New York City-based hedge fund DE Shaw & Co. on Wednesday criticized its board’s “reckless” spending on the portal while continuing to postpone its profitability goals. Questions have also been raised about CEO Andy Florance’s large cash and stock incentive awards.
CoStar Group’s second major investor is now criticizing the attention and resources being spent on Homes.com and urging the company to change direction.
New York City-based hedge fund DE Shaw & Co. on Wednesday released an open letter to CoStar’s board of directors regarding the company’s “reckless expenditure of stockholders’ capital and refusal to address the company’s long-standing and significant underperformance.”
The letter, first reported by Real Estate News, was written by managing directors Edwin Jaeger and Michael O’Malley and said the company’s shareholders were “deeply disappointed” that the company continued to spend a “disproportionate” amount of resources on Homes.com despite its unprofitability.
A KoStar spokesperson characterized DE Shaw & Co.’s response as “clinging on” to Third Point’s “misguided” efforts to eliminate Homes.com “despite its significant and essential strategic importance to long-term shareholder value.” The investor letter criticizing the company released last week was written by Third Point founder Daniel Loeb.
“Last month, management met directly with more than 300 shareholders who expressed enthusiasm for accelerating EBITDA growth and a clear focus on the extraordinary potential of the new Homes.com AI platform,” a CoStar Group spokesperson said in a statement. “We demonstrate strong shareholder alignment with the Board’s unanimous support for our strategy, including Homes.com, to create lasting long-term shareholder value.”
The letter also noted that as a result, all shareholders who purchased Kostar shares in the past five years suffered losses on their investments. Similarly, total shareholder return has underperformed CoStar’s self-selected industry peers over the past 10 years, the letter said. The company’s absolute stock price has also fallen for five consecutive years.
The letter generally criticized the general deference to CEO Andy Florance and the lack of willingness to consider alternative strategies for the company’s capital allocation.
But disgruntled investors primarily took issue with Coster’s insistence on investing more than $3 billion in “loss-making” Homes.com by the end of 2026, while diverting resources from its core business.
Homes.com, on the other hand, has annual revenue of just $80 million and cumulative losses of more than $2 billion, a “far cry” from CoStar’s original projections of $700 million to $1 billion in revenue and profit by 2027.
Investors also took issue with Homes.com’s slow path to profitability, with CoStar not expecting to reach profitability until 2030, several years later than originally expected.
“[T]”The company points to the returns on past investments and claims that it has ‘never failed’ and will never fail. However, telling shareholders to ‘trust us’ is a poor substitute for a disciplined capital allocation plan that is expected to generate healthy returns, especially given management’s seeming inability to accurately predict the Homes.com business,” the letter states.
DE Shaw & Co. said in the letter that the company recently met with its board of directors and shared actions it believes will help strengthen the company’s capital discipline and rebuild shareholder confidence, including “exiting, spinning off, selling, or significantly reducing spending” on Homes.com, which is set to break even by 2027. adding new independent directors to the board; and separating Homes.com with new leadership and board oversight.
But investors said the board dismissed their concerns, expressing a “troubling disregard” for the decline in value that shareholders have had to endure over the past year.
The board also declined to meet with DE Shaw & Company alone without Mr. Florence present when requested, so that the board could provide honest feedback about the company’s leadership. In the eyes of investors, this showed the board was “too deferential to Mr. Florance to provide effective oversight or accountability.”
The letter also criticized the annual cash and stock incentive award paid to Mr. Florance, which allowed him to earn about $130 million, making him one of the highest-paid CEOs in the S&P 500, despite the company’s depressed stock price. Investors similarly criticized Mr. Florence for using multiple private jets for personal travel, more than three times as often as executives at similar companies.
Finally, DE Shaw & Co. urged Costar to make “urgent” changes and wondered if Mr Florance had so much faith in Homes.com why he didn’t increase his holdings in Costar “instead of letting other shareholders carry the bag”. Florence has sold approximately $27 million in stock since launching Homes.com in November 2022.
Email Lillian Dickerson
