Rex is building the first global, multiple listing service. Here's why:
What is a Multiple Listing Service?
MLS’ are large data bases that distribute real estate information. The data is sourced mostly from the brokerage community. The platform then sells the data back to the brokerage, landlord and investment communities.
Basics on Loopnet/Costar
Loopnet/CoStar is the commercial MLS in the United States.
Morningstar claims they have over 20,000 clients and 200,000 individual users.
The renewal rate for CoStar Suite is 94%; blended together with LoopNet and its apartment listings networks, the number is around 90%.
Analysts estimate that the total addressable market amounts to over $10 billion: $6.1 billion market for CoStar Suite, $1.9 billion for LoopNet, and $2.1 billion for its apartment listings network.
Key investment factors
Intense competition and consequential technology obsolescence.
Investors have poured over a billion dollars in real estate technology in both 2014 and 2015.
CoStar Suite costs hundreds to thousands of dollars per month per user depending on the market.
Apartment listings network: Zillow (market cap $4.13 billion) operates real estate and home-related information marketplaces.
Unlike claims made by CoStar CEO Andy Florance about Apartments.com’s dominance, Zillow has the most traffic in the industry.
LoopNet: Unique visitors to LoopNet fell by 21.2% from February 2015 to February 2016.
Huge gamble on apartment listings network
CoStar’s planned $1 billion gamble on its apartment listings networks.
To date, it has spent $757 million on acquisitions and over $100 million in advertising.
2015 advertising guidance oscillated from $75 million to $80-85 million, to ultimately over $100 million. This illustrates cost containment issues, exacerbated by the $5 million Lil Wayne Super Bowl advertisement from 2016.
Apartment research
46% of Apartments.com’s visitors originate from Google (and over 7% from Bing and Yahoo).
Apartment listing networks have become a commodity product. They outbid one another with expensive advertisement campaigns in a fight that will drive profits to zero.
Florance in his 4Q earnings call shared that: “According to comScore, Apartments.com enjoyed more visitor traffic in 2015 than any other apartment rental website.”
SimilarWeb ranks Zillow, Trulia, and Realtor ahead of Apartments.com for all real estate websites.
Zillow and Trulia alone, ignoring its many other brands, have over 700% more traffic than the combination of all three of CoStar’s apartment websites.
Airbnb valued at $25.5 billion, shared in July 2015 that 20% of its business is generated from rentals longer than 30 days.
Obsolete Business Model
CoStar’s data collection process is unsustainable and unprotected. It no longer monopolizes lease information.
CoStar reported in its 2014 annual report that it had 1,481 researchers and outside contractors who collect commercial real estate information “through millions of phone calls, e-mails and internet updates each year, in addition to field inspections, public records review, news monitoring and direct mail.”
Of the 500 college graduates who undertake this manual work, half leave after a short period.
A former employee summarized CoStar’s data collection process: “What essentially the company does: it makes its researchers get information from the brokers and other people involved in real estate for free, and then sells it back to them for a certain price. Ultimately, this business model works, since the company is growing and keeps buying its competitors.”
These cold-calling methods are neither proprietary nor sustainable: anyone can cold-call a broker for information about her last deal.
CoStar fails to provide the breakdown of revenue or profitability by brand, number of paying users, customer acquisition costs, or growth rate by product line.
For the first time in 19 years, management excluded information about CoStar’s “comprehensive database. this is a major red flag, given that its core offering, the CoStar Suite, relies on this database.
The number of researchers on staff, is no longer shared in this year’s annual report.
Rising goodwill and intangible assets signal a company might have overpaid for acquisitions. Of the $1.66 billion spent on acquisitions since 2011, 70% was spent on goodwill and 23% on other intangible assets.
LoopNet claims on its recently revised website that it receives 5 million monthly visitors, web traffic data indicates that this is false. Web traffic fell between February 2015 and 2016 from 2.5 million unique visitors to 1.97 million.
In 2016, management plans to integrate the back-ends of LoopNet and CoStar Suite. Once this is complete, CoStar plans to convert its LoopNet customer base to a more expensive product (from $115 to $195-295 per month, less than half the cost of a CoStar Suite subscription), which will serve as an intermediate product between the LoopNet and CoStar price points.
LoopNet’s continuous price hikes have outraged the broker community in the past so much so that brokers launched an online petition to stop them (to little success).
This intermediate product might cannibalize CoStar Suite membership; be prohibitively costly for some brokerage shops (the primary users of LoopNet); and, divert management’s attention to another growth area that is already becoming commoditized.
Despite rapid changes across the real estate technology industry, CoStar has hardly changed its amortization schedules since 2005. Compared to the number of years used in 2005, two of intangible asset categories were extended, and building photography, an insignificant intangible asset (given the emergence of Google Maps), had its life reduced by a year.
The risky conversion to upsell LoopNet users, the lukewarm or poor traffic to LoopNet and its acquired assets (BizBuySell and LandsofAmerica), and the intense competition in this space forces one to question why the $48.7 million of acquired trade names from the LoopNet acquisition has yet to be impaired whatsoever. Moreover, the $625 million in goodwill, a nebulous line item on the balance sheet, sits unimpaired.
Valuation metrics (updated)
CoStar is trading at a 10x premium to its peers. Rapid changes and increased competition in the real estate technology industry should compress multiples, as many of these services become commoditized. There is a high likelihood that the sector’s 12.3x EV/EBITDA will fall to around 9x EV/EBITDA. Even if CoStar continues to trade at a 20% premium or 10.8x EV/EBITDA, the base case price target would be around $88, for a total decline of -52%.
Rex will decentralize the way real estate data is distributed making the information more accessible to everyone.
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