CoStar Group, Inc.

Good day and thank you for standing by. Welcome to the Q3 2021 CoStar Group Earnings Conference Call. At this time, all participants are in the 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. I would like to hand the conference over to your speaker today, Bill Warmington, Vice President and Head of Investor Relations. Thank you. Please go ahead.

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 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 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 Florence.

Thank you, Bill. You did an excellent job. Good evening, everybody. Total revenue for the third quarter of 2021 grew by 17% year-over-year to $499 million. That's at the upper end of our guidance range at almost half a billion dollars in revenue for the quarter. Most encouraging, year-over-year revenue growth for CoStar reached double digits this quarter for the first time since before the pandemic. And that's with a 10% revenue growth in the third quarter and 12% revenue growth in September. Net bookings of $47 million for the third quarter include the strongest sales quarter in the history of CoStar, which were only dampened by a soft sales quarter for Apartments.com. Adjusted EBITDA of $144 million exceeded the high end of our guidance range, coming in $10 million ahead of the third quarter consensus estimates. Our marketplaces continue to deliver exceptional value to our customers as traffic to our sites increase 25% year-over-year. Our marketing campaigns generated over 4.6 billion impressions in the third quarter across Apartments.com, LoopNet, and 10X. We are welcoming our newest marketplace, Bureau Loco, the French commercial marketplace we acquired on October 1st to our fast-growing network of property marketplaces. The U.S. apartment market is experiencing the highest unit absorption rate in decades. causing the lowest vacancy rate in decades and the highest rent growth in decades. The absorption rate, vacancy rate, and the rental growth are well outside one to two standard deviations to normal ranges of the past 20 years. The rate of change is stunning, and the market stats are best described as whipsawing or extremely volatile. The pandemic initially caused a sharp drop in occupancy, high move volumes, and slight rent declines. With the availability of vaccine, absorption shot through the roof and occupancy levels and rent growth soared. When you see it on a chart, the slope of the curve is unprecedented. For investment grade rate properties, 50 units or more in the United States, the average occupancy range over the last 20 years has been, average occupancy rate has been 93%. One steering deviation to the low side is 92.3%, and one steering deviation to the high is 93.7%. That's a very tight range. Owners manage the range tightly to optimize for total revenue by moving unit rents using automated yield management systems. Last year, occupancy fell below the 20-year standard deviation low to 92%. Currently, at 95%, The vacancy rate, the occupancy rate is way above the top end of the standard deviation high of the past 20 years. 95% overall is a very high number. The 20 year average annual net absorption of apartment units is 218,000. This year, the annual absorption rate tripled that average with 658,000 units absorbed. Annual apartment rent growth is 12.4%, which is the highest it's been at any point in the past 20 years. The 20-year average is one-sixth that number at only 2%. The 20-year average rent for an apartment has been $1,250 per month, but today that number has climbed to $1,676 per month. These sky-high rents are good for owners, but make for a major housing crisis. Investors in apartments are being richly rewarded with the average sales price of an apartment unit at $248,000 a door, which is 82% above the 20-year average. What does this all mean for Apartments.com? Well, our clients are doing very well, very, very well, but it also means that tens of thousands of large investment-grade apartment buildings in the United States are now basically fully leased. 12.5% of the U.S. investment grade apartment communities are now 99% leased or more. This is unprecedented. You've likely heard anecdotal stories of every major apartment building in some neighborhood having long waiting lists. When a community becomes 99% leased, they may love Apartments.com, but decide they can lower their advertising level less. They want the continued presence on our marketplace, but they do not need hundreds of leads a month with zero or one apartment available. Our renewal rates have remained high during this period, but thousands of communities that are essentially full have reduced their spend with apartments. During this high occupancy marking condition, some may have reduced their spend by 50% or more, though that's atypical. I believe this is a market anomaly that will resolve back to normal occupancy ranges within a few quarters. From Economics 101, when an apartment community is fully leased, it has underpriced its apartments. An optimally full apartment community is about 93% leased. Over time, the automated yield management systems will keep pushing rents until occupancy falls back to 93%, as well as the current levels will draw additional supply, which we're already seeing high levels of supply, new supply. I believe the yield management systems were either maxed out by the implied rate of increase necessary to optimize occupancy, or the property managers took the systems offline because they felt the potential rate of rent increases necessary to maintain optimal occupancy were outside of acceptable social norms for rent increases. One of the primary independent variables in many yield management systems is the number of leads coming into the leasing office. More leads means more competition for available units. More competition means the owner can raise rents. We believe that Apartments.com is the primary source of these high value leads that are driving higher rents for the owners. More leads to a point are good. So despite these wild, unprecedented gyrations in the market, we believe that the demand for Apartments.com is stronger than ever. In the year to come, we believe there will be unusually high unit turnover and clients will want a steady lead flow during this great migration. In August, we surveyed more than 20,000 renters about their moving intentions. As a result of that survey, we expect apartment market will experience increased turnover, more out-of-market moves, and lower renewals as we head into 2021 and 2022. When asked, when do you think you will next move into a new residence, 53% of survey respondents said they will move by winter. When asked, what do you plan to do when your current lease expires, only 24% of renters expect to renew within the same community, down from 47% pre-COVID. This all makes sense given the huge affordability changes and changing work from home policies. Last month, the National Apartment Association held its first in-person meeting post-pandemic, and I was able to meet with a number of clients. One conversation stands out to me. As we conclude a meeting with our largest client, the senior member of that team stated that he wanted to make an important statement. He thanked us profusely for being the single most important partner to his firm. According to him, we were the single greatest source of leads for his communities and helped them have an amazingly successful year. He stressed how much he valued our relationship and how much he appreciates the great work we're doing for them. I've had thousands of client meetings over the last 35 years. His comments were unprecedented in their positivity. Over the past five years, this client has tripled their annual investment with us and become well more than twice the size of our largest co-star client. Yet while he's thanking us profusely, his firm is reducing their spending level with us over the past few months by about 5% because many of his communities were so full. Despite these market gyrations, I believe we have a fantastic relationship with this client, and our relationship with them over the intermediate and long term will grow and flourish. I believe they'll continue to grow their investment at Apartments.com in the years to come, long past this current market condition. While Apartments.com sales were soft this quarter during this unprecedented high-leasing environment, our high-lease environment, The strength of our platform remains incredibly strong. Leads were up 39% year-over-year in the third quarter and visits were up 17%. This was partially driven by our biggest marketing quarter of the year, where we delivered 3.5 billion media impressions in the quarter. As we've discussed here and on our second quarter call in July, the increase in our site traffic combined with largely flat pricing has meant a windfall value to our clients in terms of effective cost per lead. The average cost per lead has decreased about 35% in two years from $9.55 in 2019 to $6.24 in 2021. To address this imbalance, we began rolling out a new rate card for apartments in September. The rate card further segments out prices with larger communities who are receiving more value commensurately paying higher rates. In September, we began testing the new pricing with 150 clients representing about 700 properties. The average initial price increases were 7% and went smoothly. I informally polled the apartment sales leadership team, and they were not aware of any related cancels. Some of the discount eliminations are resulting in more significant revenue growth, though, and we'd expect to see more of that going forward. For example, in September, a Florida client with a 380-unit property with a gold ad was paying $759, and they renewed and they're now paying $1,399 for an increase of 84%. A Texas client with a 424-unit property with a platinum ad was paying $1,349, and they renewed and are now paying $1,799 for an increase of 33%. We will continue to scale our right pricing campaign, and though it has not had an impact on this quarter, we believe that it will have impact in our quarters. Given the value of our client relationships and the extreme volatility of the current multifamily markets, we're moving cautiously to protect the long-term value of our franchise. Despite all the sales successes we've had over the last five years, there are many more prospects out there a day than we have clients so far. Our estimated penetration of five to 100 unit buildings is less than 4%. And in the hundred plus unit buildings, our penetration rate is only about 50%. We believe that we have many, many years of growth ahead for apartments.com just through new client acquisition. overall we continue to believe the us apartment market is a six to eight billion dollar revenue opportunity for apartments.com costar had its strongest new bookings quarter of all time in the third quarter with net bookings up 57 percent sequentially and up over 500 percent year over year the record performance was driven by multiple factors including the growing success of our upsell program high renewal rates new product and information capabilities the return of annual price increase for renewals, and continued economic recovery. Based on our sales success in the third quarter, we now expect revenue growth for CoStar of 13% in the third quarter, returning to our long-term historical revenue growth rate. Historically, we sold multiple versions of the CoStar product across two dimensions, separate functionality modules for basic property information, comparable sales data, and tenant information, and separate geographic coverage for local, regional, state, national, and global coverage. About 18,000 of our 30,000 CoStar clients had a version that was less than the full CoStar offering. So they were able to take, they were not able to take full advantage of the CoStar product capability. On July 1st, we started selling only the single comprehensive global integrated CoStar platform. and began a 12 to 18 month process of upgrading those 18,000 accounts. This is a win-win in which clients get access to CoStar's unmatched breadth and depth of information and analytics on commercial estate globally while we streamline product development, marketing, and support. Since the start of the program on July 1st, we have upgraded about 3,000 or 18% of those 18,000 eligible accounts, generating 7 million in annual sales. With this strong starting point, we remain confident the upsell process will generate 30 million to 40 million incremental annual revenue. Of the almost 1,300 clients we surveyed in the third quarter who upgraded or had a conversation about upgrading, about two-thirds gave us a net promoter score of 9 or 10. We think the favorable reactions from clients reflect the higher value they're receiving from the incremental capabilities of CoStar's single integrated platform. Again, the CoStar sales team delivered their best quarter of net new business generation ever, 8% higher than the extraordinary fourth quarter of 2017, back when Acceligent filed for Chapter 7 bankruptcy, and 27% higher than the first quarter of 2018 when we sunsetted LoopNet Premium Searcher. On a per rep net sales level, the team is 1.5 times more productive than pre-pandemic. And these performance results are not just tied to our initiative and pricing actions. We signed up nearly 20% more new customer agreements in Q3 2021 versus the quarterly pre-pandemic average in 2019. In the first quarter of 2021, we integrated commercial mortgage-backed security loan information into CoStar, CMBS data, providing our customers valuable insights into more than $1 trillion of outstanding commercial loans made over 100,000 commercial properties. Our clients have taken advantage of that highly detailed loan financial data with approximately 60,000 unique users collectively accessing that data over 800,000 times year-to-date. Next month, we plan to launch CMBS Analytics, which aggregates CMBS loan and property data across over 1,000 markets by property type, representing over 3 million costar properties. In addition to analytics, we'll also release prepayment information, historical loan commentary and status, and information on 150,000 disposed loans. We estimate the CMBS data generated over 3 million of net new annualized revenue in the third quarter. CoStar Lender, our new analytic tool that helps lenders with the underwriting, monitoring, and regulatory reporting of commercial real estate loans is progressing on plan. We are walking clients through the system and their feedback has been very positive. We're on schedule for 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 along with a loan screening tool for originators and underwriters. Subsequent releases will focus more on loan origination and underwriting as we broaden the solution to cover the entire lending cycle. These lender tools are specialized high value applications and so will be priced at a premium to our standard CoStar offering. As such, we estimate they represent a potential incremental annual revenue opportunity of over $300 million. In mid-October, CoStar further broadened its international coverage with the launch of the Montreal market, the 18th largest city in North America by population. Montreal is the sixth market for CoStar in Canada since the launch of Toronto in 2014. CoStar currently tracks about 33,000 properties in Montreal with about 238,000 properties in Canada overall. Last Friday marked the two-year anniversary of the great acquisition of STR. The uneven recovery of the hospitality industry continued in the third quarter, but STR's revenue continued to grow an impressive 13% year over year. Their quarterly renewal rate on our business remains strong at 94%. An encouraging sign of the recovery of the health of the industry, SDR continues to add to the number of hotels that provide data to us. In August, this number reached 70,000 hotels, which is an all-time high. Separately, we're seeing good progress in P&L, new contributors to P&L, and forward casting is quite impressive. Back on April 1st, CoStar Suite subscribers received access to highly detailed data on 90,000 new enhanced hotel properties. In mid-September, we reached another milestone with a cumulative 1 million property views of that data by CoStar subscribers. While still early, the CoStar Salesforce campaigns targeting high-quality hospitality leads have generated over 2 million in new annualized revenue. Our LoopNet marketplaces delivered another strong performance in the third quarter with revenue growth of 17%. Growth in revenue from our premium diamond, platinum, and gold signature ads was up 52% in the third quarter with the number of ads, as well as the average price per ad, both growing by strong double-digit amounts. Renewal rates remain very strong, reaching an all-time high on a rolling 12-month basis in the third quarter, which demonstrates the recognition by our customers of the value and effectiveness of LoopNet advertising. Our LoopNet marketing campaign was in full swing in the third quarter. It's expected to deliver 2.2 billion media impressions in 2021 across TV, streaming, and social channels. Our inaugural campaign, titled Space for Dreams, featured prominently on major sports events, primetime TV, streaming services, and a wide variety of digital channels. The campaign is targeting tenants who can search and find great spaces on LoopNet. In the third quarter, LoopNet marketplaces grew traffic almost 20% year over year and delivered a new quarterly high of almost 11 million unique visitors on average monthly basis. In fact, our site traffic is now more than 40% above the pre-pandemic levels. Office vacancy remains very elevated by historic standards. We believe that LoopNet is uniquely positioned as the ideal marketplace for brokers and owners to market to help fill those painful current and potential vacancies. We continue to make progress expanding our direct sales channel for LoopNet. New hires and training were launched in the third quarter and we currently have 32 salespeople dedicated to selling only LoopNet. Our goal is to have 50 dedicated LoopNet sellers by the end of the year. or more and continue to hire aggressively throughout 2022. Our CoStar Info sales team will continue to sell both CoStar and LoopNet in the foreseeable future. Overall, I'm very happy with the value and the performance of our LoopNet marketplaces and the growth potential before us. Today, our signature ad listings only represent about 7% of the highest value properties across the US. So I believe we are well positioned to continue strong double-digit growth for many years to come. Our residential business delivered strong 3Q results with our HomeSnap product revenue growing almost 40% year-over-year and SaaS revenue growing almost 45%. HomeSnap Pro registered users grew 15% to 777,000. Total agent subscribers to HomeSnap Pro Plus grew 53% to over 67,000 at the end of the third quarter. At the end of the second quarter, we repurposed approximately 60 salespeople from Homes.com to HomeSnap. Upon completion of their train, the group went into production in mid-July. The results have been outstanding. In their short time selling HomeSnap, Homes.com transplants have generated over 5 million in annualized revenue. The average monthly reoccurring revenue generated by these new salespeople at HomeSnap is about 70% higher than when they were selling at Homes.com. Throughout 3Q, we eliminated or are winding down the vast majority of the products and banner ads sold through the Homes.com website. We refocused the homes.com team to improve and optimize the homes.com site and implement a new experience for agents and consumers using the platform. For the first time ever consumers can come to homes.com or, or a major, uh, real estate portal and connect directly to the listing agent consistent with our, your listing, your lead philosophy. Consumers are no longer served up buyer agents with who know nothing about the property or the buyer. And that's been a major pain point for agents and consumers with other competing residential sites. So we're doing something completely different and hopefully it'll be a much better experience for the agents and the buyers. Now, in addition, we're increasing the content on homes.com to give consumers expanded options to find a place to live. Starting in August, apartments.com listings are now appearing on the homes.com site, adding over 800,000 apartment availabilities for consumers to choose from. This added content not only improves traffic to homes.com, but it is expected to add millions of unique monthly visitors to apartments.com, benefiting both of these marketplaces. The response to these changes has been very encouraging so far. Properties generated and sent directly to the listing agent were up over 60% since we acquired Homes.com compared to the same period last year. Two weeks ago, we announced a very important new partnership with the Real Estate Board of New York, or REBNY, to create CitySnap, the first ever consumer-facing search website and mobile app for New York City's residential listing service, or connected to that unique feed of data that the agents maintain. CitySnap will provide complete, accurate, and real-time residential listing data agents, building owners, and most importantly, home buyers and tenants. The new site and app will go live in the middle of 2022. CitySnap will offer consumers and brokers multiple advantages. It'll be free to list on CitySnap, so that means we have all of the listings, not just the paid listings. We will connect potential buyers and renters with a listing agent consistent with our Your Listing, Your Lead philosophy. and make collaboration possible through access to HomeSnap's suite of tools. The thing that makes CitySnap Partnership revolutionary, however, is promoted listings. While you can find promoted listings on the Internet for just about any other product these days, including apartments on apartments.com and commercial properties on LoopNet, you don't see that for residential homes in the U.S. until now. As part of our partnership with the Real Estate Board of New York, we will be able to offer promoted listings on CitySnap.com so agents and consumers will be able to buy preferred placement and features to increase market exposure. In a few weeks, we'll be attending the National Association of Realtors Conference. The annual NAR conference is the industry's largest trade show, drawing thousands of residential property professionals from across the country. As we did with our customers in the apartments industry, We want our presence at this show to be assigned to residential real estate brokers and agents that we intend to partner with them and support them as opposed to trying to disintermediate them. We believe we can build a profitable, successful business without disintermediating our clients. We plan to use our technology and services to help them strengthen their relationships with their clients and sell more properties. Less than 10 years ago, We had literally almost no presence trafficker revenue in online marketplaces. Since that time, we've grown to be the leader in digital real estate marketplaces with approximately 90 million unique visitors per month. And we're generating nearly a billion in run rate revenue in the third quarter for a 10 year compound annual revenue growth rate of 55%. We have successfully demonstrated our ability to generate leading market place positions by curating the best content, offering a great user experience and bringing effective market strategies to bear. Our Belbex business in Spain, which we purchased in 2015, had no marketplace exposure back then and had one-tenth the site traffic of much larger competitors. Within five years, we've grown our listing content by 22 times and achieved the top position among dedicated commercial property portals in Spain, with about 70% of our traffic coming organically. Riala in the UK has grown listing content eight times in three years and increased the number of unique visitors to our site by over four times. During this time, Riala's share of commercial property site traffic has increased from 5% to almost 60%. We are excited to continue to expand our international marketplace capabilities with the acquisition of Bureau Loco, one of the largest specialized property portals for buying and leasing commercial estate in France. Launched in 2008, Bureau Loco provides a subscription-based commercial property listing advertising platform with a client base that includes over 90% of France's top commercial property agents and brokers. Traffic to the company's website, Bureau Loco, has grown by 30% of compound annual basis since the beginning of 2018. Bureau Loco has over 60,000 for sale and lease listings. and over 425,000 visits to its website each month. This acquisition is an important one for our international expansion strategy as France has the sixth largest economy in the world and has total real estate valued at an estimated $7 trillion. Bureau Loco has built a leading commercial property specific platform with national coverage, great brand recognition, and an excellent reputation among its clients. Finally, 10X revenue grew 27% year over year in the third quarter of 2021. We saw a 19% increase in average deal size and a 32% increase in transaction volume. Unique visitors to the 10X site grew 230% year over year. The average number of bidders per asset in the third quarter was 3.6% versus 2.8% a year ago. The synergistic network effect of improving supply and demand is reflected in 10X trade rate, which is the total assets sold as a percentage of the total assets brought to the platform. The third quarter 2021 trade rate remains strong at 71%, which we believe is about twice the average trade rate for offline traditional property sales. On the supply side, The dollar value of assets brought to the 10X platform year-to-date grew 37% from $1.7 billion in 2020 to $2.4 billion in 2021. Total gross merchandise value sold in the third quarter increased 92% year-over-year. 83% of the assets by dollar value we closed in the third quarter of 2021 were performing assets sold by institutional and private client groups. In the third quarter of last year, that figure was only 65%, reflecting the ongoing transformation of 10X from a distressed asset platform into a market rate commercial property sales platform. 10X is still very capable of selling distressed, though. And with office vacancy rates at the highest level in decades and only 36% of the leased space occupied, we currently have an absurdly high functional vacancy rate of 70% in the office world. The CASEL security access data also shows us that we're only seeing about 100 basis point improvement per month in the percent of swipe cards being used. If this issue results in a significant number of distressed properties coming to market, 10X could experience a major windfall selling these distressed properties in the quarters to come or years to come. We believe that these strong performance numbers prove that 10X's value proposition of better speed, certainty, exposure, cost, and control than using a traditional property sales process increasingly resonate with brokers buying or selling commercial estate properties. So at this point, I'm going to turn the call over to our Chief Financial Officer, Scott Wheeler, who's going to share some riveting numbers with you.