Notorious R.O.B.

Am I being dramatic enough here?

Thanks to a comment on my About page, I thought to look into the dance going on between CoStar and Reis. It’s fascinating stuff, actually. If the story weren’t being told through boring press releases, SEC filings, and dated news clippings, it might make for a great opera, full of passion and melodrama. As a matter of fact, I wrote a little story — it’s at the end of this monster post.

At least, I think it would, based on what little I can tell as a totally uninformed outsider who has not been following the story. But hey, when did being uninformed ever stop your faithful scribe?

The latest chapter in the tale is that CoStar has reiterated its offer to buy Reis for $8.75 a share earlier today (the press release is dated 2:38PM on Wed, August 13, 2008), for the total price of $96.1m. An important point here is that CoStar made the exact same offer back in June, and was rebuffed. A mere ninety minutes later, Reis rejected CoStar’s offer for the second time (the press release is dated 4:01PM, Wed, August 13, 2008), saying:

In the view of the Board, the price offered in the CoStar proposal is inadequate. The price is below the long-term value REIS could realize for its stockholders by the pursuit of its business as an independent entity and the continued disposition of its real estate assets, or by a sale of the Company.

Mr. Lloyd Lynford, CEO of REIS, stated: “It is extraordinarily disappointing that, after our Board unequivocally rejected CoStar’s $8.75 proposal, CoStar has seen fit to come back with exactly the same proposal in a hostile fashion. To judge the value of our company by the daily trading prices of its relatively illiquid common stock makes no sense. We trust that our clear second rejection of CoStar’s offer will prompt CoStar to withdraw it. Our Board will, of course, review carefully any serious proposal from any responsible third party.”

I believe words like “extraordinarily disappointing” and “unequivocally” and “makes no sense” are corporate chieftainspeak for “Fuck off, you loser!” Reading between the lines, you can almost feel the heat.

Initially, I was really puzzled. In normal course of business, getting a 97% premium over the last stock price (which hasn’t moved at all until the offer came in) is cause for celebration and a rush to the alter lest the groom come to his senses. I mean, imagine that your house was valued at $300,000 and some dude rolls up and goes, “Hey, I’ll give ya $600,000″. That’s normally a “Honey, start packing — we’re moving!” type of thing. But Reis was like, Talk to the hand:

The price is below the long-term value REIS could realize for its stockholders by the pursuit of its business as an independent entity and the continued disposition of its real estate assets, or by a sale of the Company.

Okay, so like, let’s go with that.

I spent the last 30 minutes or so of my life looking at stock charts and old new reports and such. Frankly, I hadn’t known that Reis was a public company at all. Back when I was still in commercial real estate, Reis was privately held, or so I remembered. Read the rest of this entry »

Thanks to Pat Kitano, I saw the cute YouTube ad that San Francisco based Rofo.com produced.  Pat already discussed the video itself, and how it shows that smart, creative people can product TV-quality advertising on a fraction of the budget.  I agree with him on all points there.

All I want to do is wish the boys and girls at Rofo all the luck in the world.  They’ll need it.  And then some.  And quite possibly some sort of deus ex machina on top of that.  They are swimming in a pond that bears only the most superficial resemblance to residential real estate, and it’s a pond that is populated by a couple of  great whites.

Commercial real estate is definitely a space that is in dire need of technological innovation.  Rather, the technology is fine; it’s the business processes leveraging technology that is in need of an update.  The profusion of MLS systems and lack of listings standards in residential real estate create problems… but compared to commercial, the residential real estate industry looks like futurama.  Off-market “pocket listings” are not only the norm, but actively encouraged.  The industry feeling is that any listing that is on the Web “has hair on it” — i.e., something’s really wrong with it.  And with the overwhelming dominance of Loopnet and CoStar, it’s unclear that a web play based really on nothing more than a friendlier user interface has any room for survival.

I wish them the best, in case Rofo ends up being the catalyst that CRE needs.  But I can’t help but feel as if I’m applauding someone in a drag car heading towards a large brick wall.

-rsh

This is big news that portends intensely amusing times ahead:

A National Association of Realtors tech incubator company has acquired a commercial real estate data exchange company and plans to use its technology to launch a national commercial real estate listing and transaction platform in May.

Second Century Ventures LLC, a private equity fund established by the Realtors trade group supported by a membership dues increase this year, acquired Gig Harbor, Wash.-based ePropertyData.

EPropertyData operates CommercialMLS.com for the 4,500-member Commercial Brokers Association in Seattle and CommercialGateway.com for the 2,000-member commercial division of the Houston Association of Realtors.

…

Gaylord said the platform will offer NAR’s commercial members “national exposure for all their sale and lease listings” and serve as a resource for national property searches.

Meanwhile, an advisory group formed by NAR leaders is studying the feasibility of creating a massive property information database, dubbed the “Gateway” — featuring detailed information for all types of properties — that could be governed by brokers, owned by NAR and accessible to varying degrees by consumers, real estate professionals and others.

Oh. Wow.

I don’t know how to feel.

On the one hand, anything that could get the Galactic Empire and the Keystone Kops to focus on serving their customers instead of suing each other is a real positive. On the other hand, is NAR the organization to challenge either behemoth — nevermind both of them — in the extraordinarily tricky commercial real estate space?

Even if NAR is the right group to bring reform to CRE, is ePropertyData the vehicle to use?

I mean… look at this:

The value of the ePropertyData acquisition was not disclosed. According to B121.com, a business information Web site, ePropertyData has fewer than five employees and annual sales of $500,000 to $1 million.

Um, okay…. I know a deli in my town that has more employees and has more sales.

In comparison (well, more contrast), CoStar’s market cap is $774M, and in 2007, it did $192.8M in revenues. Loopnet’s market cap is $435.7M and its 2007 revenues were $70.7M.

NAR really ought to have thought this one through more, methinks. All that CoStar needs to do here to crush this nascent problem is to go to the five guys who work at ePropertyData and offer them $150K a year jobs working at CoStar. They’d be fools to turn that down. And that’s if CoStar were even remotely worried about ePropertyData instead of more pressing problems, like whether to have the corporate retreat in Las Vegas or in Orlando.

Here’s a tip for NAR: if you were going to buy any small company that has a reasonable shot at competing with the Two Big Boys, you should have bought Catylist. At least Catylist has experience working with some major institutions that are respected in the CRE space, like CCIM. And Dustin Gellman at Catylist is one of the really smart guys in CRE who really gets the web.

But really… you’re the frikkin National Association of Realtors, with a technological marvel of a building that looks like this in Washington DC:

You couldn’t get Google or Microsoft to talk to you about doing something in commercial real estate?

And yet… I can’t help but cheer the efforts of NAR. The online commercial real estate space is desperately in need of an alternative to the really-smart-but-evil guys on the one hand and the bumbling-simpletons on the other hand.

I look forward to seeing the reaction of the commercial real estate industry, as well as CoStar and Loopnet and Xceligent and everyone else in that business.

-rsh

With everyone focusing on the gloomy residential real estate market, I thought it might be interesting to take a look at what’s happening over on the Dark Side of the Force, aka, commercial real estate.

CoStar released their Q4 financial results recently, and boy, are they impressive:

BETHESDA, Md., Feb. 20 /PRNewswire-FirstCall/ — CoStar Group, Inc. (Nasdaq: CSGP – News), the number one provider of information services to the commercial real estate industry, today announced that net income for the year ended December 31, 2007 increased 28.5% to $16.0 million, or $0.82 per diluted share, compared to $12.4 million, or $0.65 per diluted share for 2006. EBITDA (earnings before interest, taxes, deprecation and amortization) for the year ended December 31, 2007 was $34.0 million, an increase of 31.3% compared to EBITDA of $25.9 million in 2006. Revenues for the year ended December 31, 2007 were $192.8 million, an increase of 21.3% over revenues of $158.9 million in 2006.

28.5% increase in profit; 21.3% increase in revenues. Wow. Nice. Congratulations are due to the people at CoStar.

For the sake of comparing apples to apples, here’s CoStar’s archnemesis, Loopnet:

Revenue for the fourth quarter of 2007 was $19.6 million, an increase of 41% from $13.8 million in the fourth quarter of 2006. Net income for the fourth quarter of 2007 was $5.7 million or $0.14 per diluted share, compared to $5.3 million or $0.13 per diluted share in the fourth quarter of 2006. The effective tax rate for the fourth quarter of 2007 was 38.1% compared to 25.8% in the fourth quarter of 2006.

LoopNet’s Adjusted EBITDA (earnings before interest, tax, depreciation, amortization and stock-based compensation) for the fourth quarter of 2007 was $9.4 million, an increase of 40% from $6.7 million in the fourth quarter of 2006. The Company has reported Adjusted EBITDA because management uses it to monitor and assess the Company’s performance and believes it is helpful to investors in understanding the Company’s business.

For the full year, total revenue was $70.7 million, an increase of 46% from $48.4 million in 2006. Net income for the full year of 2007 was $21.1 million or $0.52 per diluted share, compared to $15.5 million or $0.40 per diluted share in 2006. Adjusted EBITDA for the full year of 2007 was $34.0 million, an increase of 46% from $23.2 million in 2006.

$5.7M vs. $5.4M — that’s a 7.5% increase — but as LoopNet points out, Uncle Sam and the People’s Republic of California took a much bigger chunk. So LoopNet points to EBITDA: $34M vs. $23.2M, or 46%. Revenues were up 46% as well.

Again, a great year, and congratulations are due to the boys and girls at LoopNet.

What about some of the other stalwarts? Maybe some non-web companies?

Here’s the clear industry leader, CBRE:

CB Richard Ellis Group, Inc. (NYSE:CBG – News) today reported full year 2007 revenue rose 49.7% to $6.0 billion and earnings per share increased 23.0% to $1.66 per diluted share – both record levels for the Company. Fourth quarter 2007 revenue increased 30.4% to $1.8 billion and diluted earnings per share increased slightly to $0.54 compared to the fourth quarter of 2006. Excluding one-time charges, full year diluted earnings per share was $2.11, an increase of 42.6% from 2006 and fourth quarter 2007 diluted earnings per share was $0.63, representing an increase of 10.5% from the fourth quarter of 2006.

Yowza. 23.0% increase in earnings, and 49.7% increase in revenues.

What about the other major player, Jones Lang & Lasalle?:

Jones Lang LaSalle Incorporated (NYSE: JLL – News), the leading integrated global real estate services and money management firm, today reported record net income of $256 million, or $7.64 per diluted share of common stock, for the year ended December 31, 2007. This represents an increase of 46 percent over the prior year’s net income of $175 million, or $5.24 per share. Revenue for the full year 2007 was $2.7 billion, an increase of 32 percent from the prior year, the result of strong performance in all operating segments. Operating income for 2007 was $342 million compared with $244 million for the prior year, an increase of 40 percent, led by Asia Pacific and EMEA. Included in the firm’s 2007 full-year results was a significant advisory transaction fee earned by the Asia Pacific Hotels business. Included in the firm’s 2006 full-year results was an incentive fee from a single client of $113 million, or $1.01 per share, earned by LaSalle Investment Management. The strengthening of foreign currencies against the U.S. dollar in 2007 contributed $0.07 per share in the fourth quarter and $0.23 per share on a full-year basis.

JLL with 46% increase in earnings, and 32% increase in revenues. Woot!

These firms somehow managed to post these numbers and do this kind of business in a world without MLS, and without a NAR-type of organization that spends millions burnishing the Realtor brand (although, yes, there is a commercial specialty at NAR).

Just something to think about. You don’t know the power of the Dark Side.

-rsh

Looks like the latest CoStar blog post takes the rivalry between CoStar and Loopnet to a new level.  It’s exciting — almost as if we’re in a Presidential Election season.  Oh yeah…. 

Anyhow, CoStar basically pimpslapped Loopnet’s membership claims and alleges false advertising:

If the impressive-sounding number LoopNet claims as its “registered users” is really the cumulative number of times someone ever registered to use their web site over the past decade, why would LoopNet say that it can “immediately expose” listings to 2.5 million people?

We think the answer is clear: LoopNet doesn’t have extensive research facilities. It doesn’t spend millions of dollars on trained researchers to track down listings all over the country the way CoStar does. Which is why CoStar has a higher quality, more comprehensive database, with the information you can’t find anywhere else. 

Granted, the two of them have been going at it for some time now, including various lawsuits enriching various corporate litigators from coast to coast.  And I gather that they’re tussling with each other over who will be the National Commercial MLS when it’s all said and done, since the commercial real estate world doesn’t have domination-by-MLS that the residential side does.

I personally can’t wait to see the response by Loopnet.  It’s going to be an interesting time in the tiny, arcane world of online commercial real estate.

Here’s the thing, however, for those who don’t follow the Inside Baseball stuff about commercial real estate websites.

There is little doubt that CoStar is right.  Loopnet does make silly claims.  2.5 million registered users just doesn’t fly considering the size and scope of the entire commercial real estate market.  Not to mention aging of users, as CoStar brings up.  At the same time, CoStar shows its character with not only the blog post but the lawsuit that inspired it.

CoStar is extremely good at what they do.  Really, they are.  Their technology is very good, and their research capabilities (which CoStar has spent hundreds of millions of dollars developing and maintaining) are second to none.  CoStar singlehandedly changed the way that commercial real estate firms conduct business.  But they’re evil.  If you look into their business practices, you realize that you are seeing the wielding of monopoly power the likes of which you haven’t seen since the pre-Google Microsoft days.  That CoStar looks upon litigation as a good competitive weapon says much about how they compete: to win, and to win in Conan-like ways.  Crush your enemies, see them driven before you, and hear the lamentation of their women.  Not that there’s anything wrong with that, but that sort of competitiveness isn’t going to make you a lot of friends.

Loopnet may not be as evil as CoStar, but they’re incompetent.  This is not the place to go into the details of their incompetence, but suffice to say that they remain in business because (1) how much the industry despises CoStar, and (2) their competitors are even more incompetent than they are.  Going out with a 2.5 million registered users claim when even a cursory examination of the numbers based on public records (as CoStar did) shows that claim to be… how shall we put this… marketing fluff is not the height of competence, especially when you’re locked in a death match struggle with the Death Star CoStar.

Looking at this particular little fight, I feel like I did when (as a Jets fan) the 2007 Patriots played the Dolphins.  Do you root for the evil empire?  Or the utter incompetence of the Fish?  Eeek.

I will point out one thing, however.

CoStar says it plays straight with its subscriber numbers.  Curiously, I haven’t been able to find those numbers.  I’m sure they publish their subscriber numbers somewhere in their voluminous marketing materials, since that is the substance of their lawsuit against Loopnet: false advertising.  I just can’t find them.

But beyond that, the way that CoStar defines ‘subscriber’ isn’t necessarily what one might think when one thinks of the term “Subscriber”.  Subscriber typically implies some sort of voluntary act, coupled with payment, by an individual to a publication.  In CoStar’s case, that ain’t necessarily so.

CoStar agreements tend to be at the enterprise level, not at the individual level.  For example, Cushman & Wakefield has a single agreement with CoStar covering all of its agents (some part of the 11,000 employees it claims worldwide).  Let’s say for the sake of discussion that 5,000 of the 11,000 are actual commercial agents & brokers, with the remainder support staff.  That means that all 5,000 Cushman brokers are ‘subscribers’ to CoStar, under the enterprise agreement — even if they have never used CoStar, never will, and don’t even know how to use the Internet.  As long as you have a listing in your name, or an administrative assistant could conduct a property search in your name, you may be covered under the agreement as a ‘subscriber’.  In fact, word is that CoStar fairly insists on having some pretty stringent definitions to ensure that the maximum number of ‘subscribers’ are covered (since the fees a compay pays to CoStar is closely tied to the number of licenses, aka, subscribers).

Let me give one example I happen to have personal knowledge of.  A firm with 35 brokers wanted CoStar, but only for the 5 brokers who are full-time commercial agents.  The other 30 are what one might call “resumercial” agents who dabble in commercial now and again.  The firm was planning on having an admin conduct property searches for its agents, and putting listings up for agents — a common arrangement.  How many subscribers would you imagine were covered in the agreement between said firm and CoStar?  If you guessed 35, you get a gold star.

And technically, that’s true — because the firm was paying CoStar the fees for having 35 licenses, and each of the 35 agents had his/her individual login and password.  The admin would login under an agent’s login/password to do the work for that agent.  But 35 people in that firm were not looking at CoStar day in and day out.  One person was, with perhaps another five checking the site once in a while.

Nonetheless, one cannot deny that CoStar’s numbers are ‘more straight’ than Loopnet’s.  Which is why CoStar’s pimp hand is so strong.  I can’t wait to see Loopnet’s response, beyond the generic “Allegation is ridiculous” pooh-poohing that isn’t going to convince anyone.

-rsh