CoStar Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 CoStar Group Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. And I would like to hand the conference over to your speaker today. Ms. Sarah Spray, please go ahead.

Thank you. Good evening, and thank you all for joining us to discuss the third quarter 2020 results of the CoStar Group. Before I turn the call over to Andy Florence, 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 expectations for the fourth quarter and full year 2020. 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 gap measure to the non-gap financial measures discussed on this call, including EBITDA, adjusted EBITDA, non-gap net income, and forward-looking non-gap 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 over to our founder and CEO, Andy Florence.

Good evening, and thank you for joining us today for CoStar Group's third quarter 2020 earnings call. Total third quarter revenue was $426 million, up 21% year-over-year. For 20 years, CoStar has grown revenue 20% plus on a compound annual basis. Our performance this quarter is no different and shows clear evidence that in the midst of this pandemic, our business is strong, resilient, and counter-cyclical. In the third quarter of 2020, all of our businesses performed well and continue to be solid, resilient, and showed the performance that we saw as we exited the second quarter. In the third quarter, we achieved 53 million in quarterly sales bookings, a 53% increase over Q2 sales bookings. This was one of our strongest sales quarters ever, despite the continued high levels of economic, social, and public health uncertainty. Our marketplace businesses displayed very strong counter-cyclical growth with Apartments.com revenue up 23% in the third quarter 2020 over the third quarter of 2019. Similarly, LoopNet revenue was up 19% year-over-year in the third quarter. Our earnings in the third quarter were very strong with net income of $58 million and adjusted EBITDA of $134 million. Our sales team at Apartments.com turned in one of their best performances ever in the third quarter with net new sales up a massive 59% versus the same quarter a year ago. Customers continue to invest in Apartments.com because of the strong and growing lead flow we deliver driven by growing site traffic and engagement. During the quarter, we set yet another record for site traffic. According to ComScore, for the third quarter, average unique visitors per month to the Apartments.com network of sites in the quarter was over 25 million, up 20% from the same quarter a year ago. The growth in lead flow was even stronger as total leads generated for our clients from the Apartments.com network of sites in the quarter was up 43% over the prior year quarter, beating the previous record by 16%. Our increased investment in marketing is driving these gains and allowing us to further distance ourselves from our competition. According to Comscore, in the third quarter, Apartments.com had 2.3 times as many unique visitors as RentPath, 9 times as many as Zumper, 12 times as many as ApartmentList, and 22% more than the Zillow Rental Network. Third quarter over second quarter 2020, the Apartments.com network added 14.5 million visits sequentially, while RentPath went down 5.3 million visits. We believe that customers take notice of and care about the huge traffic and lead advantage Apartments.com offers them. Our customers routinely tell us who they are marketing with, including whether they're marketing with RentPath. Since the beginning of 2020, we estimate that we have added $36 million in annualized revenue to Apartments.com for multifamily properties that we're advertising on RentPath. We have added thousands of new properties as advertisers on Apartments.com this year. During the same time period, we do not believe that RentPath has grown their revenue. In fact, we can see from their advertised sales promotions, they're shifting their focus to reselling advertising solutions that, in fact, compete with ApartmentGuide and Rent.com. RentPath offers services placing ads for apartment communities on Facebook, social media, Google, SEM, and the like. They may be doing this because their core sites are less and less attractive to advertisers. We believe that this shift in their business is a shift to lower margin, less differentiated product. From when we entered into an agreement to acquire RentPath before any of us had ever heard of COVID, it seems like the world has changed. While we continue to seek approval at the Federal Trade Commission to close on our acquisition of RentPath, right now we're very focused on laying the groundwork for a very strong 2021 for Apartments.com. We believe that the total addressable for Apartments.com is huge and growing. In the U.S., 51% of the larger apartment communities with at least 100 units are advertising on Apartments.com. Our penetration of the multifamily market continues to grow as we added 879 more of these 100-unit-plus communities this quarter alone with an overall average revenue per property of $1,060 per month. The opportunity to grow our client base in the properties with less than 100 units is much more exciting. They're both exciting, but the smaller midsize opportunity is really remarkable. Just 3% of the over 350,000 apartment communities with 5 to 100 units currently advertise with us. That's 3% of the 350,000 5 to 100 unit key units are advertising. But that customer segment is growing at twice the rate of the larger 100 unit plus community advertisers. In the previous quarter alone, 820 communities with 5 to 100 units began new advertising relationships with us for an overall average revenue per property per month of $536. The broadest opportunity of all is to provide marketing and leasing solutions to the 18 million properties with 1 to 4 units. So far this year, we've sold about 5,900 ads to the 1 to 4 unit properties, including almost 2,700 in the third quarter at an average price of $150 per month. We are successfully adding clients from large, medium, and small rental properties. This quarter, we blew past the $600 million run rate in annualized revenue, and yet we've only sold advertising to less than 1% of the U.S. rental properties. We clearly have a huge opportunity here and intend to invest in growing our apartment sales force into 2021 to capture more of this opportunity and the potential for high incremental margins. The Apartments.com brand is well positioned to capture this opportunity. As I can argue, Apartments.com is becoming a household name and part of the culture. As many of you have seen, the proof point is the wonderful Free advertising we received earlier this month from the writers at Saturday Night Live. In the VP Fly Debate Cold Open, Jim Carrey, playing Jeff Goldblum as a fly on Vice President Pence's head, delivers our slogan, Apartments.com is the place to find a place, while the Apartments.com logo displays. Tens of millions of viewers watched that awesome free placement. This quarter, LoopNet was also able to prove resilient and counter-cyclical, recording a new all-time high in net new sales and year-over-year revenue growth of 19%. In the third quarter, LoopNet's record high in average monthly unique visitors at 8.3 million supported that revenue growth. That higher traffic drove a 70% increase in email and phone leads to our LoopNet advertisers in Q3 versus Q1 2020. We have implemented a comprehensive retargeting program this year, which we believe is instrumental to achieving both this growth in traffic and leads. LoopNet's strong traffic is driving strong sales of diamond ads, our most prominent level, which reached a price point of $11,000 per month and averaged $3,260 per month in the quarter. This is a bargain price point when compared to the hundreds of millions of dollars of potential lease revenue these ads are marketing. At the same time, it's a huge number compared to the average price point of only $10 to $20 a month that LoopNet was getting when we purchased LoopNet a little more than eight years ago. I'm convinced that the LoopNet opportunity is just as big as Apartments.com. As we begin making plans for LoopNet in 2021, we intend to invest in growing both our sales force and our marketing with an eye to accelerating our revenue growth even faster. We are working with our advertising agency to build a powerful LoopNet marketing campaign for 2021 that will encourage both owners and brokers to unleash their digital potential by being in the know, by being in the loop. It's a bit of a retro campaign in that getting in the loop was one of the first campaigns for LoopNet back at its founding. But since we acquired LoopNet, the platform has certainly transformed from a slow-growing website offering ads, cheap ads, on lower Class B properties to the premier marketplace for world-class commercial real estate. We believe that now is the time to bring the LoopNet image in marketing up to the top level. You will know when we have achieved our goal when you hear the LoopNet slogan used in a future Saturday Night Live cold open Pence-Harris presidential debate four years from now. As LoopNet grows, we are adjusting our organizational structure to continue to facilitate that growth. Going forward, LoopNet's organizational structure will more mirror the apartments.com organization, which we believe will allow it to focus fully on developing the growth potential of LoopNet. Where LoopNet in the past has shared leadership across product design, sales, customer service, and marketing with CoStar, Going forward, we'll have a dedicated management team within CoStar Group focused just on LoopNet growth. While the CoStar sales team will continue to sell CoStar for the foreseeable future, we've named James Moon, a veteran of the Partners.com leadership team, to senior vice president leading LoopNet sales. Over the next 12 to 18 months, we plan to build out a dedicated LoopNet sales team with an incremental 100 to 200 sales professionals. We intend to announce a president of the LoopNet organization within the next month. We plan to place additional LoopNet leadership positions over the next few months. I want to highlight that all of our marketplaces are growing traffic. Biz by Cell hit a new record in average monthly unique visitors this quarter. The Lands of America Network also set a record this quarter and is now growing so fast it's approaching LoopNet's traffic level with 6.8 million monthly unique visitors. The Lands Network monthly unique visitor count soared 80% year over year. We completed our acquisition of 10X at the end of the second quarter this year, and after only three months with the business, I'm more excited than ever about its potential. One of the first steps we've taken is to put any property going to auction on 10X to the top of LoopNet and CoStar and present them as upgraded diamond placements with enhanced retargeting. This is dramatically increasing their exposure to potential bidders. The benefit was immediate and dramatic. On the auctions that took place following this upgrade exposure, we saw the number of qualified bidders coming to 10X jump by 47%. We also observed a 19 percentage point increase in trade rate to 68% versus prior year. The trade rate is a percentage of the successful sales at auction divided by total number of properties brought to that auction. This trade rate of 68% is groundbreaking. Based on CoStar and LoopNet data on sales transactions over the past three years or even longer, the trade rate on traditional offline commercial real estate sales transactions is only 36%. 64% do not sell on their first listing. The minority that did sell were on the market for an average of 500 days before they sold. obviously specific properties very widely but those are pretty depressing numbers properties selling the traditional method took five times as long to sell on average compared to the 90 days it takes to sell a property on 10x on 10x both sellers and brokers have a higher probability of closing the sale at a much faster pace hypothetically A broker utilizing 10X can sell twice as many properties in a quarter as an offline broker can sell in a year. We believe that that is a major game changer. A potentially apt comparison to the traditional commercial real estate sales market is back to the days of the OTC pink sheets, which is a slow, expensive, illiquid, and not very transparent market. We believe that 10X could be comparable to the advent of NASDAQ in the 90s, which dramatically increased price transparency, volume, and liquidity in the OTC markets. The upside potential for every player in the commercial real estate market is tremendous and good. We are prioritizing the integration of 10X technology with both CoStar and LoopNet to be ready for what could be a significant wave of distressed properties coming to the market in the next 12 to 24 months. We will soon have real-time information on properties coming to auction fed directly to CoStar and LoopNet, creating additional exposure and interest from our 150,000-plus CoStar users and 7.8 million monthly LoopNet visitors. The full merger of the two back ends is expected to be achieved during 2021. 10X is an exciting space to watch, even from an operational perspective. I think that once we get those real-time feeds going, everyone will be glued to their screens as the auctions take place. CoStar has continued to grow through the pandemic, despite the pandemic's negative impact on commercial real estate. CoStar revenue grew 6% Q3 of the same quarter a year ago. Net sales booking surged back from a soft second quarter, growing 146% third quarter over second quarter 2020. Considering the scale of disruption to commercial real estate this year, I'm very impressed with our team's ability to maintain as strong a renewal rate as we have. The vast majority of cancellations from the second quarter occurred among small one and two agent broker shops. Over the past six months, only six firms with five or more brokers have canceled their contracts. Clearly, Demonstrating that the information analytics that CoStar provides are truly mission critical. I'm very optimistic about CoStar's potential moving into 2021. Just one of our headline product enhancements in the pipeline for CoStar is the integration of robust CMBS data into CoStar. The CMBS data includes deep information on over 100,000 commercial estate loans with 90,000 tenant lease expiration dates, 40,000 detailed operating statements, and details of thousands of distressed loans. CoStar customers will be able to search for properties based on loan maturity date and payment status. They will have access to detailed operating statements on a property level and tenant lease expiration dates. will build income and expense models that customers can use to build their assumptions on acquisitions, valuations, or developments. We will be able to use this data to inform our forecast models and analytics and to enhance our overall research efforts. I'm also excited about the multitude of major enhancements we have in the work as we integrate hospitality information into CoStar. We are close to integrating all of STR's properties into the CoStar database. We are building a suite of hospitality analytic tools into CoStar that we believe will be the best in class. We have designed the next phase of developments to migrate the STR benchmarking capabilities from emailed worksheets to a fully digitized end-to-end SAS benchmarking solution for the hospitality industry, all integrated with CoStar. We aim to offer a broad range of functionalities, including a dashboard view of traditional benchmarks such as RevPAR and and all the star reports, and also the P&L metrics and forward booking data. The tool will have enhanced portfolio analytics. I believe that this is a potential killer app in the hospitality segment. While the analytics and benchmarking we are building here are specific to hospitality, I think it's particularly exciting because it creates a proof of concept for CoStar's ability to deliver robust benchmarking across other commercial real estate asset classes in the future. In addition, we have made excellent progress in our track to deliver a full-featured, internationalized, and polyglot version of CoStar in 2021. If you think CRE analytics are cool, both of you, then you would love seeing our new capability to generate on-the-fly real-time aggregated comparative analytics from multiple countries, multiple languages, and multiple currencies, all presented in the currency localization and language of the user's choice. So exciting. Given the progress on International CoStar, it's timely that we're announcing today the closing of our purchase of Emporus, a German-based international commercial real estate data provider. Acquiring Emporus allows us to integrate their 700,000 building records and over 600,000 images across 100 countries into CoStar, providing a jumpstart to our international data collection efforts. In 2021, we plan to integrate and enhance the international data we have from our existing operations in Spain and Germany into CoStar. Beyond this, we've identified an additional 50 international cities that we plan to add to CoStar with cost-efficient data collection efforts initiated over the course of the next 24 months. We believe the market opportunity for us internationally is more than twice the market opportunity in North America. If you've noticed, over the past six months, we've increased our cash reserves through a combination of equity and debt funding to almost $4 billion in cash. I expect that the questions at the end of this call will be similar to every prior call and that someone will rightfully ask, where are you with merger and acquisitions? Given that I cannot discuss specific targets or potential transactions, I thought it helpful to clarify what we look for and the criteria we apply when we're evaluating acquisition opportunities. So let me answer the question in advance, but likely the question will be asked anyhow during Q&A, just slightly differently, but nuance is fun. We're a disciplined acquirer. Our strong balance sheet and stated intentions to deploy our cash for M&A have attracted attention from practically anybody considering selling their business in the prop tech space. It's a big group. There are currently 7,000 prop tech companies trying to create value by digitizing real estate. It's our practice to be open-minded and talk to everyone and consider carefully all potential acquisition opportunities, the vast majority of which we don't pursue. For the ones that we do not pursue, it could be because they're too far afield, too far from what we do, overvalued, not strategically valuable, too small, throw red flags in due diligence, or have no clear path to accelerate growth, among other reasons. One common theme for us has been to use acquisitions to enter a new closely related real estate segment. For example, we acquired National Retail Bureau to jumpstart our retail entry. We acquired Apartments.com to enter the apartment sector. We acquired STR to enter hospitality. We acquired Lands of America to enter the rural land space. In these cases, 75% of the technology and processes are identical to what we already do, maybe more than 75%. Placing upon a map a geo-query presenting acres and square feet, property photos and videos, property characteristics, marketplaces, aggregate analytics, and more are the same from one property type to another. Our expertise in one sector enables us to innovate quickly into a new segment. We believe that each time we add a new property segment, our solutions become more valuable to many of our clients because we offer them a more comprehensive solution to their needs. Banks almost always lend money across many property types. Praisers often value almost always more than just one property type. Brokers transact across multiple property types. Local government deals with all kinds of property types. Owners often own more than just one property type. Giving these clients consistent, convenient information solutions in one integrated offering is invaluable to them. Another theme for us is to target entering closely related solutions in the same property segment. For example, CoStar is and was a strong commercial real estate information solutions provider with a lot of data. And by acquiring LoopNet, we added commercial real estate market expertise and revenue. The commercialized information resources we already had allowed us to quickly innovate the marketplace solutions LoopNet offered, making them more valuable to searchers. Once we integrate the data behind LoopNet and CoStar, each product essentially generates free data for the other as a byproduct, making each more valuable. We sometimes acquire companies with complementary geographic footprints with similar segment coverage and solutions in order to accelerate our geographic expansion efforts. We built out much of our U.S. coverage 10 to 15 years ago this way and some of the European coverage about 10 years ago, five years ago. We often prefer to buy companies that are slow growing where we believe we see strategies to accelerate their growth rate. We have a strong track record of buying slow-growing companies and accelerating their growth rates. Today, Apartments.com is six times the size it was when we acquired it, LoopNet is over four times, Real Estate Manager is almost six times as big, and Comps.com is over eight times as big. Most of these companies were growing in the low single digits, if at all, when we acquired them, and we then accelerated them to strong, consistent double-digit growth. We jump when we see a chance to acquire a larger company that has a similar product with redundant cost structures. Our acquisition of 4Rent is a good example of acquiring a company, eliminating most of the cost structure while maintaining most of the revenue. It's great when you can do a deal where you're converting revenue into EBITDA. We prefer to acquire larger companies to obtain scale results for relatively the same efforts. It's called the Frank-Carchetti theory. Since acquiring small or large companies seem to take about the same amount of effort to do right, it makes sense to acquire larger ones. We generally invest in smaller companies only to obtain strategic new product solutions or for the purpose of research and development. Each of the acquisitions we consider must have multiple opportunities to create significant growth and profit for the business. Otherwise, we typically pass on the deal. With this approach, it only takes one of multiple possible investment theses to pan out in order for the acquisition to succeed. Historically, we've taken a balanced, conservative approach to financing acquisitions. Over the past 10 years, we've deployed approximately $6 billion for acquisitions and and have leveraged operating cash, equity raises, and short-term debt in roughly equal parts to fund these deals. We anticipate continuing this balanced funding approach in the future with one additional criteria as a result of our debt offering. Going forward, we're absolutely committed to protecting and maintaining our investment-grade credit rating. Finally, I'm going to wrap up with some observations about the real estate economy. Looking to the economy in the current state of the commercial real estate, we see a labor market recovery that is noticeably slowing. Furloughed workers continue to be rehired as the economy reopens, but at a slower and slower pace each month. The hardest-hit sectors of the economy, like restaurants, hospitality, and entertainment, are struggling to try and reopen safely as the colder months of the year approach what appears to be a third wave of infections, is beginning to ramp up, or as Dr. Fauci says, the first wave. But an interesting thing is happening. Even as the possibility of new stimulus seems to be fading, measures of household and business confidence have been rising recently, and census data on new business formations shows that growth in new companies is up nearly 40% from a year ago, more than triple the growth rate at this time in 2019. This isn't what we normally see during recessions, New business formations fell 15% in 2008 and were zero in 2009. Commercial real estate weathered a tough second quarter and showed resilience in Q3 2020, even the hardest-hit sectors of the market. Hotel occupancy continued its slow grind higher, reaching 50% by quarter end. Parts of the retail landscape clearly remained challenged by reduced traffic and social distancing mandates. but I should note that leasing volumes recovered strongly for retail assets in the third quarter. Retail properties leased to essential credit tenants have been a bright spot, as well as discounters and grocery-anchored properties. We've seen grocers taking over previously challenged spaces vacated by home good retailers and even booksellers. This is maybe a good time to note that Amazon opened its first physical grocery store during the third quarter, called Amazon Fresh. There is still plenty of distress to work out in retail and hospitality, and we're continuing to see increased usage of the product from our clients in asset management, credit, and especially valuation departments. We've heard from clients that CoStar's services are more mission critical now than ever before, and I think that shows in CoStar's resilience. On the other hand, I hardly need to tell you that the industrial sector has enjoyed great tailwinds in the current e-commerce-driven environment. CoStar Data tells us that the third quarter 2020 was actually a new record for industrial leasing volume. Amazon obviously led the way, but a deep roster of firms are looking to expand their distribution footprints to catch up. Walmart and Target have been especially active this year, along with third-party logistics firms, home good retailers, and a long list of others. The surge in leasing demand is coming at the perfect time as there's a record amount of space set to deliver in the near term, much of which remains available. The office market has been inundated with headlines for months now with competing stories of this company shifting towards permanent remote work while another company is starting to move towards a return to office. It seems inevitable there will be increased adoption of flexible work schedules to some degree, but there'll also be demand for more space for social distancing. It's interesting to note that one of the biggest office deals during the third quarter was Facebook's purchase of a brand-new 400,000-square-foot office campus in Bellevue, Washington, with a price tag of over $350 million. That sure is a lot of money to spend and a lot of office space. They aren't the only big tech companies buying or leasing office space in the third quarter. The likes of Google, Apple, Amazon, Microsoft, and others have been very active acquiring office space. The multifamily sector has been one of the most fascinating to track over the last seven months. There isn't a lot of high-frequency day in the commercial estate market, but Apartments.com provides us with millions of data points each day on rents and availabilities, giving us real-time views of the market. A large supply wave of four- and five-star properties in downtown CBD locations has continued to push those rents lower. After the second quarter produced the lowest net absorption in eight years, there are fears of a lost leasing season for 2020. But Q3 absorption rocketed back and was the largest third quarter ever recorded, CoStar, showing that apartment demand has simply been pent up during the first few months of the quarantine. The 2020 leasing season has simply been delayed, and higher vacancies and expensive newly delivered product are an expanded opportunity set for Apartments.com to help owners to fill those units. The real estate capital markets have begun to show some stabilization. Third quarter deal volume was down 40% from last year, but a closer look shows that each month the quarter got better. September deal volume was only $4 billion short of the average September over the last five years. only $4 billion. A thawing of the lending markets has certainly helped as CMBS spreads have come back down from their widest levels and new issuance has picked up. Looking at pricing, our same-store price indices indicate valuations have largely plateaued and aren't yet showing year-over-year declines or broadly higher cap rates. This flattening of prices around pre-COVID levels is consistent with what we're hearing from clients. There's still plenty of demand for good assets, and those that trade aren't going for meaningful discounts. More challenged assets are simply not trading if they don't have to. It seems that fewer are being forced to trade today as underwriting standards and leverage were more conservative going into this downturn than the last. We know from CMBS delinquency and special servicing rates that a wave of distressed assets in hospitality and retail is coming. And the 10X platform is expected to give us insight into investor demand for those properties. We believe the mountain of dry powder waiting on distressed properties is large, which will make an interesting space as we look into 2021 and beyond. This quarter has again demonstrated that our data and information are mission critical to our customers and that our marketing visits are counter-cyclical. We're extremely pleased with our strong third quarter results, and we're very excited about a strong finish to the year and a great 2021 around the quarter. So, and to talk more about the growth, I'm going to ask our CFO, Scott Wheeler, to please wear a mask when he's shopping in our store, and then he can deliver his report for the quarter.