that that should normalize in a few quarters as yield management systems push rents up. What’s the likelihood that this could be the new norm over the medium term as the economic recovery continues to take hold? And how receptive have customers been to some of your pricing and lead management initiatives to try to compensate and address the prevailing dynamics?

I don’t think it’s typical for communities to be 99% leased. It’s similar to unemployment; reaching 1% unemployment indicates an unhealthy economy. If housing supply drops below a certain level, the market becomes frozen. Therefore, it’s in the owners' interest to maintain some vacancy to test pricing limits. For those with fixed mortgages, increasing rents is very appealing. Their net operating income (NOI) can rise significantly compared to rental rates. If they raise rent by 10%, their NOI might increase by 40% with a cap rate of 3.5%. These owners are inclined to push rents, and they might decide to sell the asset afterwards. However, I don't see this as the new standard. Additionally, the feedback on our pricing changes has been quite positive. I recently met with senior sales leadership on the apartment side for a couple of hours to inquire about cancellations, and the response was that there haven’t been any. Overall, clients seem satisfied. It’s important to note that when we raise prices, we're actually reducing the rate at which we lower their cost per lead at a time when they're benefitting from more efficient, lower-cost leads. We might be providing leases for as little as $30 each, compared to the historical $300 or $700 per lease. The conversation is clear: we’re providing value, and clients appreciate that. I expect some property managers will try to negotiate with us, but so far, no cancellations is a positive sign.

It's evident that apartments will likely continue to hinder growth as we move into next year, depending on the changes in these unprecedented occupancy levels. However, I wanted to give you, Andy, a chance to discuss some positive factors that could drive the business in 2022 and where you see potential for growth acceleration. For instance, at LoopNet, where the sales team is expanding, in Residential, where you're investing, and also CoStar Suite with the new product improvements, how do you view the potential for organic growth in the business throughout 2022 and possibly beyond, if you're willing to share your thoughts?

Sure. First, there are positive developments in the Multifamily and Apartments.com sectors that are worth noting, particularly in terms of overall penetration rates. There are two main factors to consider: the revenue generated per unit from existing customers and the ability to attract new customers. Our penetration rates are still quite low, and we are demonstrating our capability to sell successfully not just to larger communities of 120 or 150 units, but also to smaller ones, including 75, 50, 30, 10, and even 4-unit communities. This represents a significant opportunity for Apartments.com, and we see potential to dramatically increase the number of communities working with us over time. This remains a crucial growth driver for 2022, and we are very focused on it. Additionally, our pricing initiatives and adjustments may create positive momentum for Apartments.com as we move into the middle of 2022. LoopNet is performing well, as indicated by its traffic numbers. I genuinely believe that digital marketing has become the standard in commercial real estate, and we are well-positioned due to our significant share of industry traffic. Many in the commercial real estate sector are still using outdated marketing strategies from the past, primarily relying on print or its digital equivalent. I anticipate growing awareness and transformation in this area. I am excited about the developments with Homesnap. While some expected us to invest heavily in marketing like competitors, we plan to grow at our own pace. Homesnap is a strong product appreciated by residential agents, but it hasn’t been extensively marketed to them yet, and we excel at that. There's considerable revenue potential there, especially since it's strategic revenue that builds our unique platform and strengthens our position in consumer marketplaces. As for CoStar, we've discussed various new initiatives beyond upselling, including lenders and new feature enhancements. I am genuinely impressed with our sales team's productivity and effectiveness. Our upsell initiative is fundamentally designed to prepare us for future revenue growth by unlocking the value of cross-border information as we gradually expand into Europe and continue our growth in Canada. Most institutional-grade asset investments are cross-border, and we aim to provide solutions that also drive revenue for our shareholders. There is no shortage of activity across all our businesses. We may occasionally encounter market anomalies or unexpected events, but overall, we have substantial positive momentum. I want to acknowledge Mark Schwartz and Drew Davidson and their sales team at CoStar for their outstanding performance.

On the RBNY partnership in Citysnap, I mean, obviously, StreetEasy has kind of dominated that NYC market in recent years. We’ve heard a lot of pushback on the kind of daily listing fees. I think, they started with a freemium model, but the pricing has gone from, I think it was $1.50 to like $6 per day, and that’s happened in a handful of years. But Andy, I think you said this is going to be free to list. So, I’m just curious about Citysnap’s kind of approach to pricing, or are we thinking about this more of like a strategic move for you guys, maybe something you can build off in the future?

Sure. So, keep in mind that Citysnap is Homesnap. There are over 1 million agents, and when they begin using Citysnap, with the MLS possibly covering costs for them, it could be free or not. However, when they subscribe to the enhanced features of the product, they might start spending $50 a month with us, similar to our previous earnings from LoopNet. If they utilize our concierge marketing services, their spending could increase to $500 or $600 a month. When you consider 1 million agents spending $500 or $600 monthly, that leads to a substantial figure since that's a monthly rate, not annual. We're currently selling a lot of that, and things are progressing well. Therefore, we don't need to adopt unpopular strategies like StreetEasy to achieve financial success. I understand that many people are unhappy with StreetEasy and their rapidly increasing prices, which are essentially pay-to-list. Some of their practices, where they leverage other people's listings to obtain broker or agent fees, can feel somewhat coercive to the industry. This has resulted in an unprecedented situation, as New York City has never had an MLS before. This is the first instance where agents have united to create something together, and we're honored to have the opportunity to serve that. Initially, fees will apply to Homesnap Pro+, which is essentially Citysnap Pro+ along with the concierge marketing products. Over time, this will lead to marketing revenue similar to our operations with Apartments.com, LoopNet, or REA Group. We provide marketing solutions that enable almost all brokers to participate, not just a select few. This approach helps them see us as allies rather than adversaries. There are various ways we can implement this. While we recognize the difficulty of building an audience, we have experience in audience building and we are eager to take on these challenges. I'm not certain if I addressed your question fully, but that's the essence of it.

Sounded good.

Andy, I want to understand the dynamics of Multifamily pricing. I appreciate that you're reducing costs for apartment owners and managers to generate leads, which is crucial. Can we expect that as vacancies stabilize over the next 12 to 18 months, we will see an increase in demand alongside the pricing increases you've implemented? I mean, I don’t anticipate prices dropping back down, right? So, there could be some leverage coming from this, although the timing is uncertain?

Absolutely. The value we’ve delivered is remarkable. When we acquired Apartments.com about five or six years ago, they were generating around 10 to 15 leads per property per month. We have now increased that to 175 leads per month, while the pricing has remained relatively stable. Rethinking that pricing could help manage the cost per lead more effectively, separate from the current high occupancy levels. We may see revenue growth as we adjust lead delivery pricing based on the varying needs of different communities. An increase in pricing could lead to faster revenue growth. Additionally, as people move around due to various economic factors and the work-from-home trend, property owners may need to upgrade to higher-tier listings to attract more renters, especially if they are facing higher vacancy rates. If our clients implement another 10% rent increase, occupancy might still remain high, but the value of our leads could increase by 10%. From a net operating income perspective, these leads could be worth 30% to 40% more. It’s possible for us to experience a significant positive impact. However, Mr. Wheeler tends to approach this cautiously and may need time to fully acknowledge the situation.

Well, there are some positives, like you mentioned the renewal pricing increases in your comments, but we’re selling new ads under our new pricing structures that are being sold for 15% to 20% prices higher than we were selling them for in July. We’re getting hundreds of properties that are coming in, paying those prices. To your point, Andrew, we’ve typically seen 10% volume growth over the years, and we have plenty of room to penetrate with volume growth. If you had a nice volume growth kicker on top of a 15% new price card, that’s interesting. Coming from Eeyore. The new Eeyore.

With the cash reserves you still have, I'm curious about how we should view the timing and size of potential deals in the next year. Specifically, can you provide an estimate of how many smaller, tuck-in deals you anticipate closing based on your current pipeline? Are there any larger opportunities in the private market that we might not be aware of?

I appreciate the question, Mario. However, we won't disclose anything specific. I can share that just before this call, I spoke with our Head of M&A, Martin Johnson, about a few small companies that could be good tuck-ins, as they hold strategic value. There's always a significant pipeline of strategic opportunities. Some are slightly larger, while others are straightforward and positive but come with challenges. Recently, we turned down a substantial deal after due diligence because we felt it did not present the right value and had too many complications. Currently, we are focused on deals that enhance our existing initiatives. We're not pursuing anything that strays from the general strategic themes our investors are familiar with, but there are many opportunities to strengthen what we're already doing.

For Apartments.com, can you give us some perspective on how the business is performing in any metro areas that are closer to the median for vacancy rates? And I’m talking relative to the historical median or within 1 standard deviation or something to the extent to which they’re out there. And then, historically, how sensitive has the business been to new apartment construction? I recognize that there’s interplay with occupancy rate, but just in terms of the need to advertise to lease up the new builds, and any update on those trends or sensitivities? Thanks.

Sure. Just keep one thing in mind as you think about the current situation. When considering the unemployment and job creation numbers, people might be anticipating 280,000 new jobs this month. However, it’s important to remember that this is alongside 5 million jobs lost and 5.2 million jobs gained. The 200,000 figure reflects this complexity. Similarly, while there might be a slight decline in some areas, which could affect apartment sales due to high occupancy rates, the construction side of the business remains strong. We are nearing an all-time high in supply, and communities typically turn to Apartments.com to fill their vacancies. That segment is performing exceptionally well. It doesn’t require advanced economic knowledge to see that with rents increasing by 12% and cap rates decreasing to around 3%, there will be more supply, especially in apartments, serving as an inflation hedge. I anticipate significant activity in land acquisition and a surge in bringing apartments to market as quickly as possible. The business is thriving. In terms of market fluctuations, different areas are experiencing spikes in occupancy at varying rates. Early in the pandemic, secondary cities like Richmond and San Diego saw increases, while markets like New York experienced rising vacancies. Now, New York is seeing an uptick in occupancy while others fluctuate. Overall, we aren’t identifying any distinct trends between markets. The general observation is that demand for apartments is at an all-time high, and while supply is also high, the demand is even stronger nationwide.

On the international data opportunity, how important are these commercial marketplaces, Realla and Belbex, and now the recent one in France, to your overall data gathering capabilities in these markets to pull back into the global CoStar data platform? And then, how are you thinking about continuing to expand commercial marketplaces in other countries? And I guess, into regions too, like APAC; could you do that with the existing assets, or will you likely continue to do smaller acquisitions like BureauxLocaux?

Yes, we have always been open to considering strong players in the data clearinghouse market. These companies provide valuable raw materials for building a larger platform. We are continuously searching for opportunities like BureauxLocaux, which are available worldwide. In terms of the significance of these sites, they are extremely valuable. While we can enter markets without them—evident from our successful marketplace in Spain—we prefer to accelerate growth. Marketplaces yield a wealth of high-quality data, much of which is submitted electronically by users. When we acquire a company like BureauxLocaux in Paris, we believe we can enhance their traffic, develop better pricing and value propositions for advertisers, and optimize revenue opportunities. We also typically improve their imagery and marketing strategies. We can leverage data from BureauxLocaux and have identified several additional data sources to combine, creating a robust information tool for professionals and investors. The uniqueness of the marketplace generates special data; increased shopping activity attracts more data submissions, creating a virtuous cycle that benefits our information platforms. We observed a similar phenomenon in the U.S.: selling data in a few cities yields moderate value, but expanding to a national footprint dramatically increases that value. We aim to achieve this same effect in Europe. Currently, we serve only a few markets, but we’re making significant progress in expanding our solutions across major economies like Germany, France, the United Kingdom, and Spain. This expansion will enhance our value proposition and lead to greater profitability and revenue growth in Europe and globally. We are also focused on internationalizing LoopNet. It’s an excellent product that showcases properties effectively and appeals to a global audience. After extensive discussions in Paris about local market nuances, we plan to adapt these insights into LoopNet. LoopNet already has a strong advantage, as it garners positive signals from Google, performing well even in markets with minimal properties outside the U.S. We are keen on maintaining local marketplaces like BureauxLocaux, Belbex, and Realla, while also promoting the international market with LoopNet, especially since cross-border sales are significant. People frequently invest across borders, which bolsters LoopNet's for-sale side, similar to its success in the U.S. I’m also interested in utilizing Ten-X to pursue LoopNet's growth, as I believe a large portion of successful bidders on Ten-X are international. So, these are some of my thoughts on our strategy.

Scott, I was going to ask you maybe around margins. As you think about the roadmap to 40% by 2023, does the softness on the Multifamily that I get it, it might be temporary? And then, maybe some of the timing issues that Andy talked about on the Ten-X impact. Does that in any way change your investment programs as you try to get to that target model, or does that remain sort of status quo?

Yes. I don’t think we have really any reason to make major changes in the investment model now. I think margins have performed very well, certainly in apartments this year, as we focus some investments in other places, but they’ve been running up on top of the strong marketing they’ve had. Like Andy said, we’ll look at the level of spending there and where they’re most effective going forward. I think the margin profiles are strong. The leverage we’re getting is strong on growth across all the platforms. So, I think as we balance that into the next years, we’ll see continued funds come available that we can reinvest in the most attractive opportunities and still give great margins compared to obviously many others in the market that don’t like to deliver margins. We still think that’s an important part of our value proposition. So, no real change in speed or course there. And I appreciate you hanging with us, Mayank, to the last question of the night.

I think with that, we’re going to wind up the call. Thank you for all the good questions. We appreciate you joining us for our third quarter call today. As we move towards the end of 2021, I can’t believe that we’re actually doing that, but here we are. We’re working towards two important short-term milestones. One is the goal of reaching $1 billion of annualized revenue run rate in our marketplaces by the end of the year. The second is we look forward to crossing the $2 billion revenue run rate for the Company overall, solidly and cleanly. We think the strength of our franchise is clear and the amazing traffic growth, lead growth, and high renewal rates we’re showing right now and the successes we’re showing with so many of our product areas and strong sales growth remain focused on growing the core businesses while working to triple our addressable market opportunity through investments in residential and international expansion. We look forward to meeting with you again for our fourth quarter call in February ‘22. Hang in there. I know it’s a little bit longer than normal quarterly interval, but we’ll be there. Until then, stay safe. And thank you very much for participating.