An investor has re-thrown down the gauntlet, challenging Costar Group management over its residential real estate foray via Homes.com.

In response, Costar compared Third Point to a disappointed child playing a board game who wants to throw its pieces off of the board.

It was last year when alternative asset manager Third Point approached Costar's management, expressing concern over what it termed weak board oversight, misalignment of management incentives and disastrous capital allocation into an ill-conceived strategy regarding residential real estate classifieds through the Homes.com portal, Third Point said in a Jan. 27 letter.

The letter took particular aim at Costar CEO Andy Florance. In its letter, Third Point said Florance received nearly $37 million in total compensation in 2024, despite what it said were abysmal results. For the year, the company earned $139 million, compared with $375 million in 2023.

"Like an elementary school child who wins a prize even for finishing last, Mr. Florance's bonuses are perhaps the costliest 'Participation Award' our firm has witnessed," Third Point said about his pay packages.

After the initial discussions, Costar entered into a standstill agreement with Third Point and D.E. Shaw. It included the addition of two independent directors and the formation of a capital allocation committee.

Claiming Third Point was unhappy with the board it helped pick, Costar in its response declared "their story is completely detached from reality. Following a review process that Third Point and D.E. Shaw suggested with participation from their Board nominees, the Board unanimously recommended a plan involving accelerated profitability for Homes.com, additional investments in our core platforms, incremental capital return, stockholder-aligned executive compensation, and greater investor transparency."

Why Third Point is acting now

Third Point had a different take over what has happened since the standstill was entered into.

"During the past year, we have had numerous conversations with management and, in December, sent a detailed (as-yet unanswered) letter to the board expressing continued dismay at the lack of progress," Third Point said. "In fact, so little progress has been made that we are convinced the Company never intended to do any of the things we discussed when we entered into the agreement."

The standstill agreement expired at midnight on Jan. 27, and Third Point declared it will propose a slate of "highly experienced new directors" to take on Florance's "empire building."

Costar should focus on its commercial real estate business, with Third Point calling it best in class. On the other hand, the board should consider strategic alternatives (sale or shut down) for Homes.com and other residential businesses.

Residential real estate helps our mission, Costar claims

In response, Costar said providing the residential real estate data is needed to provide comprehensive digital solutions to the world's markets.

"Third Point's demand that we abandon Homes.com reflects their complete misunderstanding of our business, industry, and the strong progress we are making," Costar said. "Third Point would have you believe that Homes.com could be jettisoned or shut down with no negative impact on our business or competitive positioning."

Over the last 15 years, Costar's acquired more than 40 businesses for approximately $7.3 billion, generating returns of between 17% and 39%, it claimed. Its deals have included the purchase of Loopnet and Roostify.

But it was not successful in a hostile bid in 2021 to purchase Corelogic (now Cotality). The attempt ended after Corelogic asked Costar to raise the cash portion of its offer following a decline in the latter's stock price. On June 28, 2021, Costar executed a 10-for-1 stock split.

On March 5, 2021, the day after the offer was withdrawn, Costar closed at $79.87 on a post-split calculation, Yahoo Finance said.

The stock closed at $65.81 per share on Jan. 26, before the Third Point letter came out. The next day, the closing price was $66.22, after opening over $3 per share higher. Wednesday, it opened at $66.97.

How Compass/Anywhere impacts Homes.com

In a Jan. 11 Keefe, Bruyette & Woods report on the competitive effects of the just-completed Compass acquisition of Anywhere, Ryan Tomasello noted Zillow could see a threat from Compass' off-multiple listing service marketing strategy and but that Homes.com, by comparison, would fare better.

"While Costar could face similar threats, we believe Homes.com's listing agent-focused model aligns with Compass's philosophy and therefore makes Costar relatively better positioned," Tomasello wrote. "All-else-equal, portals whose models rely on diverting leads to buyer agents (Zillow, Rocket/Redfin) may face more friction than portals who keep leads with listing agents (Costar/Homes.com)."

Costar closed at $58.49 on Jan. 9, the last trading day before this report came out.