Star bright, starlight

  • By Wendy Broffman
  • Published January 2016

more responsive mapping and improved search tools and state-of-the-art search engine optimization (SEO).

Florance said in a statement that Apartments.com has transformed the way owners and property managers market their apartment buildings, moving them from the classified ads section of Classified Ventures owners' newspapers to more effective online advertising, in much the same way that LoopNet revolutionized how owners and brokers market the CRE sectors of office, industrial and retail.

Brand awareness
Research had indicated there was no trusted, branded website that stood out on the Internet to help the nation's more than 100 million renters-30 million of which move annually-find an apartment.

To drive consumer awareness to its new acquisition and erase any negative spin around renting, CoStar did what no other company had done before to popularize apartment living-launched a $100 million ad campaign, starring actor Jeff Goldblum as Silicon Valley maverick and visionary futurist Brad Bellflower to be featured in print and television ads and across social media sites Facebook and Twitter.

"When the media campaign launched it was unprecedented in the multifamily space. Nobody had come close to being able to fund a campaign that promoted apartment living and encouraged renters to go online to get information," said Bollinger.

The competition soon followed. Rent.com-an ILS that is part of the RentPath network of sites-responded in June with its own site rebranding and an expensive television campaign staring comedian J.B. Smoov as the "Legit-a-Master," personifying what Rent.com refers to as its "legitimate apartment listings."

But being first has its advantages if one can deliver what one promises.

Florance told analysts in October that by September, Apartments.com had nearly 60 million monthly page views, or about three times Rent.com's 17 million, based on numbers from Alexa Rank.

Responding to research indicating reviews are very important to renters searching for a home on the Internet, CoStar offered to give free rent for life to the winning writer of an apartment review contest launched in June.

CoStar received more than 155,000 reviews during the 12-week contest period, nearly 1,800 per day, close to ten times the number of reviews posted to Apartments.com in the prior three years.

To enable CoStar and its clients to be aware well in advance of any new apartment communities coming online, CoStar charters aerial surveillance planes with military pilots handling the flights and a team of surveillance researchers operating a high-resolution camera system with augmented reality data overlays.

As of Q3 2015, CoStar had flown over 28 U.S. metros and discovered nearly 120 million sq. ft. of new multifamily building activity, but Florance believes that, by the time his aerial team has covered the entire U.S., they will have identified close to a billion sq. ft. of previously unknown construction.

Florance noted in Q3 that new apartment development represents stiff competition to CoStar's clients, sometimes requiring them to change their leasing strategies. For CoStar, he said, they are good revenue opportunities, as buildings looking to lease up have the largest advertising budgets.

No risk, no reward
The acquisition and relaunch of Apartments .com carried significant risk for CoStar, and Florance admitted to analysts he awoke several times at 4 a.m. during the process of rebuilding the Apartments.com website.

Would CoStar be able to rebuild and integrate the new site across multiple platforms within its budgeted timeframe? Could it collect enough content to improve renters search experience and drive brand loyalty? There were many more unknowns, but when the post-launch results were released last March, CoStar reported that net sales were up 827 percent in the first quarter of 2015, more in one month than in the previous year.

While Florance acknowledged that a single month of sales does not make a meaningful trend, he also told analysts that many of the thousand-plus apartment communities that signed up with CoStar in March curtailed their spending on competing sites.

"We do know that was the case with ApartmentFinder.com. After turning in reasonable growth for the past few years, their sales turned down as we launched our new site," he told them.

Double exposure
While in the midst of purchasing Apartments .com in 2014, CoStar was shopping for its second ILS.

Apartment Finder, with a similar business model and approximately 13,400 properties listed on its site, was among those courted.

CoStar planned to build a network of multiple ILSs, influenced by other big rental site operators like Zillow Group, which, in addition to Zillow, owns Trulia and HotPads, and RentPath, Inc., which also operates Apartment Guide, Rent.com and Rentals.com.

"Finder was an integrated media solution for many years (with both print and digital) and more recently had started the process of converting to a pure digital platform, which was one of the things that attracted CoStar when they looked at Finder as a secondary acquisition to the Apartments.com solution," said Bollinger.

At the same time, there were several companies in the online apartment rental space on the block in the 14 to 18 times EBITDA range, including Apartment Finder.

But Florance had already communicated to investors that CoStar was unwilling to purchase another ILS at the same EBITDA multiple it had paid to acquire Apartments.com.

"Using the multiple that was in play last year, when we were unable to find the price we wanted, we would have been expected to pay more than $300 million for Finder," he told analysts last April, explaining that CoStar passed on a number of potential deals for that very reason.

After intense negotiations with Apartment Finder, the companies were unable to come to a purchase agreement and walked away from the table.

CoStar turned its focus toward relaunching Apartments.com and reducing the risks associated with its acquisition.

The strategy paid off. Within days of the national media campaign and site relaunch of Apartments.com, the owners of Apartment Finder contacted CoStar, seeking to resume negotiations at a much lower price.

The deal closed last June at seven times EBITDA and roughly $80 million less than the lowest price Apartment Finder was asking a year earlier.

Florance noted when he announced the transaction during the Q1 earnings call, that the difference in the original ask and close price is roughly what CoStar spent on the incremental marketing campaign for Apartments.com that actually helped CoStar achieve the lower price, among other benefits.

Rather than spend on a large T.V. marketing campaign like it had for Apartments.com, CoStar increased Finder's budget by 500 percent over the previous year to focus on online marketing, but the ILS also benefited from the advertising and brand work already executed around Apartments.com.

Florance told analysts in Q1 that CoStar expected to achieve $20 million in synergies over 18 months, which effectively could lower the multiple paid to four times EBITDA, and, in Q3, CoStar reported it was already enjoying $15 million of those synergies.

Clearing hurdles
One challenge inherent in the Apartment Finder transaction was the legacy print apartment directory business that Finder had operated for 25 years. Florance characterized that operation as an anchor around Apartment Finder's neck in a highly competitive Internet marketplace.

But the print advertising contracts gave its advertisers exposure on the Apartment Finder website, as well as in the print books distributed across the country, and the Finder team was challenged with retaining those clients while converting them from print to pure digital contracts.

Moreover, with $65 million of the core advertising revenue to protect, CoStar had to maintain the revenue levels in those contracts throughout the process.

Bollinger and her team accomplished the task in two quarters, well ahead of the 18-month schedule, retaining 95 percent of the contracts. She estimates that for every print reader lost during conversion, more than 20 new potential Internet searchers were gained.

"We worked closely with each individual advertiser on a game plan to make sure their platform could substantiate and keep their lead volume at the level they needed. It was a very focused and localized initiative and our success was quick and fast by placing more spend in the SEO to make sure our digital ad volume remained propped up while disassociating the print," said Bollinger.

"We had a very upfront message to our customers and were honest and forthright and that helped as we worked through the transition from integrated to pure digital," she continued.

"The cancellations we had during the time were actually fewer than normal, so we don't feel there were a lot of customers that left us. There were a few and many have already come back to us and use us digitally now," she said.

CoStar also jettisoned $13 million in other non-core or unprofitable revenue streams, like social media consulting and items around the print business, and anticipates another $20 million in associated spend and cost cuts, including around 100 staff members, which Florance called "always hard, but necessary to ensure that the company remains ripe for rejuvenated long-term growth."

This year, CoStar expects to reduce its marketing budget to $20 million below 2015 levels since, "It's more expensive to introduce a