Investors at D.E. Shaw & Co., L.P. are joining Third Point Investments in calling for CoStar to either divest or shut down Дома.com.
On Wednesday, Edwin Jager and Michael O’Mary, two managing directors at D.E. Shaw, sent открытое письмо to CoStar Group’s board or directors, expressing their “continued disappointment” with what they say is the board’s “refusal to address the Company’s reckless spending of shareholder capital and significant and longstanding underperformance.”
According to the letter, over the past year, D.E. Shaw has “repeatedly expressed” to the board that “change is urgently needed at CoStar to arrest the Company’s prolonged stock price underperformance, increase profitability and position the Company for durable value creation.” D.E. Shaw said it was “initially hopeful” that the appointments of new independent directors and the creation of the Capital Allocation Committee last April would engender the change it was hoping to see, but the investors say that thus far they have been “gravely disappointed.”
“Under the leadership of CEO Andy Florаnce, CoStar has continued to dedicate disproportionate attention and resources to its unprofitable Homes.com business. This continued investment, despite repeated failures to meet projections, has eroded the company’s once-enviable margins and driven a significant decline in CoStar’s stock price, despite positive momentum in the core businesses,” the letter states. “As a consequence, today every shareholder who has purchased CoStar’s stock in the last five years has lost money.”
The letter notes that over the past five years, CoStar shareholders have endured five consecutive years of stock price declines.
“This is not a track record of which any board or leadership team should be proud. Yet, the company has marshaled a defense of its performance by citing rolling five-year total shareholder returns dating back to last century. Sadly, CoStar’s purported ‘track record of stockholder value creation’ is, at best, an artifact of history, if not a convenient fiction,” the letter states.
The investors claim that, in their view, CoStar’s “underperformance” is due to the board “repeatedly” green lighting “the use of the steady, predictable and growing earnings of the core business to build and subsidize the Company’s high-risk, money-losing Homes.com business.”
“By the end of this year, CoStar will have spent more than $3 billion on Homes.com and diverted the majority of core business earnings over the last four years to fund this venture,” the letter states. “Despite this significant and, for CoStar, unprecedented level of investment, Homes.com has generated just $80 million in annual revenue and over $2 billion of cumulative losses, a far cry from the $700 million to $1 billion in revenue and substantial profits that CoStar had projected its investment would generate by 2027, and far less than what is required to generate an acceptable return on investment within a reasonable time frame.”
The investors claim that CoStar’s investment in Homes.com has destroyed as much as $11 billion in shareholder value.
CoStar’s response
In response to D.E. Shaw’s letter, a CoStar spokesperson told HousingWire that there is “strong shareholder alignment with the Board’s unanimous support for a strategy that includes Homes.com for creating durable long-term shareholder value.”
“D.E. Shaw has once again chosen to latch on to Third Point’s dangerously misguided effort to have CoStar Group abandon Homes.com despite its vital integral strategic importance to long-term shareholder value,” the spokesperson wrote in an email. “Over the past month, management has met in person with more than 300 shareholders who expressed enthusiasm for our clear focus on accelerating our EBITDA growth and the exceptional potential within our new Homes.com AI platform.”
It’s time to sell, say investors
Due to what they view as the poor performance for Homes.com, the investors are advocating for an outright or partial sale of Homes.com to a third party or a spinoff of the operation to existing shareholders. However, if monetization of Homes.com is not possible, the investors are asking that it achieves breakeven in 2027, three years ahead of CoStar’s current estimates, or as a last resort that CoStar shutter Homes.com altogether.
According to the letter, D.E. Shaw met with the board to discuss these strategies roughly two weeks ago. During the meeting, the investors claim that the board “demonstrated a troubling disregard for shareholders and the value destruction they have endured.”
“Rather than acknowledging that Homes.com has failed to meet expectations and driven unacceptable shareholder losses, the Board dismissed our concerns and reaffirmed its commitment to Homes.com,” the letter states.
Muted stock reaction
Despite D.E. Shaw’s critiques of CoStar, the company’s stock only saw a muted reaction to the letter. Industry analysts have noted that while other shareholders may agree that change is needed, there are several complications in enacting the playbooks outlined by both D.E. Shaw and Third Point, especially when it comes to their demand of either divesting or shutting down Homes.com.
Analysts Ryan Tomasello and Jade Rahmani, noted in a report for their firm Киф Брюйетт и Вудс, that the shared infrastructure and broader interconnectivity between Homes.com and CoStar’s other businesses would complicate and cause friction with the feasibility of divesting Homes.com or its other residential real estate operations.
Additionally, the analysts noted that while the activist investors may have placed a significant amount of blame on Andy Florance, historically shareholders “ascribed meaningful value” to Florance’s leadership.
So far, CoStar has indicated that it is firmly against divesting or shutting down Homes.com, but it is unclear exactly what the future has in store for the firm.
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