Firm: CoStar Group Inc (CSGP)
Enterprise: CoStar Group engages within the provision of on-line actual property marketplaces, data, and analytics within the business and residential property markets. It operates by way of the next segments: CoStar Portfolio, Data Companies Portfolio, Multifamily Portfolio, LoopNet Portfolio and Different Marketplaces Portfolio. The CoStar Portfolio phase consists of two lessons of commerce receivables primarily based on geographical location: North America and Worldwide. The Data Companies Portfolio phase consists of 4 lessons of commerce receivables: CoStar Actual Property Supervisor; Hospitality, North America; Hospitality, Worldwide; and different Data Companies. The Multifamily Portfolio, LoopNet Portfolio and Different Marketplaces Portfolio segments concentrate on one class of commerce receivables. The corporate was based by Andrew Florance and Michael Klein in 1987 and is headquartered in Arlington, Va.
Inventory Market Worth: $26.07B ($61.50 per share)
Possession: 0.71%
Common Price: n/a
Activist Commentary: Third Level is a multi-strategy hedge fund based by Dan Loeb, that may selectively take activist positions. Loeb is without doubt one of the true pioneers within the discipline of shareholder activism and certainly one of a handful of activists who formed what has turn into modern-day shareholder activism. He invented the poison pen letter in a time when it was typically needed. As occasions have modified, he has transitioned from the poison pen to the facility of the argument. Third Level has amicably gotten board illustration at corporations like Baxter and Disney, however the agency won’t hesitate to launch a proxy struggle whether it is being ignored.
What’s occurring
On Jan. 27, Third Level despatched a letter to the CoStar board calling on them to (i) exchange a majority of the board and align administration compensation to whole shareholder return; (ii) take into account strategic alternate options for Properties.com and associated residential actual property (RRE) companies; and (iii) refocus on the core business actual property (CRE) enterprise. Third Level was beforehand certain by standstill restrictions following a settlement for board seats final 12 months, which expired on Jan. 27. The agency now plans to appoint a brand new slate of administrators.
Behind the scenes
CoStar Group (CSGP) is a supplier of on-line actual property marketplaces, data, and analytics within the property market. It manages main manufacturers together with CoStar Suite, LoopNet, Flats.com and Properties.com. Roughly 95% of the corporate’s income is derived from its core business actual property (“CRE”) franchises, which largely consists of CoStar Suite and Flats.com. These companies profit from excessive limitations to entry, robust pricing energy, proprietary information and subscription-based enterprise fashions that drive recurring income and extremely predictable free money circulation. Due to these dynamics, this enterprise has traditionally traded at a premium to its Data Companies friends however is now buying and selling in keeping with them.
This regression within the firm’s valuation largely stems from CoStar’s aggressive funding into the residential actual property (“RRE”) market, Properties.com, which the corporate acquired in Might 2021. From the start, CoStar’s plan to construct a dominant on-line classifieds enterprise within the U.S. RRE trade was deeply flawed. In contrast to its core CoStar Suite and Condo.com companies, Properties.com lacks clear aggressive benefits and significant differentiation and faces intense competitors from well-established friends like Zillow. Nonetheless, over the previous 5 years, CoStar has invested roughly $5 billion in its RRE phase, $3 billion of which was within the U.S. Regardless of this huge funding, the U.S. RRE companies generated solely $60 million of income in 2024 and $80 million in 2025. Furthermore, along with these direct monetary losses, these initiatives have diverted focus from the core CRE enterprise, limiting its development potential.
It was this backdrop that originally prompted Third Level to have interaction with CoStar final 12 months, which in the end resulted in a help settlement between the corporate, D.E. Shaw and Third Level. This settlement included (i) the addition of Christine McCarthy, John Berisford and Rachel Glaser as administrators to the board; (ii) the retirement of Michael Klein, Christopher Nassetta and Laura Kaplan from the board; (iii) the appointment of Louise Sams as unbiased board chair; and (iv) the creation of a capital allocation committee. Whereas these governance modifications seemed to be a significant step in the fitting course, progress has been deeply disappointing. Administration has continued to maneuver ahead with its U.S. RRE initiatives, repeatedly shifting the technique and lacking targets even after that they had been revised. Actually, the RRE enterprise has gotten so unhealthy that in 2025, the corporate minimize Properties.com subscription pricing by over 30% and Properties.com is now anticipated to scale back 2025 adjusted EBITDA by greater than 65%. Furthermore, these losses will not be going away anytime quickly, as CoStar’s new medium-term steering now tasks that Properties.com won’t break even till 2030. Unsurprisingly, these failures proceed to be mirrored within the firm’s share efficiency, which has been underperforming the S&P 500 by over 45 proportion factors because the date of the settlement and over 120 proportion factors over the previous 5 years.
With the standstill interval now expired, it is maybe no shock that Third Level is escalating its engagement, issuing a letter to the CoStar board calling on them to (i) exchange a majority of the board and align administration compensation to whole shareholder return; (ii) take into account strategic alternate options for Properties.com and associated RRE companies; and (iii) refocus on the core CRE enterprise. Whereas the latter two of those initiatives could really feel intuitive given the aforementioned observe report, it prompts the troubling query as to why this has not already been put into movement. The reply to that’s the board’s failure to carry administration accountable. Actually, the corporate has rewarded CEO Andrew Florance. In 2024, he acquired roughly $37 million in whole compensation, putting him within the high 10% of S&P 500 CEO earners regardless of the corporate being within the backside 10% of performers. The board has completed nothing to treatment this going ahead because it has proposed tying solely 25% of his future long-term incentives to whole shareholder return, additional disconnecting his pay from shareholder outcomes and notably regarding for a CEO with de minimis inventory possession. This was completed by the brand new board with three of eight administrators not too long ago appointed by way of the Third Level/D.E. Shaw settlement settlement, which seems to underscore the diploma of management the CEO maintains over the corporate.
Whereas this may increasingly look like a tall process, if Third Level succeeds, the upside potential seems important. The agency factors out that CoStar Suite alone has important untapped pricing energy, with a median promoting value of simply $350 per thirty days, far beneath comparable data providers merchandise. Third Level additionally believes that the corporate has substantial alternatives to develop into adjoining finish markets and develop new agentic merchandise. Total, Third Level believes that the CRE enterprise needs to be able to reaching EBITDA margins above 50% within the medium time period, with additional growth over time provided that friends in the end obtain margins from 60% to 70%. As well as, the corporate’s under-levered steadiness sheet additionally supplies capability for significant share repurchases, creating additional alternatives for shareholder worth creation. Placing all of it collectively, absent the RRE distraction, Third Level believes that the CRE enterprise might compound income at a mid-teens fee and develop earnings energy per share in extra of 20% yearly.
This engagement is an instance of shareholder activism the way in which it must be. Third Level shortly and amicably agreed to a settlement with the corporate to provide it an opportunity to point out Third Level that it might change its methods and begin to flip round its poor efficiency. Had CoStar Group completed that, you wouldn’t be studying this proper now. However the firm did the alternative, leaning into the technique that has been failing it and its shareholders. So, now Third Level is aware of two issues for positive: (i) change is certainly wanted and (ii) three new administrators will not be sufficient to launch the grip that Florance has on the board. We might count on to see Third Level nominate anyplace from three to 6 new administrators. Two of the three administrators (Christine McCarthy and John Berisford) appointed in final 12 months’s settlement have been chosen by Third Level, and we might count on them to not be focused this 12 months. So, assuming they’re on the poll as incumbents, Third Level might get a majority of the board by successful three seats. The choice whether or not to go for greater than three can be made after consulting advisors on technique and doing proxy math, notably within the period of the common poll. There may be an outdoor likelihood that the agency goes for eight if the corporate doesn’t nominate McCarthy and Berisford. We might hope to see a Third Level govt nominated as a result of in conditions like this the place substantial change is required and that change has been met with resistance by a founder/CEO for therefore a few years, it’s useful to have the activist within the room who designed the plan and is most enthusiastic about it. Whereas Third Level doesn’t overtly name for it, it’s exhausting to think about a state of affairs the place the agency wins significant board illustration and Florance stays on as CEO – it doesn’t look like both of them would need that.
Third Level, based by Dan Loeb, is a real pioneer in shareholder activism, however has used it extra sparingly in recent times as dictated by the market atmosphere and obtainable alternatives. He invented the poison pen letter in a time when it was typically needed. As occasions have modified, he has transitioned from the poison pen to the facility of the argument. Nevertheless, on this marketing campaign we see shades of the outdated Dan Loeb – utilizing phrases like “feckless board of administrators” and “CEO and his supine enablers.” We notably loved his analogy of a CEO’s compensation to elementary faculty youngsters who win participation awards for ending final. CoStar Group noticed the brand new, extra amicable Dan Loeb in April when he settled for 3 new administrators. Now, the corporate could have woken up the Dan Loeb of the previous, who has been in a type of hibernation for years. We won’t know for positive till March 13 when the nomination window opens.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.
