CoStar Group, Inc.

Thank you, Tay, and thank you for standing by. Welcome to the Q2 2021 Co-Start Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to have the conference over to your host, Mr. Pio Warmington, Vice President of Investor Relations. You may now begin.

Thank you, Chris. Good evening, and thank you all for joining us to discuss the second quarter 2021 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 the company's outlook and expectations for the third 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's 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 measures of the non-GAAP financial measures discussed on this call include EBITDA, adjusted EBITDA, non-GAAP net income, and forward-looking non-GAAP guidance are shown in the 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 call is being webcast, and a 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 Florence.

Thank you, Bill. Good evening, everyone. Good morning to our AsiaPAC employees. And thank you for joining us for CoStar Group's second quarter 2021 earnings call. Total revenue for the second quarter of 2021 grew 21% year-over-year to $480 million, ahead of the $470 million high end of our guidance range. Net bookings of $50 million, $51 million were up 47% year-over-year, and adjusted EBITDA of $150 million was well above the $135 million high end of our guidance range. CoStar Group saw a substantial increase in the demand for the information on our marketplace as evidenced by a 47% year-over-year increase in unique visitors. In total, almost 30 million more people visited CoStar Group websites in the second quarter of 2021 than did the same quarter a year ago. We believe that growth in marketplace audience is a leading indicator of future growth in marketplace subscription revenue. Leading the results, CoStar Suite had its strongest new bookings quarter in years. CoStar Suite bookings in the second quarter of 2021 grew 19% sequentially and were almost 10 times last year's level at the start of the pandemic. As a result, we expect CoStar Suite organic revenue to return to double digits by the fourth quarter of this year, well ahead of our expectations just six months ago. The commercial real estate economy is a tale of two cities with examples of both strengths and weaknesses and key indicators. Overall, it feels like the heat economy is driving solid demand for CoStar Suite. CoStar Suite's quarterly renewal rate for the second quarter of 2021 reached an impressive multi-year high at 94.5%. That's extraordinarily high. This high renewal rate is all the more impressive because it does not exclude dissolutions of commercial estate firms as principals and companies normally retire or cease operations. I believe the renewal rate for those clients that remain in business could be approaching 98% plus. Historically, we have sold CoStar on a module basis, offering clients modules covering basic property information, comparable sales, tenant information, and various geographical modules covering cities, states, or countries. Clients buying just a few product modules for just one geography were only getting a fraction of the value we could offer them. As we've grown and as we continue to expand internationally, it requires more and more effort to offer our products as limited modules. Conversely, it costs us more money to offer clients less. Effective this month, we started selling only the full global CoStar suite product to new clients, which we now simply call CoStar. The CoStar sales team's primary focus is now upselling our existing clients who currently subscribe to less than our full product to the full product. There are approximately 18,000 client firms with partial coverage for our sales team to upsell. Through Friday, early days, early stage of the effort, 553 clients have upgraded their CoStar service, generating $111,000 in incremental monthly revenue, an average increase per client of about $200 per month. We expect the upsell process to generate $30 to $40 million in incremental annual revenue, with encouraging initial results leaning towards the higher end of that range. These upgrades were more than just an incremental revenue generator. We believe our clients are overwhelmingly more satisfied after they upgrade as evidenced by increasing net promoter scores. We believe that this may result in even higher renewal rates, if that's possible. Of the almost 300 clients surveyed by our quality assurance team after they upgrade or had a conversion conversation about upgrading, roughly two-thirds gave us a net promoter score of 9 or 10. Clients certainly didn't see this upsell as a cost increase. They see it as a value add to their business. In the first quarter of this year, we integrate CMBS data into CoStar. We have received very positive feedback from our clients on the value of this new content. Since the launch of the CMBS data, our clients have used that detailed loan and financial data extensively, with about 45,000 users accessing the data over half a million times. Later this year, we plan to launch CMBS Analytics, which aggregates CMBS loan and property data by property type across more than 1,000 markets. CMBS Analytics will include loan origination metrics, distressed loan levels, maturity volumes, as well as detailed revenue expense information. In later releases, we plan to include detailed prepayment information and over 150,000 disposed loans. We estimate that CMBS data has already generated over a million of net new annual revenue year-to-date. Over half that revenue signing was in the last month of the second quarter, and monthly sales continue to increase. We're also hard at work on a CoStar solution for lenders that leverages the expertise we've developed with CoStar Risk Analytics to support lenders with risk management, underwriting, surveillance, and compliance through the CoStar product. CoStar Lender is progressing as anticipated, with plans for a full release in the first quarter of 2022. The first lender release will focus on portfolio risk analytics and surveillance to help lenders meet regulatory and accounting requirements. Subsequent releases will focus on loan origination and underwriting. We believe these tools have the potential to become the standard for regulatory reporting in the U.S. That said, these lender tools are specialized, high-value applications, and so will be priced at a premium to our standard CoStar offerings. In April, we released the first international version of CoStar. This new release integrated our databases for the UK, US, and Canada into one system. In addition, we loaded basic information on hundreds of thousands of additional buildings across 200 countries that we obtained through our acquisition of Emporus in October of 2020. In the 60 days since we launched this international product, about 10,000 CoStar users have viewed properties outside their home country 4.6 million times. We view this as a confirmation of our clients' need for cross-border property information. We know that trillions of dollars of capital crosses borders to invest in commercial real estate annually, and that global corporations have up to a million facilities internationally. We recently gathered a dozen senior CoStar leaders in Iceland for a week-long summit to evaluate and plan our international growth strategy. Oddly, Iceland is one of the few places where staff from multiple countries can gather without a week of quarantine, so it's a good spot to meet. We believe there's a clear opportunity to expand CoStar into 50 additional countries over time. We believe we can win tens of thousands of new customers and create much more value for many of our existing clients. We believe that international expansion presents a unique opportunity to leverage our scale and expertise, and we're really excited about that opportunity. Beyond CMBS, CoStar lenders, student housing, international and hospitality information, we have over 100 additional product enhancements that we have in planning for CoStar over the next five years. We believe that these future enhancements will help us win more customers, sell more to our existing customers, and increase the value of our service to existing customers. Given the strength we see in CoStar renewals and sales, as well as our clients' good performance, we are restarting annual price adjustments on CoStar contract renewals in September of this year. LoopNet revenue in the second quarter of 2021 grew 18% year-over-year, driven primarily by a 71% growth in our diamond, platinum, and gold ads that provide unparalleled exposure and branding benefits for our clients. We also saw LoopNet net new sales growth accelerate 36% from the first quarter of 2021. In the quarter, LoopNet earned the highest renewal rate of annual contracts that we've seen in years and possibly ever. We have launched a broad-based marketing campaign to enhance LoopNet's brand, increase our visibility, and support our clients who own office properties and their need to bring people back to the workplace. The campaign also serves as a message to the commercial real estate audience that LoopNet is a high-value marketplace connecting premier properties with the most valuable tenants and investors. I hope many of you have seen the LoopNet Space for Dreams advertisement broadcast during the PGA Championship or the U.S. Open. Or you may have seen the ads airing during prime time at CNN, NBC News, MSNBC, CNBC, and many other leading media outlets. In May and June, we delivered over 1 billion high-value media impressions across TV, streaming, and social channels. I believe that these pieces are both well done and very well received. Office vacancy rates remain elevated by historical standards, and LoopNet is uniquely positioned as the ideal marketplace for brokers and owners to market to help fill those painful vacancies. We believe LoopNet, with almost 20 times more traffic than our closest competitor, is the best commercial state marketing solution available. Our Space for Dreams advertising campaign, coupled with our enhanced SEM investment and the SEO optimization, has led to record average monthly traffic of approximately 10 million unique visitors across our LoopNet network in Q2. Traffic to the LoopNet network of sites is up 33% year-over-year in the second quarter of 2021 compared to the second quarter of 2021. We are seeing quality traffic as well with 887 of the Fortune 1000 companies searching on LoopNet and Q2. Visitors to the site are also spending 59% more time on the listings this quarter compared to the second quarter of 2020. We've seen the owners and brokers with the properties that are the best candidates for our highest level diamond and platinum ads show increased activity on LoopNet with overall search activity from them up about 40% year over year. Our investments in e-commerce have yielded positive results with e-commerce sales rising 86% year-over-year based on improvements in the checkout flow and mobile responsive workflows. Today, we are relying on the CoStar sales force to sell both CoStar and LoopNet, which is suboptimal with the market for the two products being so vast. The CoStar Salesforce is delivering exceptional results, selling more new business in the second quarter of 21 than in any quarter over the past three years on a combined CoStar LoopNet product basis. So they're about as productive as they've ever been. We continue to believe that we're in the early stages of a major offline to online shift in marketing commercial property. So we are building the recruiting, training, leadership, and facilities to support a centralized team of professional, dedicated LoopNet sellers in Richmond, Virginia. Our first sales class on this new model is expected to join the third quarter and grow to 50 or more by the end of the year. We believe the LoopNet brand has so much more growth potential beyond the current business. The online advertising shift is a years-long journey, so building a strong foundation for the business is critical as this year as property owners come to view LoopNet as a must-have to properly market their properties. Our apartments.com platform continues to deliver unprecedented value to our customers. Our 2021 consumer ad campaign starring Jeff Goldblum has been our most effective campaign ever, delivering 4.1 billion impressions in the second quarter alone. The campaign runs across multiple outlets, including traditional television and top primetime sports programs. And we've expanded investments into new outlets, including video on demand, streaming, audio, social media, and new partners such as Twitch, TikTok, eSports, and more. Aren't we hip? As a result, in the second quarter, we saw record network visits up 32% year-over-year to 363 million and record unique visitors up 30% to 177 million. The consumer campaign will continue heavily into Q3 with more top programming, as we've already aired in every game in the NBA Finals and are currently running across the Olympics. More and more properties continue to make the decision to advertise on Apartments.com. There are now over 60,500 paying properties on Apartments.com, an increase of 17% since the beginning of 2020. In addition, our existing customers are staying with us longer. Our renewal rates have increased over the past three years and are now at their highest levels ever. That's a trifecta. We've got LoopNet, Apartments, and CoStar at their highest renewal rates. We believe the reason for this is because we've consistently delivered exceptional value to our customers. Site traffic represents valuable reach and exposure for our customers' vacancies. Looking back to the start of the pandemic in the first quarter of 2020, apartment site traffic has increased significantly, with visitors up 48% and visits up 60% for the second quarter of 2021. As a result, with high-quality consumer leads to our advertised properties, have increased a whopping 123% since the beginning of March last year. Leads are up 123%. Because we held our subscription package advertising rates flat during the pandemic, we essentially more than cut in half what we charged our clients on a per-lead basis. Our growing competitive advantage and our success in driving such strong traffic and lead growth had the unintended consequence of creating a half-off sale and reducing organic revenue growth for a short period of time. The second quarter of 2020, the average client received 88 leads from our lowest ad level, Silver. Silver clients needed more leads. They often upgraded to our highest ad level, Diamond, and received, on average, 118 leads per month. With so much success in traffic and lead growth, the average lead flow from our lowest end to add the silver level surged beyond diamond to 129 leads per month in the second quarter of 2021. The silver ad package is generating so many leads, clients essentially stopped upgrading to our higher ad level spend packages, slowing our organic growth. Fortunately, this is a high-class temporary problem that's easily solved by adjusting our price per lead upward closer to the level it was before the pandemic. We believe conditions are ideal to reduce the discounts in our price per lead. Demand for apartments, not the dot-com, the actual apartments, has increased. Vacancy rates have decreased. Eviction moratoriums will soon expire, and rents are soaring. For investment-grade apartment buildings, three- to five-star with 100 units plus average rents has soared 12% from $1,464 unit in Q320 to $1,634 in Q321. Twelve percent is a pretty big jump in that short time period. The value of investment-grade apartment buildings has soared as well. The sales price per door of an apartment building climbed 74% from the second quarter of 2020 to from a low of $102,000 per door to a second quarter 21 price of $263,000. That is a massive increase in price per door. We believe that turnover departments is poised to increase as organizations that have been 100% remote return to in-office work, resulting employees shifting back to the cities they just left. That increased churn should drive increased demand for leads. In addition, as landlords raise rents, it drives even more turnover as tenants move to avoid rent increases. We believe that this, combined with the fact that we continue every year to deliver more and more value to our customers, will allow us to increase our advertising rates for Apartments.com in the third quarter while still providing the best value per lead our clients have ever seen. We are once again growing our mid-market multifamily sales force in Richmond, Virginia. A component of this training class is from the homes.com sales force as we are repurposing a portion of that team for apartments.com. And we're really excited to have almost 30 of these reps join our mid-market sales effort. In total, we expect to more than double the size of our mid-market sales force by the end of the year. We believe the U.S. apartment market is a $6 to $8 billion opportunity, and our penetration rate across all segments remains relatively low. Although our near-term sales and revenue growth rates will be lower than last year, we believe that our exceptional price value and ability to once again grow our sales force will return sales and revenue growth to strong double-digit levels. The global hospitality industry is finally seeing an encouraging recovery driven primarily by leisure travel in the United States. We are seeing positive signs of activity around the world with the number of hotels providing data STR now over 67,000, which is again growing and above the pre-pandemic data contribution levels. STR's solid performance in spite of the challenging macro backdrop affirms the critical nature of STR's data to the hospitality industry. STR's subscription revenue grew 5% year-over-year on a pro forma basis. during a pandemic with renewal rates of 95%. We saw positive net new sales consistently throughout the second quarter. Although the pandemic stopped the hotel industry in its tracks only five months after we acquired SDR, our subscription revenue is up 10% compared to the trailing 12-month revenue prior to the acquisition. In the 91 days since the release of hospitality performance data in CoStar, we are seeing strong interest and activity levels. 47,000 CoStar users have performed over 94,000 analytic searches, including views of market and sub-market reports and capital market reports. In total, there have been almost 690,000 hospitality property views. The initial sales effort for this product was focused on training existing subscribers and increasing the number of distinct users at customer locations. At the end of June, we launched a new CoStar sales campaign focused on the new hospitality data prospects. This initial campaign targets 1,200 high-quality leads with a team of 70 CoStar County executives selected and trained to focus on hospitality owners and brokers. It's like an elite group of hospitality salespeople. We acquired 10X in June 2020. One year later, we've transformed 10X into a very vibrant transaction platform with a lot of potential with growing traffic and increasing asset volume and size. 10X revenue grew 42% year-over-year on a pro forma basis in the second quarter of 2021, driven by a 31% increase in average deal size and a 35% increase in transaction volume. Connecting 10X to our CoStar platform, increasing LoopNet advertising, and producing our highly successful Don't Just Sell It, 10X It campaign with Keegan-Michael Key have all contributed to this transformation. 10X's value proposition of speed, certainty, and market price is increasingly resonating with buyers and sellers and brokers. We are making significant progress on both the supply and demand side of the business and which are working together synergistically to produce better results for both buyers and sellers. On the supply side, the number of assets brought to the TEDx platform grew 30% year-over-year in the second quarter of 2021, and the dollar value of assets grew 80%. About 80% of the assets we closed in the second quarter of 2021 were sold by institutional and private client groups, which is a good proxy for performing assets. So about 80% of the assets were performing. In the second quarter of last year, that figure was 59%. So this reflects the continuing transformation of 10X from a distressed asset platform into a market rate commercial property sales platform. Though it is ready, should there be a surge in distress. The rate card reduction on high value properties we implemented in the first quarter of this year is clearly working. Even with the rate reductions, we have really solid margins on those high-value properties. We're seeing an increasing number of higher-value assets brought to the platform. In the second quarter, we had a $20 million student housing facility, a $120 million multi-building industrial portfolio, and a $60 million loan moved through the 10X platform. On demand side, traffic grew 18% quarter-over-quarter and 140% year-over-year. Product detail pages grew 110% year-over-year, and the number of approved bidders was up 150% year-over-year. The average number of bidders per asset is a 10x distressed asset ambulance. Taking the next property platform. I think that's my ride. It's recycling capital. The average number of bidders per asset increased from 2.9% a year ago to 4.4% in the second quarter this year. The synergistic network effect improving supply and demand is reflected in the total assets sold as a percentage of total assets brought to the platform, known as the trade rate. The second quarter of 21, trade rate reached an all-time quarterly high of 74%. Notably, this is about twice the average trade rate for offline property sales. We are adding to the 10x sales force every month and expect to have a sales team of about 60 by year end. Our experience so far is that our sales training combined with our strong product offering is producing highly effective new salespeople. Almost 20% of 10x sales pipeline already in the second half of 2021 is from new salespeople hired and trained in 2021. HomeSnap had an excellent, excellent second quarter, growing total revenue 50% year over year and SaaS revenue 46%. HomeSnap Pro registered users grew 14% to 750,000. Total agent subscribers grew 80% to 63,000 at the end of the second quarter. Total paying agents grew 52% year over year from 53,000 to $81,000, and those agents are spending 35% more in advertising, about $80 per year versus $60 per year a year ago. Our residential portfolio now consists of HomeSnap, the leading real estate productivity and marketing application, Homes.com, a well-recognized residential marketing portal acquired in just May of this year. The combination of Homes.com as the home buyer's portal and HomeSnap as the agent's professional platform sets the stage for us to offer sellers, buyers, and real estate agents a better, more collaborative online home sale and purchase experience. Once integrated, we plan to provide agents with instant access to manage their listings on Homes.com, view and respond to inquiries, collaborate with clients, and provision sophisticated digital marketing campaigns. We believe this direct connection between agents and a consumer portal would be both very unique and very valuable in this industry. We plan to grow homes.com site traffic by offering home buyers accurate real-time information straight from local MLS, supported by the best photography and multimedia content possible, along with good agent interaction traffic, and a website that empowers home buyers to collaborate with agents they trust. CoStar Group's hundreds of talented architectural photographers have brought millions of properties alive for millions of renters with the highest quality photographs, videos, and 3D tours. Now this team is committed to providing an immersive and compelling presentation of residential properties on homes.com. We began integrating Homes and HomeSnap immediately and have already taken steps to improve the experience for buyers and eliminate products that work against the agent-seller relationship. If you had looked at homes.com when we acquired them back in May, you probably noticed there was a little bit of room for improvement on the site. We still have a lot ahead of work. We have a lot of work ahead for us. But you might be impressed to see how many improvements we've already made in just a matter of a month or so on the site. The results are tangible. The daily leads to the site up approximately 70% since we first made the improvements about a month ago. Homes.com has a large real estate portal sales force, and we are repurposing that to sell HomeSnap products to hundreds of thousands of additional real estate agents, as well as we're using them for middle market advertising sales for apartments.com. In order to build our integrated residential marketplace, we're planning to increase the level of integration investment in our residential offering in the second half of 21 by $25 million. The investment split roughly in two between marketing costs and additional technology and content generating resources. We're calling you today from within our headquarters building, and we've seen most of our colleagues in this building today. We're pleased to report that we're making great progress bringing our employees safely back to work. We believe that being physically in the office is essential to collaboration, productivity, and company culture. We evacuated our offices last March because of a global pandemic, not because an HR innovation that discovered that remote work was more productive. Currently in the U.S., approximately 94% of our employees are vaccinated, and approximately 85% of our employees have come back to the office. When school reopens, we expect our in-office numbers to grow as parents have better daycare options. We're grateful to all of our staff who kept CoStar Group running so well during the challenges of the past year. As CEO, it feels great to see our staff back in the office together collaborating, learning, and growing. I believe that while other companies have yet to come to grips with the challenges of getting their workforce back to full productivity, we're well ahead of the game at this point. The U.S. economy is experiencing the strongest rebound in growth of the G20 economies. This strength, in turn, is fueling a broad-based recovery across the commercial real estate sector. With cash in the bank, plenty of accrued vacation time, and vaccination cards in hand, leisure travel is driving a recovery in the hospitality sector. Over 70% of U.S. hotels have occupancy above 60% in June, the most since October 2019. In multifamily, search activity of apartments is trending well above 2020 levels. High consumer demand combined with vacancy rates at 20-year lows and limited supply growth is resulting in unprecedented rent growth. Single-family market remains white-hot, driven by tight inventories and low interest rates. In retail, government stimulus plus wage growth have driven retail sales well above pre-pandemic levels. As a result, both leasing activity and transaction volume in retail surpassed pre-pandemic levels in Q2 2021. While bankruptcies and closures persist, they are on pace for their lowest levels since 2016. In industrial, elevated spending in consumer goods, the rise in e-commerce, and the need to expand industrial supply chains drove leasing volumes to all-time highs in Q2 2021, up 40% year-over-year. Despite record high construction, demand continues to outpace supply and produce rent growth of 5% in Q221. Despite negative net absorption and high vacancy rates, the office sector is beginning to show early signs of recovery. Leasing volume rose above pre-pandemic level for the first time in Q221. Sublease space growth decelerated as companies realized they might need their office space. and occupancy losses moderated. In capital markets, total transaction volume in Q2 2021 increased and actually exceeded Q2 2019's levels. Q2 2021 deal volume exceeded five-year averages in multifamily investor and retail, but did lag in office. Distressed sales to date are running about half of 2020 levels. At this point, I would like to turn the call over to our Chief Financial Officer, Scott T. Wheeler. And I suggest the first question in the Q&A be, what does the T stand for in Scott T. Wheeler?