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Edited Transcript of CSGP earnings conference call or presentation 22-Oct-19 9:00pm GMT

Q3 2019 CoStar Group Inc Earnings Call

WASHINGTON Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of CoStar Group Inc earnings conference call or presentation Tuesday, October 22, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew C. Florance

CoStar Group, Inc. - Co-Founder, CEO, President & Director

* Richard Simonelli

CoStar Group, Inc. - VP of IR & Public Relations

* Scott T. Wheeler

CoStar Group, Inc. - CFO

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Conference Call Participants

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* Andrew William Jeffrey

SunTrust Robinson Humphrey, Inc., Research Division - Director

* Brett Richard Huff

Stephens Inc., Research Division - MD

* Joshua Kapler Lamers

William Blair & Company L.L.C., Research Division - Associate

* Keen Fai Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Mayank Tandon

Needham & Company, LLC, Research Division - Senior Analyst

* Peter Corwin Christiansen

Citigroup Inc, Research Division - VP and Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

* William Arthur Warmington

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, the conference is being recorded. I'll now turn the conference over to our host, Mr. Rich Simonelli, Investor Relations. Please go ahead.

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Richard Simonelli, CoStar Group, Inc. - VP of IR & Public Relations [2]

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Thank you, operator, and welcome to CoStar Group's Third Quarter 2019 Conference Call, everyone. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I'd like to share some important facts.

Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties 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 today in CoStar Group's October 22, 2019, press release on our third quarter results and the company's outlook and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports 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 to the non-GAAP financial measures discussed on this call, including non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance are shown in detail in our press release issued today along with definitions for these terms. And they can also be found in -- on the press release on our website, which is located at costargroup.com.

As a reminder, today's conference call is being broadcast live and in color on our Investor Relations website. So please refer to today's press release on how to access the replay of this call. (Operator Instructions) But I'll now turn the call over to Andy Florance. Andy?

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [3]

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Thank you, Rich. That was extremely well done.

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Richard Simonelli, CoStar Group, Inc. - VP of IR & Public Relations [4]

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Thank you.

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [5]

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Thank you for joining us for CoStar Group's Third Quarter 2019 Earnings Call. CoStar Group's total revenue was $353 million in the third quarter of 2019, an increase of 15% year-over-year. During the second quarter of 2019, CoStar Suite revenues moved through the $600 million annualized run rate mark. In the third quarter, Apartments.com moved past the $500 million annualized run rate mark and did so with a 20% year-over-year growth. This is outstanding sustained growth considering we're in the 6 years of -- sixth year of owning Apartments.com. But we expect there's much more to come. Multifamily is a huge opportunity. We estimate that total addressable market multifamily is somewhere between $8 billion and $10 billion. This is 4 to 5x bigger than we initially estimated the multifamily opportunity was when we entered the space in 2014.

Net income for the third quarter 2019 was $79 million, an increase of 34% over net income of $59 million for the third quarter of '18. EBITDA was very strong for the third quarter of '19 coming in at $113 million, an increase of 24% versus EBITDA of $91 million for the third quarter of 2018. Adjusted EBITDA margin moved to 37%, and we achieved 80% gross margin in the third quarter.

Our balance sheet remains strong, and we expect to have over $1 billion in cash at year-end and no debt even after the closing of the STR acquisition earlier today. We continue to show strong growth and profitability, while we continue to invest in the future growth of the company. I'm delighted with our ability to consistently deliver on both fronts. There's a massive opportunity in both the United States and abroad in information, analytics and marketing for commercial real estate. While I'm pleased that we are approaching $1.4 billion of revenue in 2020, we believe there are billions of dollars of opportunity not yet realized, so continued investment is optimal.

We had another excellent sales quarter generating $50 million in company-wide net bookings, and increased 27% year-over-year in the third quarter. Our average net new sales of $52.5 million per quarter year-to-date in 2019 is 32% higher than the comparable period in 2018 when the average net new sales per quarter was $39.8 million.

On the multi-family side of the business, the larger sales force we deployed in 2018 has delivered in a big way. In fact, both CoStar Suite and Apartments.com sales team each achieved more than 30% growth in net new sales in the third quarter 2019 compared to the third quarter of last year.

I'm optimistic that our sales levels will continue to be strong for the remainder of 2019 and can improve in 2020 as we are proactively increasing the size of our sales force, offering new products and services and continue to grow share in our huge addressable market. We now have 280 field sales reps in production for CoStar Suite and LoopNet, and we look to add -- enter 2020 with about 300. In the third quarter of 2019, we identified and distributed a list of 17,000 CRE owners as strong sales leads to our sales force. Each rep has a target owner list. We have been aggressively preparing our sales force to target and sell owners both LoopNet Signature Listings and more CoStar Suite.

I'm pleased to announce that we have closed on the acquisition today of STR for $450 million. Founded in 1985, the STR team has created the global industry-leading benchmarks in analytics that are the primary information tools hotel management investors rely on to monitor and optimize their assets. It provides the foundation for daily hotel and lodging pricing strategies. This is an extraordinary company that's a valuable partner with the hotel industry. Ultimately, the cash flow intelligence STR provides is the fundamental value driver in the $3 trillion hospitality sector of commercial real estate. The industry needs information to effectively develop, finance, appraise and transact hospitality properties. We are bringing together the leading provider of commercial real estate information analytics and online marketplaces with a gold standard in global hospitality industry for premium performance benchmarking and revenue forecasts. We are excited to add this world leader as it extends the depth and reach of our comprehensive CoStar platform.

STR aggregates data from over 65,000 hotels worldwide, representing 9 million guestrooms in over 180 countries. Hotels electronically submit their revenue and occupancy data to STR in a weekly basis. CoStar currently provides billing information on 80,000 hotels, 45,000 hotel sale comparables and 4,500 hotels currently offered for sale. We plan to integrate the STR data with CoStar to create exciting new products that provide hotel building data, aggregate income and occupancy information, sales comps and for sale information.

STR has expanded our global footprint. CoStar now has over 4,400 employees in 19 countries with over 600 working outside the United States. For the first time, CoStar now has staff in Singapore, Australia, China, Colombia, Brazil, UAE, Indonesia, Italy, India, South Africa and Japan. Just imagine the air miles.

Smith Travel brings an unrivaled reputation within the global hospitality industry for their data integrity, reliability and strict confidentiality. And we look forward to continue to build on those core values in the next chapter of Smith Travel's growth. CoStar has extensive experience segregating and protecting highly confidential client information such as accounting data, leases and lease abstractions, major deals in progress, payroll data and sensitive banking data. Integration of STR to the CoStar product will maintain absolute confidentiality while also allowing property owners, investors and service providers in the hospitality sector a more holistic, aggregated view of the industry at market levels.

I've already had the chance to meet with the STR team in London. It's a great group. And tomorrow I will be in Hendersonville, Tennessee to welcome hundreds of new employees to the CoStar team. I'm looking forward to working with our outstanding management team including: Amanda Hite, CEO. Hello, Amanda; Elizabeth Winkle, Chief Strategy Officer; Robert Rossmann (sic) [Robin Rossmann], Managing Director and many other strong leaders. That was just a guess there. We believe that combining STR's superior hospitality service offering combined with the CoStar platform will benefit all industry participants as we work together to create valuable new and improved tools.

I'm very pleased to report that one of the world's leading property companies, JLL, has renewed its contract with CoStar with a 5-year deal and a 2-year renewal option. As you know, JLL recently completed its acquisition of HFF. Our contract for the combined entity is [larger] the 2 firms we are paying individually since now all the brokers at JLL will add access to the national CoStar Suite data and analytics. We saw a similar phenomena when Grubb & Ellis combined with Newmark Knight Frank confirming that consolidation CRE can be beneficial to CoStar revenues, particularly when a combined entity expands their access to CoStar services.

Want to update you on LoopNet, where we are with that. Office buildings for lease have historically been remarketed from broker to broker via print brochures or e-mailed brochures. And owners seeking to lease up their building would hire a broker who would then distribute a few hundred flyers to other local brokers announcing the broker's availability. The landlord's broker will generally affix a sign to the building announcing the space offered for lease, but that will only reach prospects who are already at the building. Given that some of these leases can be worth more than $150 million, this strikes me as a primitive way to market space. It's understandable in a historical offline context as there were severe limits in the methods available to market office space. There could be tens of thousands of tenants within 5 miles of a typical office building availability with hundreds of thousands of potential decision influencers. Additionally, 20% to 40% of the tenants searching for space in the market are coming from outside that MSA. The size, distribution and changing nature of the prospects have made it impossible for owners to build effective direct mail or e-mail marketing lists.

Running national TV, radio and newspaper campaigns for a year or so it takes to lease a property is prohibitively expensive. Hence, the industry has relied on marketing through a double middleman model. On a $150 million lease, an owner might pay $9 million in commissions, $7 million in free rent concessions and $14 million in tenant improvements for a total marketing cost of $30 million. Even after investing that much money, we estimate that office owners lose approximately $40 billion annually to excess vacancy.

Smaller tenants occupy about 35% of the U.S. office space, so most owners cannot pay a mortgage without them. Yet commission brokers are less motivated to pursue small deals, therefore, owners relying on the double broker model face greater challenges marketing to small tenants. While WeWork has not been a complete success, one of its growth drivers has been that it is meeting the massive unmet need for connecting smaller tenants to space.

The Internet has created transformative opportunities to market commercial real estate online, and LoopNet is fortunate to be at ground zero for that opportunity. LoopNet and its related sites are now generating 6.6 million unique visitors per month as reported by Google Analytics. This is a 16% year-over-year increase. No other CRE marketplace comes close to LoopNet. No other CRE website comes close to LoopNet. According to Hitwise, LoopNet has almost 2,000% more traffic than the second most heavily trafficked website, wework.com. For the 22,000 CRE keywords we prioritize, LoopNet holds the #1 SEO position on Google 86% of the time.

The fact is that today millions of tenants look for office space online. We believe that LoopNet is the most effective way to market commercial space today because it offers unprecedented reach, strong frequency and elevates a property's brand. We know LoopNet's effective at marketing because tens of thousands of brokers pay to market to listings on LoopNet in order to reach tenants and users. We believe we can significantly expand a property's reach, frequency and branding by [sorting] the top of LoopNet and CoStar just as we do in Apartments.com. This increases the ad size, content and by repeating across our websites, it's growing that reach and frequency. We call these signature ads, and we already can see they work. By tracing IP addresses, we can see major tenants viewing signature ads on LoopNet followed later by their brokers viewing the same ads or content in CoStar, and then we see the tenants lease space in the property we believe that the tenant originally found on LoopNet.

We see specific deals in the range of 0.5 million feet, so we see some huge deals this way. The owners of an office building have a much greater stake in its economics than their broker, so we're focusing our sales force on selling these ads to owners directly in harmony with the brokers at price points above $2,500 a month. We have recently put in place more training incentives to drive sales to this goal. We have made great strides in improving the website over the past year to better fit our clients' branding goals. We have created richer content and signature listings including photography, reviews, bios and graphics. The signature ads can have a hugely positive impact on marketing and building for as little as a few cents to a few dimes per square foot, when the owner could already be investing $100 a foot in traditional costs and methods to lease up their space. So we're talking 1 point or 2 on additional cost to make the program more effective.

We believe that marketing commercial real estate online will be a multibillion-dollar opportunity and that CoStar Group is well positioned to capture a major share of that opportunity. We expect that LoopNet will be a significant contributor to our 2020 sales growth.

Turning to Apartments.com. Apartments.com is doing very well. Apartments revenue is up 20% year-over-year. Net sales are up 30% year-over-year, and profit contribution has been growing rapidly as we continue to grow revenue. In July and August, the Apartments.com network reached an all-time high in unique visitors according to comScore. We had nearly 60 million visits in August 2019, an increase of 8 million over August 2018. The Apartments.com network continues to pull further away from the competition by growing unique visits -- visitors 10% year-over-year to 18.9 million in September as reported by comScore. At the same time, RentPath saw a decrease of 4% in the same period. Our network had more than 9x the number of visits that Apartment List had and 2.6x the visits that RentPath had. The Apartments.com network had more visitors than did the Zillow Rental Network.

We have just begun beta testing Apartments.com's digital tenant screening, lease documents and rent payment system. Our first 2 markets are Santa Monica and Atlanta. It's only been 2 weeks, so it's still very early. But the initial reaction exceeds our expectations. 36% of the landlords who added a listing on Apartments.com in the test period elected to use our digital leasing tools. Really happy with that number. We've already begun processing applications, screening renters and executing leases and collecting rent payments. Some of the owner and comments have included, "It shows me the level of overall quality of a specific tenant especially compared to other potential tenants in terms of reliability, trustworthiness, responsibility, et cetera." Another owner said, "It was more thorough than what I was expecting." Another said, "I thought it was user friendly and takes a holistic approach. It covered every detail we needed and was quick and easy to use for both myself and my potential tenant." Finally another owner said, "Very easy and fast." Some of the renter comments were really quite simple: One, "Application, it was much easier than expected."; another one, "It was extremely simple and felt secure submitting my information."; and finally, "It was fairly easy." I think it's good that the comments are so short. We expect to continue rolling out the tools throughout the rest of the year and into next year.

There are hundreds and thousands of mid-sized and smaller apartment communities that we're now successfully selling to. To fully capture this opportunity, we are significantly expanding our apartment sales force by building a 100-plus-person team in Richmond focused on this middle market opportunity. I had a chance to meet with the first team of 17 reps and managers last week. It's a very promising, highly motivated group with excellent support from our Richmond technical and administrative infrastructure. I'm very excited about the growth prospects that the expanded sales force can deliver going forward.

During last quarter's earnings call, we reported that we thought we could provide our advertisers with more value, enhance our competitive advantage and generate a good ROI with more aggressive marketing investment behind Apartments.com. On our last earnings call, we announced that we're increasing our marketing spend for the second half of 2019 by $10 million. We did that, and we increased the investment in the third quarter alone. We have analyzed the results, and we have achieved our desired outcomes.

Beginning in August, we roughly doubled our investment in certain categories of Google keywords, and not surprisingly, we more than doubled our apartment rental click share compared to other top Internet listing services, moving from 32% click share to 67% click share according to Hitwise. During the same time period, RentPath click share plunged from 35% to 17%. RentPath had been making up for weak SEO by buying SEM traffic. During the trial, RentPath moved from having more click share than Apartments.com to having 1/4 of Apartments.com's click share. Apartment List had 24% of click share before it began, and their share dropped in half to 12%. We've also increased the number of times we were in the #1 position in Google by nearly 600%. During the trial, we appeared in the top 4 Google SEM positions 95% of the time in our targeted neighborhoods.

Given the success of the trial, the only humane thing to do is to immediately suspend the trials and widely deploy the increased investment to help millions of additional renters find a great apartment soon. That's me channeling Brad Bellflower.

We plan to continue to sustain an elevated level of SEM spending in the fourth quarter. By the end of the year, we will have increased our SEM spend by a total of $20 million in 2019 over our initial budget at the beginning of the year.

We acquired Apartments in 2014, and since that, we've grown profitable revenue organically and acquisitively. We expect to achieve a 5-year compound annual growth rate of 38% based on our 2019 forecast. We have grown from serving just over 17,000 apartment communities to serving well over 50,000, in fact, about 52,000.

In an industry that has historically only monetized large apartment communities, we're very successfully selling marketing solutions to large, medium, small communities and even single-family rentals of which there are tens of millions. That shows this is a massive, massive opportunity. We are clearly in the lead position in the industry. We absolutely want to cross $1 billion in revenue in Apartments.com soon and go well into the billions of dollars of revenue. Ultimately, we would like to generate $1 billion plus of EBITDA from the apartment sector alone.

In 2015, we showed our commitment to the industry with an unprecedented $100 million investment into marketing Apartments.com to the 100 million plus renters in the U.S. It was not initially very popular with everybody, but it clearly worked. It helped us grow our revenue from $85 million to $500 million.

In the third quarter this year, we have tested a more aggressive marketing investment, and we like the returns. As we move into 2020, we plan to take Apartments.com to the next level again. We expect to increase our investment in marketing from approximately $150 million in 2019 to $250 million in 2020. That's a $100 million incremental increase in our marketing spend. This will bring our 2020 margin down, but we believe in the future, this investment will drive our revenue and margin up well beyond the investment we're making in 2020. Our $250 million 2020 Apartments.com marketing budget is expected to consist of much more aggressive search engine marketing, more aggressive TV and digital video marketing with the goal of moving our unaided awareness from the 26% to 33% range to the 50% plus unaided awareness range. We also plan to invest in marketing programs to support our digital leasing initiatives. Make hay while the sun is shining. The sun is shining brightly, and we intend to make a spectacular amount of hay.

I have a legal update for you on Xceligent if you remember that. CoStar shareholders have invested billions of dollars to enable CoStar Group to build and acquire robust information systems in marketplaces that are invaluable to the commercial real estate industry. CoStar's ability to protect its intellectual property for misappropriation is a critical factor in our success. Over the course of those last several years, Xceligent, its former officers and directors instructed contractors and employees to circumvent our security systems protecting CoStar Group's websites in order to steal an enormous volume of intellectual property from CoStar Group. They repackaged and sold that content as their own. This represented a fundamental threat to CoStar Group, and we had to stop it. We relied on the protections of the U.S. copyright law in terms and use our websites among other legal tools.

We sued Xceligent and their contractors. As a smokescreen, Xceligent complained to the FTC in countersuit complaining anticompetitive behavior. Faced with an iron-clad case against Xceligent for massive copyright infringement, in November 2017 Xceligent's parent company, DMGT, wrote down its investment to Xceligent to 0 after losing somewhere around $150 million investments in Xceligent. Xceligent was bankrupt.

On the day DMGT announced the write-down and loss of $150 million, its shares suffered a 23% drop hitting a 5-year low. I do not believe that DMGT was aware of the scale of illicit things that Xceligent was doing. DMGT was just a string of investors in Xceligent over the course of the 20-plus years that lost millions, tens of millions or $100 million. We welcome the investigation, including an audit authorized by the Federal Trade Commission to determine whether CoStar content was improperly added to Xceligent systems or vice versa. The massive investigation led by the FTC-approved monitor concluded that Xceligent improperly derived, took nearly 38,500 images from CoStar's database. We believe this is a complete vindication of CoStar's allegation of Xceligent's unlawful activity.

The Department of Justice appointed a trustee to manage the now bankrupt state of Xceligent. After the results with the FTC monitor's investigation along with other overwhelming evidence of willful copyright infringement perpetrated by Xceligent under CEO Doug Curry, the trustee has agreed to the entry of a judgment of $500 million against Xceligent in favor of CoStar Group for copyright infringement. This $500 million judgment would be the largest copyrighted image judgment in history and the third largest copyright judgment of any kind. The judgment is awaiting approval of the bankruptcy court overseeing Xceligent's bankruptcy and the court overseeing CoStar copyrights soon.

Because Xceligent is bankrupt and virtually without sellable assets, the total amount CoStar will recover under the judgment is only $10.75 million, which will be paid to us by Xceligent's insurers. Of course, I never put the word only in front of $10.75 million. The trustee has also agreed that Xceligent's countersuit against CoStar would be dismissed with prejudice.

In connection with Xceligent's massive illegal operation, the directors and executives of Avion, Xceligent's foreign contractor in the Philippines, have been charged and indicted on cybercrime charges brought by the Philippine prosecutors. In its papers, the Philippine's DOJ stated that Avion acted in concert with Xceligent management to commit the classic example of computer crime.

In final judgment entered in Indian court in favor of CoStar, Xceligent's other foreign contractor, MaxVal, stated that it was misled by Xceligent, its executives and managers, including Xceligent's CEO, Doug Curry, who personally visited the operation in India to supervise their work infringing CoStar's copyrights. Shortly after Xceligent's bankruptcy, Doug Curry started another competitive CRE information business called Intrepid. It failed within a few weeks of launch. Apparently after that, Doug has started another CRE information business with several million dollars of funding from Moody's, a company you may have heard of. The scale of Xceligent's copyright infringement is unprecedented and sort of a history marker, and CoStar Group is very grateful for the thorough efforts of the FTC-appointed monitor in completing the massive audit of the copyright violations.

I believe our investors will give us credit for aggressively defending their investment in CoStar against intellectual property theft. We have ultimately achieved favorable findings or judgments in this defense in federal court in the U.S., coming up on 2 in federal court in court in India before the Philippines Department of Justice from the U.S. Department of Justice-appointed trustee and the monitor appointed by the Federal Trade Commission, which sums up to 5 wins and 0 losses in a pretty challenging case. A special thanks to our trial attorney, Nick Boyle, who did a fantastic job and the entire teams at Williams & Connolly.

Quick look at the commercial real estate economy. Despite growing concerns around the economic outlook, commercial real estate activity continues to post strong totals for leasing and investment volume. We believe this is justified given the sector's sound fundamentals. Vacancy remains an -- vacancy rates remain near historic lows across all sectors, and supply is generally limited. And the recent drop in treasury yields makes returns in commercial real estate, multi-family real estate all the more compelling. Investors may also view real estate as a defensive investment as trends in capital market and economic indicators have increased the probability of a near-term slowdown.

In particularly, we note disruptions in trade, falling manufacturing output and business investment, slowing demographic growth. Despite these headlines, however, GDP growth and job gains have yet to show any meaningful slowdown and continue to support demand for commercial and multi-family real estate. The property market's apartment rent growth once again topped 3% nationally. We believe the ongoing health of the apartment sector relates to the broad and growing shortage of housing in the United States. In particular, an insufficient supply of new for-sale housing units has limited home buying and led to the unprecedented level of apartment demand. In response to this demand, apartment construction has risen to levels not seen since the 1980s. CoStar tracks just over 300,000 units delivered over the past 12 months, and we're tracking about 650,000 apartment units currently under construction. The large majority of these developers rely on the Apartments.com advertising platform to market those units.

Investors continue to favor U.S. multi-family assets. Investment in the sector set a third quarter record this year topping $40 billion. In the office sector, leasing has consistently set new records despite single-digit vacancy rates and limited supply. Large tech firms have driven demand as they expand beyond their Bay Area and Seattle footprints. Rent growth, however, has trended at just around 3% well below typical gains in the past periods of expansion. Unlike past expansions, however, supply is limited at less than 2% of current inventory and concentrated at handful of markets. New York also stands out with 25 million square feet underway. We work -- unfortunately, will leave New York a little bit vulnerable since they're heavily concentrated in New York, but we don't think it's a big issue.

We believe that measured rankings and low supply risk in the office sector helped insulate the market from potential economic reversal, and our base case forecast calls for steady rent gains. And industrial sector ongoing changes in how consumers shop continue to generate record levels of demand for industrial space despite vacancy rates around 5%. Developers are responding a record amount of industrial space as under construction, but rent growth continues to post gains about 5% year-over-year, the best among major property types and investment in sectors on pace to set another record. Disruptions to trade pose some risk to the sector, but we expect fast growing demand for local distribution space to provide same-day delivery of goods will help offset any slowdown.

In the retail sector, negative headlines around store closings and e-commerce obscured the sector's superb fundamentals. We estimate retail vacancies of below 5%, the lowest across the property types, and construction underway amounts to less than 1% of current stock. The shortage of space has resulted in low leasing absorption levels, but demand for retail space from grocers, discounters, fitness clubs and experiential retail is offsetting move outs from department stores and big-box retailers.

We expect the record levels of activity in commercial and multi-family real estate to continue. We expect the demand for CoStar Group's products and services to grow as we help owners, lenders, brokers and investors, property managers make quality choices and realize successful outcomes in any economic environment.

We continue to generate strong momentum in 2019 and make important investments. I'm extremely excited about the rest of the year as we continue to execute on our long-term vision with a great company.

This point, I will turn the call over to our CFO, Scott Wheeler, and he'll give you more detail on our earnings and our planned investments.

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Scott T. Wheeler, CoStar Group, Inc. - CFO [6]

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Thank you, Andy. Well said.

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [7]

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Thank you.

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Scott T. Wheeler, CoStar Group, Inc. - CFO [8]

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Really didn't seem like we took a break this summer. The third quarter delivering another great financial outcome while initiating and closing our acquisition of STR, took less than 12 weeks but who's counting?

Well, now Andy mentioned a number of highlights on our third quarter results, including our second consecutive quarter of net new bookings of $50 million or more. We also had strong double-digit revenue growth, 50% year-over-year, which, by the way, is 10 straight quarters of revenue growth of 15% or more. And for all of you EBITDA lovers out there, another fun fact over the trailing 4 quarters. We amassed over $500 million in adjusted EBITDA. That's $0.5 billion, certainly a significant achievement for all of us here at CoStar.

So starting off with revenue, which came in above the midpoint of our guidance range for the third quarter at 15%. And for the year, we expect consolidated revenue growth of approximately 16% to 17%. Looking at revenue performances by services. CoStar Suite revenue growth was 12% in the third quarter versus the third quarter of 2018. The revenue growth rate for CoStar Suite is expected to be approximately 13% for the full year of 2019. Revenue in our information services sector grew 11% year-over-year in the third quarter of 2019 primarily as a result of CoStar Real Estate Manager revenue growth of 19% year-over-year.

As we get further past the lease accounting standard adoption dates, Real Estate Manager results include subscription revenue growth of 44% year-over-year in the third quarter and the 20% drop in onetime implementation revenues. We expect information services revenue to grow at a rate of 20% to 21% on a year-over-year basis in 2019, which includes approximately $3 million to $4 million of STR revenue. More on our STR outlook a little later in the call.

Multifamily revenue growth for the third quarter remained strong at 20% over the third quarter of 2018. The full year 2019 revenue growth for multifamily is expected in the 20% to 21% range. Commercial property and land revenue grew 17% year-over-year in the third quarter of 2019.

Our LoopNet marketplace, which represents approximately 75% of the revenue in the commercial property and land sector is seeing continued strong growth numbers even as we reposition LoopNet into the premium advertising solution for property owners. There's a lot of work going on behind the scenes to implement our plans for LoopNet as Andy has mentioned, and this includes discontinuation of certain legacy products and contracts that are not in line with our strategy. Excluding these onetime impacts of discontinued products and contracts, the third quarter revenue growth rate of LoopNet would have been over 20%. We expect year-over-year organic growth in the commercial property and land sector to be about 16% for the full year of 2019 and are looking forward to stronger growth rates from LoopNet as we continue to build that sector of our company.

Our gross margins came in at 80% in the third quarter of 2019, slightly increasing from 79% gross margins we achieved in the second quarter of 2019. This is the result of strong cost leverage. Our revenues increased $9 million in the third quarter of 2019 compared to the second quarter of 2019, but our cost of revenues remain relatively unchanged sequentially. We now expect overall gross margins of approximately 79% to 80% for the full year of 2019.

Operating expenses of $187 million for the third quarter of 2019 were slightly below our estimates and down from the $197 million in the second quarter of 2019 as a result of seasonally slower marketing spend in the third quarter. As mentioned during our last financial update in July, we increased our planned levels of marketing spend in the third quarter, which we expect to continue through the end of the year.

Our third quarter adjusted EBITDA of $129 million represents an 18% increase compared to adjusted EBITDA of $110 million in the third quarter of 2018. It was approximately $2 million above the top end of our guidance range. Favorable personnel expenses were the main reason for the positive variance. Resulting adjusted EBITDA margin of 37% is 80 basis points above the 36% margin we achieved in the third quarter of 2018.

Net income in the third quarter of 2019 was $79 million, increase of 34% or $20 million compared to the Q3 of 2018. Our effective tax rate in the quarter was 21%, reflecting benefits associated with our share-based payment transactions and R&D credits.

Non-GAAP net income for the third quarter increased 21% to $96 million compared to Q3 2018 or $2.61 per diluted share, includes adjustments for stock-based compensation, acquisition expenses, some restructuring costs associated with the organizational changes in Apartments.com and research that we discussed last quarter. Non-GAAP net income for Q3 assumes a tax rate of 25%, which does not include other discrete tax adjustment items.

Cash and investment balances were approximately $1.4 billion as of September 30, 2019, up approximately $91 million since last quarter. And as you know, we closed on the STR acquisition today, so we expect our cash balance to be approximately $1 billion and around that at the end of 2019.

Now let's take a look at some of our performance metrics for the quarter. We had another strong bookings quarter with net new sales of $50 million, an increase of 27% year-over-year for the third quarter. The sequential decline from the $59 million of bookings in the second quarter is a result of seasonal sales patterns primarily in our online marketplace businesses. At the end of the third quarter, our sales force totaled approximately 820 people, up about 40 people from last quarter and up almost 90 people from the third quarter of 2018. Most of this growth is in our commercial real estate sales team, which is focused on selling CoStar and LoopNet. We expect to continue growing the commercial real estate sales force during the remainder of this year along with the ramp-up of our mid-market sales team in Apartments.com. We anticipate our sales team will grow to an approximate range of 880 to 890 by the end of 2019. The renewal rate on annual contracts for the third quarter 2019 was in line with the rate achieved in the second quarter of 2019 at 90%. The renewal rate for the quarter for customers who have been subscribers for 5 years or longer was 95%, also in line with the renewal rate of 95% in the second quarter of 2019. Subscription revenue on annual contracts now accounts for 82% of our revenue in the third quarter, up from 80% this time last year and flat compared to last quarter.

I'll now discuss our outlook for the full year and the fourth quarter of 2019 beginning with the outlook for the STR acquisition. We expect that STR will contribute between $3 million to $4 million in revenue in the fourth quarter of 2019. Our revenue estimate is impacted by the negative accounting effect of deferred revenue that was on STR's books at the time of acquisition. STR's deferred revenue balances are quite significant relative to other acquisitions we've completed in the recent past. This is because STR bills and collects the full year amount for annual subscriptions in the first quarter of the calendar year. This is a practice that I'm particularly quite fond of, but it does reduce the accounting revenue post acquisition. Similarly our estimate of adjusted EBITDA for STR in the fourth quarter is negatively impacted by the accounting adjustments for deferred revenue as well as the impact of integration costs. We expect a negative impact to adjusted EBITDA of approximately $5 million to $6 million in the fourth quarter as a result of the acquisition.

These estimated impacts to revenue and adjusted EBITDA from the acquisition of STR are included in the revised outlook for 2019. As we look towards 2020, the results for STR will continue to be affected by the negative accounting adjustments for deferred revenue. For example, the current annual revenue run rate for STR of approximately $64 million would be reduced by an estimated $10 million of deferred revenue that carries over to 2020. This would result in a revenue outlook of approximately $55 million for STR in 2020 before any anticipated growth or integration changes. Similarly, the deferred revenue effects in 2020 flow through to the EBITDA for STR. We'll need time to develop a detailed plan for STR and the integration in 2020, but at this stage, we expect the acquisition to become accretive in the second half of the year and contribute positive EBITDA for 2020. Of course, these are all accounting results for STR, which in no way impact the economic attractiveness of combining CoStar and STR, which we've discussed previously.

We continue to expect, as we said in the press release for the acquisition, within the next 3 to 4 years, our investments in new products and our focus on growth of the combined businesses will generate annual revenue growth above 20%, which is approximately 2x STR's current growth rate, and profit margins in line with CoStar's long-term goal of 40%-plus adjusted EBITDA margins by 2023.

Now I'll discuss the combined outlook for the company. We're raising our revenue outlook slightly to $1.385 billion to $1.391 billion for the full year of 2019 to include the estimated revenue from the STR acquisition. The outlook reflects revenue growth for the year between 16% and 17%. We expect revenue for the fourth quarter of 2019 in the range of $360 million to $366 million, representing top line growth in the range of 14% to 16% for the quarter versus Q4 2018. We expect adjusted EBITDA to be in the range of $494 million to $500 million for the full year of 2019, which is relatively unchanged from our previous guidance, except for the inclusion of the estimated STR results mentioned previously. We expect full year adjusted EBITDA growth of approximately 19% year-over-year with an adjusted EBITDA margin for the year of approximately 36%, up approximately 70 basis points at the midpoint of the range compared to 2018, despite the negative short-term impacts of the STR acquisition.

For the fourth quarter of 2019, we expect adjusted EBITDA in the range of $129 million to $135 million. Included in our outlook for fourth quarter adjusted EBITDA are the impacts of the STR acquisition along with the increased level of marketing spend for Apartments.com. As Andy discussed, we've seen outstanding results from the increased spend levels and expect to continue investing in Apartments.com marketing at a higher level. The net result in the fourth quarter after considering other cost offsets is an incremental spend of approximately $5 million to $6 million for the fourth quarter 2019.

In terms of earnings, we expect full year non-GAAP net income for diluted share of $9.90 to $10.02 based on 36.6 million shares. For the fourth quarter of 2019, we expect non-GAAP net income per diluted share in the range of $2.52 to $2.64 based on 36.7 million shares.

Looking ahead, we believe that 2020 is the right time to increase our investment in marketing to rapidly expand our multifamily business. Although it's too early to provide detailed guidance for 2020, we expect overall adjusted EBITDA margins to decline by approximately 400 basis points in 2020 from the adjusted EBITDA margin outlook for 2019.

In dollar terms, we would need to generate approximately $65 million of incremental profit to recover those 400 basis points. To put that in perspective, in 2019, we expect to add approximately $80 million of adjusted EBITDA. We believe that by increasing our marketing investment in 2020, the results in the form of increased revenue growth will improve our ability to reach our long-term goal of $3 billion in run rate revenue and 40%-plus adjusted EBITDA margins in '20 to '23. I'd like to add additional financial perspective to this investment, which is similar in size to the initial marketing investment we made when we launched Apartments.com back in 2015.

As many of you may recall, after we bought Apartments.com, we placed a big bet by investing $100 million in marketing to go after what we believe at the time was a $2 billion addressable market opportunity. Looking back now, it's hard to argue with the results, which indicate that this bet has clearly paid off. Since we launched Apartments.com, our multifamily revenues have grown from $160 million in 2015 to almost $500 million in 2019, an increase of 310%. During that same period, our annual Apartments' marketing spend has grown from $130 million in 2015 to only $150 million in 2019. That's an increase of only 15% in total over 4 years. So revenue has grown 20x faster than the marketing spend. I think that's pretty good leverage, although some might argue that we've actually underinvested in marketing as we've grown this business.

This year, as oppose to 2015, we're in a much stronger position to increase marketing spend, both operationally and financially than ever before, which increases our chance for even greater success. Our direct sales force is much larger and continues to deliver record sales levels each year. Our site traffic leads the industry, our data content is massive, and the addressable market opportunity that we see now is $8 billion to $10 billion, which is 4 to 5 times the size it was back in 2015. Also, back in 2015, our marketing costs represented 80% of the multifamily revenue. Now in 2019, they're only 30% of multifamily revenue. With this potential increase in our marketing budget of $100 million, we estimate that marketing would represent approximately 40% to 45% of multifamily revenue in 2020.

CoStar is now big enough and growing fast enough to absorb investments of this size. If our growth continues in 2020 at the same rate as 2019, we could potentially add $200 million in revenue next year, which would be 2x the potential increase in marketing.

To summarize, now is the time to increase our multifamily investment. We believe the market opportunity is bigger and much easier to see than before. We have more assets at our disposal, and more experience to leverage these for success. Investment required is actually much smaller than before relative to our size and scale. And we believe the returns will be bigger and faster than in 2015.

Overall, I believe our strong results and operational improvements have us well positioned for the fourth quarter and beyond. We're happy to have closed the STR deal so quickly, and once again, we want to welcome everybody at STR to the CoStar team.

With that -- that was a mouthful. We'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question from the line of Brett Huff with Stephens.

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Brett Richard Huff, Stephens Inc., Research Division - MD [2]

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Scott, thank you for the sort of thoughts and justifications around the additional ad spend. That's super helpful. Can you just go through those -- go through that one more time for me? And then talk a little bit about where does ad spend go from there. And Andy, you mentioned right after you guys did the first Apartments deal, people were worried about it. I think the worry was that this business in order to grow would require incrementally even more ad spend. Can you just give us your thoughts as you go forward? That 20x return is compelling, but just explain how you guys think about that long term.

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Scott T. Wheeler, CoStar Group, Inc. - CFO [3]

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All right. Okay, Brett. Let me walk through that one more time, so the financial perspectives around this thing. So back when we did the initial investment in marketing in 2015, $100 million, we had a report out that said the marketplace is $2 billion in size. And then as you know, we worked through the large end of that marketplace. We've seen the opportunity in the mid-market. We've seen now the opportunity in the IO large-tail market. And we know that, that estimate has now grown to between $8 billion to $10 billion opportunity. So we think the $100 million to go after $2 billion was a great move. We think the $100 million to go after the next $8 billion is an even better move. So that was one important note.

The other is that, the time when we made that investment, the total company multifamily was not nearly as big or as strong as we are now. So we had $130 million marketing spend, and that was 80% of the revenue. Clearly, we've grown that now to be almost $500 million in revenue and saw an incremental $100 million in spend against that fast-growing business. It's much less a portion of the business, much less of a bigger bet. The other thing I think is important to notice is that, that we've now grown sales force much bigger than it was before and produces a very high level. The site traffic has grown significantly. The amount of data we have, the amount of electronic feeds, all the strength of that site there to leverage into this next size of the market that will make that $100 million even much more effective. So like softening up the beachhead before the troops all go in on the attack.

And then I think when you look at just the ability of the company now when we're growing as rapidly at $1.4 billion in revenue, we had couple of hundred million of revenue in a year at our current growth rates. We've added over $110 million, $115 million in costs this year. So adding investment in costs are just -- they're going to be bigger numbers. They scare people a bit because they're big. But when you look at the relative size of the company, these are the bets we should be making to keep increasing the scale and the growth on the top line. So that's what I'd probably comment on, and let Andy...

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [4]

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Yes. And Brett, you've sort of expressed a concern from the 2014 period where we have to continuously invest -- increases investments in marketing. One of the things that is unique about this industry is we are one of the only aggregators out there investing any material money into the industry. So this is not something where we are doing it in a zero-sum game trying to keep up with some other competitor. What we're doing is we are seeing that when people are aware of our products and services, they're tending to buy them and renew at a high rate. And with an unaided awareness in the 20s to low 30s, there's a lot of people that are not aware of the product, and we want to make more people aware of the products and services so we can sell to more people.

We also perceive as a strategic advantage of investing ahead of the pack. We want to be -- we are confident and believe that we will be turning through a $1 billion revenue mark on Apartments at some point and going beyond there. We want to be investing into that size of company, not into what the industry was doing a couple of years ago. So this is really driven by the fact that we now have much better numbers, metrics, ROI analysis, SEM analysis. We have a good handle of what we can sell and who we can sell it to at what price points. And we just want to go capture the opportunity. It's a relatively small investment compared to what we think the upside game is. And some people think that there's a big opportunity in the apartment sector. That would be one of us. And some people think there's not a big opportunity in the apartment sector. But we believe there's a big one, so we're investing in it. We're not being driven by an escalating tit for tat with a bunch of head-to-head competitors. We're not in a beer business or the car business or the insurance business. We're all alone in a multitrillion dollar asset class. So we're pretty excited about it. We think it's good.

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Operator [5]

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And our question from Andrew Jeffrey with SunTrust.

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Andrew William Jeffrey, SunTrust Robinson Humphrey, Inc., Research Division - Director [6]

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Lots to absorb as usual. One of the things I think you touched on, Andy, in LoopNet is the changing behavior of commercial property owners and managers and more of a focus on online. Wonder if you could provide a little texture around that and why you think we're at a tipping point and what specifically you're doing at LoopNet to capture that opportunity. It may not get as much airtime or attention as the big marketing spend in multifamily, but it sounds like a structural change in the market you're addressing.

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [7]

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Yes, it is. So I've had the good fortune to spend a couple of decades in the industry, and I was there back in a completely offline side, then you see it move into unsophisticated online where there was an era where online marketing commercial real estate meant that you save $0.55 on a stamp when you sent your flyer as a PDF to the brokers in town. But really what's happened is, we could see it clear as day, is you look at the traffic coming into LoopNet. Actually, LoopNet has got 80-some percent share of the folks looking for commercial property coming through. And we, through reverse IPs and through Google Analytics, we can get an idea of who these folks are, and they're pretty much the Fortune 100, they're Walmart, they're Amazon, it's McDonald's, it's all the major tenants, it's the big law firms, just like people are using Internet in everything from dating to buying a house to buying a car and buying insurance. Everything they do, people are looking for commercial real estate. And they should not -- Facebook is a client of ours. It should not surprise anybody that Facebook goes on the Internet to look for commercial space. Duh? Right? But it does surprise the industry because the industry is sort of trying to figure out, is locked into a historical marketing mindset of you can -- you can't market to end users. There's just too many of them. And it's just not possible on traditional methods to do it. But the whole digital folks searching out on the Internet rather than you going out and trying to market to them, they come to you, and we're producing the tools where the owners can be visible when they come looking for them.

So I'm very bullish on it. I think it is just an identifiable mathematical certainty that it's occurring. But -- and so we're going to push that and we're going to create awareness with folks how it's happening. And I think it's a pretty interesting opportunity because the broker to broker model is pretty good at the 30,000-foot, 50,000-foot size, but it doesn't work so well when you get below 10,000 feet, and that's where the majority of transactions are. So we're going to push on it. We're going to see -- I believe we'll see success in it, and I'm pretty excited by it. But it doesn't happen overnight. We're rebuilding LoopNet. We can see it. When you go look at the site, you can look at some office buildings for lease in certain cities. You'll see that we're no longer presenting the data, like just simply a Craigslist where you're just presenting raw data. We're now paying attention to how the buildings are branded online and the image they present, and the image of the architect, the image of the owner, the image of the brokers. And so we're not just presenting them. We're controlling the kind of frequency they get by controlling where they sort, the size of the placard. We're controlling the branding, the reach, and so we're -- I think we're producing what will be the most powerful marketing tools the industry has ever seen, and I think that's going to be exciting revenue opportunity. And it's pretty much what I think about, about half the day.

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Operator [8]

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We'll go to Bill Warmington with Wells Fargo.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [9]

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So congratulations on closing the STR deal.

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [10]

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Thank you very much, Bill.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [11]

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So the question I have for you is on LoopNet. Maybe you could talk a little bit about the pricing as it's being applied to the real estate brokers and then the pricing as it applies to the owners. And you gave the -- an update on the TAM for multifamily at $8 billion to $10 billion. I was hoping we could get an update on LoopNet TAM as well?

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [12]

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So yes. So the -- again, the way LoopNet was historically marketed, it was geared to brokers just because LoopNet when it was a standalone company, had no research department and need to get content via the broker ads. So they would sell buckets of ads to brokers at super low prices. Brokers have a relatively small economic interest in the transactions. They -- typically, the LoopNet ads were purchased by a broker who was pulling 1.5% of the economics themselves. And unlike an owner, the actual price achieved in a sale or a lease transaction isn't nearly as leveraged for the broker as it is for the owner. So brokers have small budgets. Remember when we first picked up LoopNet, probably the average ad price was $6 a building. We are now seeing owners who have 95% of deal economics and who are willing to pay the sort to the top, have walked -- videos that walked through the building, willing to pay for drone videos, willing to pay for larger placards. Those folks are willing to pay price points in the 5,000, 6,000. Remember, when we were selling ads to owners in print, we were up at 12,000 up to 50,000 a building. So we're just -- we're migrating. And it's not something we're doing in conflict with the brokers. The brokers like what we're doing because the brokers get promoted since they're the ones representing these buildings. So the owners are paying to promote their building, get broader reach for the building and frequency and exposure and branding. And that also carries -- that lifts the brokers too. So it's sort of fun when you could be raising prices by shifting to a different segment with a different value proposition for what you're producing and not alienating anybody. So that's what we're doing.

In terms of the TAM. We haven't really recalculated that, but we're at a -- we're under $200 million now on that. We were roughly about $160 million, and the last calc we did on this was between $2 billion and $2.5 billion was top of the envelope version. So we haven't updated that lately. But as we get further into the selling and we see the take rates and the full sales force behind the products that we launch over this next few months, we'll probably be able to update that as we get the mid-part of next year. And that's just looking at the marketing side of it. There's -- there are a number of things we perceive the industry would find valuable, like reducing their workload in sub 2,000-foot leases. So we're comfortable that it's a pretty big TAM, and that we have a lead on it.

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Operator [13]

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And we have a question from George Tong with Goldman Sachs.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [14]

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Scott, you're planning to increase your Apartments.com marketing spend by $100 million in 2020, which amounts to about 600 basis points of margin headwind. You mentioned earlier that you expect margins to decline by about 400 basis points next year. So can you discuss where you expect positive margin offsets to come from, whether it's from productivity gains or cost-cutting elsewhere in the business?

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [15]

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Yes. There's a certain amount, George, that we'll spend each year outside of marketing that is natural to the business. Hence, we've added this year salary increases, those things. They'll go on into next year, but they won't go as fast as these increases in marketing. So our forecast now looks at around a 36% margin at the midpoint for 2019. So if you take into account extra $100 million in marketing, and then the rest of those costs will, say, personnel costs and related, won't grow nearly as fast. And so that will provide a bit of an offset. So in the end of the day, we'd expect to have about that 400 basis point drop off the 36 as a rough guide. Now obviously, they'll be some variety around that when we get into specific planning and we'll share that in February. But that's really where we are. We don't see that there needs to be a bunch of cost cuts out there. It's more of -- it's managing after we've done a nice bit of investing this year, our cost base into next year.

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Operator [16]

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Our next question will be from Pete Christiansen with Citi.

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Peter Corwin Christiansen, Citigroup Inc, Research Division - VP and Analyst [17]

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Andy, how can you -- it's obviously a huge step up in marketing spend here, makes sense to lean in at this time. But how can you ensure you get the right efficiency when you're trying to target the IO, the independent owner category versus the broader category? How do you ensure that you get that efficiency? What's the strategy...

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [18]

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That's a really good question, and that is right on target. It's something I think a lot about. And I sort of have a simple answer, which is we're not targeting the IO strategy. We are -- we can look -- we're targeting general awareness. We're targeting making sure that we're capturing increasing percentage in share of the renters hitting Internet regardless whether they go to institutional property or to a low-end property. That creates value and it's hard to -- and it's really not that easy to mess up on that. We have an experienced strong team on handling our SEM on Apartments. We have a good sense of what the good keywords are, good neighborhoods and the like. So that one is a pretty safe investment. That's driving demand to our clients.

Secondarily, we are -- we've broken open on this middle market opportunity. So we have gotten great penetration of the larger-sized properties, really good institution at the 100-unit plus to 100 -- 200-unit plus, but we are selling 10,000-plus ads in an area that folks never really knew existed, which is the 5-unit to 100-unit community. So we are just trying to create general awareness for the person that's got a 30-unit apartment building and softening the road for the hundreds of folks we got in the Apartment sales force selling exactly the same thing we've been selling successfully. So it's just creating awareness in the same way for the same folks.

Now as a derivative of that, it has a side benefit of supporting our IO effort because as they become aware of the site, you see that pickup rate where someone puts an apartment onto Apartments.com for lease. They select the renter tools. At this early stage, we're seeing 36% opt-in. So just awareness, general awareness of the site will support the IO initiative. And when we run focus groups, we're getting positive feedback from both the renter and the small owner on what we're offering. We're getting extremely positive feedback from the renter. And so our primary concern is just to make sure that we have a large pool of owners opting into the tools so the renters can take advantage of them. So we're thinking a lot about it. A lot of it is very basic blocking and tackling, blocking and tackling with low risk and then what we're doing is we're fine-tuning the messaging, creating awareness amongst the 300,000 folks with apartment buildings that we haven't sold to and we hope to sell to over the next couple of years. It's a lot of money.

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Operator [19]

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And we'll go next to Ryan Tomasello with KBW.

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Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [20]

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The revenue profile of the business has obviously evolved a lot over the past few years. And it seems like that will definitely continue to be the case as Apartments.com's reach expands, the prospect for the LoopNet owner initiative seems strong, and of course, the push into hospitality with STR. So Andy, I was hoping you could provide us with your updated thoughts on the resiliency of the business model through a downturn as these new businesses grow and how your efforts to manage the revenue quality of the business are perhaps governing your decisions with respect to new investments across the CoStar platform?

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [21]

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Sure. So I mean it's an important question. We are obviously in a very mature cycle. I went through the market economics for CRE right now. And then when you say they can't get better, they get better, and then they get better. So we're not seeing any weakness in the CRE industry, however, just common sense says that we're not at the end of cycles. So we -- one of the things I do like is that if you look at the CoStar information revenue stream, it is -- a lot of that revenue is now coming from banks and major owners. And when you go into a cycle, banks step up. They're buying typically. They don't reduce it. So that is a stabilizing influence. We are -- we continue, having gone through 2008, we continue to discourage salespeople putting a lot of energy into plant watering companies and moving companies and other companies that evaporate in the cycle. And we put effort into major owners, banks, investors who tend to have more demand in the cycle.

Now we operated Showcase and we can observe LoopNet in a cycle. And there's a little bit of countercyclicality there where, when you get a $150 million building that loses a tenant, you are willing to spend thousands a month to try to replace that vacancy. And what we hear from people who've operated the apartment business through cycles is that, this is actually the worst cycle to be in, right? These are so low. And when they can increase, people's budgets go up for marketing apartments. That makes sense. You do in a cycle get complete bankruptcies, but then that's quickly followed by someone picking up the asset with an unlimited marketing budget, which is a wonderful thing to see. The STR revenue, we believe, is very resilient. The renewal rates there are shockingly high. So we think there's some resilience there. And it's a basic operating metric being used by the hotels between their -- from their sales manager and general manager to the flag, to the brand, to the investors. It's something that is a utility, and it's not something that they have the optionality to shut off in a down cycle, even if -- unless they just simply don't exist anymore. So we're -- we've done well in past cycles. We don't -- I think we dropped -- CoStar sales dropped 3% in '08, which is remarkable given the scope of it. And I think we're pretty diversified and pretty resilient when the next one comes. And there's the offsetting thought, which is when you go into a cycle, it's a wonderful time to buy really good companies at a big discount, which we always look forward to.

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Operator [22]

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We'll go next to Mayank Tandon with Needham & Company.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [23]

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I know you gave the margin guidance, but you could at least qualitatively talk about the revenue outlook for next year, just in the context of should we expect the growth to accelerate given the investments? Or will that be more of a 2021 scenario? And then should we look at the '19 growth rates across the different product lines and maybe a baseline for 2020?

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Scott T. Wheeler, CoStar Group, Inc. - CFO [24]

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Yes. Thanks, Mayank. It's always a tricky spot and we're in the third quarter and we don't have our specific guidance ready or forecast or budget prepared for 2020. I alluded in my comments to continuing growth next year like we've seen this year, which certainly what we've been planning for and investing for. And we expect, certainly with the increased investments in marketing, to help underpin that. What we more looked out was we gave that 5-year outlook previously. And obviously when you make a new marketing investment, you want to be sure that the business one can absorb it, make it invested effectively and then the outcomes of that will get us more assurance that we'll hit those goals. And I think as we work through that exercise, you could see just by the scale of the business, we're now -- or you can invest $100 million, and you may take a bit of a margin drag on that. But with the size and the speed of our growth, you could recover that margin drag within a year and then go back on top of it quickly in the second year out. Now these are all financial models. They're not plans or budgets yet. So I don't want to get out ahead of ourselves on what that means. But we certainly expect that these investments will continue the growth rates where we are, and we want them to move us forward into the mid and later part of next year and really see the benefits of them into 2021. And so we have to invest now to get that to happen. Hopefully, that helps give you some direction on how we think about it.

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Operator [25]

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Our next question from Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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On the marketing, Andy, you've said a number of times that this actually is the tougher time of the multifamily cycle where occupancy rates are so high, vacancies are so low. So is the incremental investment more tied to just where you think the competitive position is, so you can just take a disproportionate amount of market share because of the healthier competitors, and it's not about the cycle? Or is it in preparation for if vacancy rates rise in 2020 not only the competitive position, but maybe you get a little bit of a tailwind from the cycle as well?

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [27]

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So it's a -- the primary driver is not an upcoming sense of a cycle. Though that is true, you'd want to have greater awareness and broader share. It's more the first thing you said, which is it's an open field. There is a clear massive transition from offline to online for the apartment industry. We're the leader. And each time we gain more information about what the market looks like, we think it's bigger than we anticipated, and we want to -- you used the word get disproportionate share, we don't believe in the word disproportionate share. We believe in the word a lot of share, and nothing's disproportionate. We just want to get a lot of share. And we just think it's the -- relatively speaking, it is a period or a time in the evolution of the industry where you can buy it at the cheapest price you can possibly buy it just because no one's bidding for it really aggressively, no one's fighting for it really aggressively. We're sort of alone in this space right now. Or we're not alone in the space right now, but people don't seem to be investing in it, even though there are a lot of players out there.

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Operator [28]

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We have a question from Stephen Sheldon with William Blair.

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Joshua Kapler Lamers, William Blair & Company L.L.C., Research Division - Associate [29]

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It's actually Josh on for Stephen. Just want to get your quick thoughts on the delayed time line of ASC 842 and how it might impact Real Estate Manager results for the rest of the year. And then is there anything else that you guys are watching that could act as a headwind or tailwind to the adoption of that product over the near term?

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Scott T. Wheeler, CoStar Group, Inc. - CFO [30]

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Yes. Sure. The delay of the adoption certainly gives you a little bit of a trough now as people may back off a bit. We think that will pick back up next year when more of the requirements come in. The effect of that now is really losing that implementation revenue that the onetime stuff is going backwards. But it's nice to see the subscription piece still growing over 40%. So we expect that will all moderate out into the 15% to 20% growth range over time. And then it's really the future growth for that business will be less dependent on the accounting teams and what they do and more around how we integrate it with CoStar, and we provide more services and tools for their clients to use the rest of CoStar in managing their real estate portfolios. And that should fuel the growth of Real Estate Manager much longer and more effectively than the near-term effects in the accounting teams.

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Richard Simonelli, CoStar Group, Inc. - VP of IR & Public Relations [31]

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Great. With that, I believe we have no more questions. And thank you very much for joining us for the third quarter earnings call, and we look forward to updating you on our progress at the year-end...

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Scott T. Wheeler, CoStar Group, Inc. - CFO [32]

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Year-end call in February.

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Richard Simonelli, CoStar Group, Inc. - VP of IR & Public Relations [33]

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It's a big thing. It's exciting.

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Scott T. Wheeler, CoStar Group, Inc. - CFO [34]

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Yeah.

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Andrew C. Florance, CoStar Group, Inc. - Co-Founder, CEO, President & Director [35]

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Happy holidays, everyone.

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Richard Simonelli, CoStar Group, Inc. - VP of IR & Public Relations [36]

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Thank you, everyone, for joining us. And we won't see you until you're through Thanksgiving and the holidays, December holidays, Christmas, New Year's and everything else. But we'll see you soon.

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Operator [37]

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Thank you. Ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. And you may now disconnect. Thank you.