A second major investor in CoStar Group has now criticized the attention and resources being devoted to Homes.com, urging the company to change course.
New York City-based hedge fund DE Shaw & Co. released a public letter Wednesday to CoStar’s board of directors about its “refusal to address the reckless expenditure of shareholder capital and the company’s significant and long-standing underperformance.”
The letter, written by directors Edwin Jager and Michael O’Mary, was first reported by Real estate newssaid the company’s shareholders were “severely disappointed” by the continued “disproportionate” expenditure of resources on Homes.com, despite its unprofitability.
A CoStar spokesperson characterized DE Shaw & Co.’s response. as “insisting” on Third Point’s “misguided” attempt to drop Homes.com, “despite its critical integral strategic importance to long-term shareholder value.” The investor letter criticizing the company published last week was written by Third Point founder Daniel Loeb.
“Over the past month, management personally met with more than 300 shareholders who expressed their enthusiasm for our clear focus on accelerating our EBITDA growth and the exceptional potential within our new Homes.com AI platform,” said a statement from the CoStar Group spokesperson. “There is strong shareholder alignment and unanimous support from the Board of Directors for a strategy that includes Homes.com to create sustainable long-term shareholder value.”
The letter also noted that as a result, every shareholder who purchased CoStar stock in the past five years has lost money on their investment. Likewise, total shareholder returns have underperformed compared to CoStar’s self-selected peers over the past decade, the letter said. The company’s absolute share price has also fallen for five years in a row.
Overall, the letter criticized a general deference to CEO Andy Florance and a lack of willingness to consider alternative strategies when it comes to allocating the company’s capital.
But first and foremost, the disgruntled investors took issue with CoStar’s push to invest in “money-losing” Homes.com, which CoStar will have spent more than $3 billion on by the end of 2026, while simultaneously diverting resources from its core business.
Meanwhile, Homes.com has generated just $80 million in annual revenue and more than $2 billion in cumulative losses — “a far cry from” the $700 million to $1 billion in revenue and profits that CoStar initially projected the portal would generate by 2027.
Investors also criticized Homes.com’s delayed path to profitability, which CoStar is now not expected to reach until 2030, several years later than originally expected.
“[T]The company points to the returns on its past investments and claims that it has ‘never failed before’ and therefore ‘will not fail now,'” the letter said. “But telling shareholders, ‘just trust us,’ is a poor substitute for a disciplined capital allocation plan that can be expected to generate healthy returns, especially given management’s apparent inability to accurately project the Homes.com business.”
D. E. Shaw & Co. also said in its letter that the company recently met with its board of directors to discuss steps it believes could be helpful in strengthening the company’s capital discipline and rebuilding shareholder confidence, including “exiting, spinning off, divesting or dramatically reducing expenses” on Homes.com to break even by 2027; adding new independent directors to the board of directors; and separating Homes.com with new leadership and greater oversight of the board of directors.
However, the investors said the board expressed a “disturbing disregard” for the decline in value shareholders have endured over the past year and was dismissive of their concerns.
The board also denied DE Shaw & Co. only to meet without Florance present when requested so that they could provide honest feedback on the company’s leadership, which in the eyes of the investors demonstrated that the board directors are “far too deferential to Mr. Florance and unable to effectively supervise or hold him accountable.”
The letter also criticized the annual cash and stock awards paid to Florance even as the company’s stock price has suffered, allowing him to earn approximately $130 million in compensation to become one of the highest-paid CEOs in the S&P 500. Similarly, the investors pointed to Florance’s use of multiple private jets for personal travel, which they said was more than three times that of executives at comparable companies.
Finally, DE Shaw & Co. called for “urgent” change for CoStar, and wondered why, if Florance believed so much in Homes.com, he hadn’t increased his holdings of CoStar stock, “instead of leaving other shareholders to carry the burden.” Florance has sold about $27 million in net shares since November 2022, when the company launched Homes.com.
Email Lillian Dickerson
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