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New York City-based hedge fund D. E. Shaw & Co. on Wednesday criticized the board’s “reckless” spending on the portal while continuing to push back its timeline for profitability. It also called into question CEO Andy Florance’s generous cash and equity incentive awards.

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A second major investor in CoStar Group has now criticized the attention and resources being spent on Homes.com, urging the company to change course.

New York City-based hedge fund D. E. Shaw & Co. released a public letter on Wednesday to CoStar’s board of directors regarding its “refusal to address the Company’s reckless spending of shareholder capital and significant and longstanding underperformance.”

Penned by managing directors Edwin Jager and Michael O’Mary, the letter, first reported by Real Estate News, said shareholders at the firm were “gravely disappointed” by the company’s continued “disproportionate” expenditure of resources on Homes.com, despite its unprofitability.

A spokesperson for CoStar characterized D. E. Shaw & Co.’s response as “latching on” to Third Point’s “misguided” effort to drop Homes.com, “despite its vital integral strategic importance to long-term shareholder value.” The investor letter published last week criticizing the company was penned by Third Point founder Daniel Loeb.

“Over the past month, management has met in person with more than 300 shareholders who expressed enthusiasm for our clear focus on accelerating our EBITDA growth and the exceptional potential within our new Homes.com AI platform,” a statement from the CoStar Group spokesperson said. “There is strong shareholder alignment with the Board’s unanimous support for a strategy that includes Homes.com for creating durable 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 10 years, the letter said. The company’s absolute stock price has also declined five years in a row.

By and large, 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, primarily, the disgruntled investors took issue with CoStar’s insistence of investing in the “money-losing” Homes.com, which, by the end of 2026, CoStar will have spent more than $3 billion on, all while diverting resources away from its core business.

Meanwhile, Homes.com has generated only $80 million in annual revenue and over $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 earn by 2027.

Investors also took issue with Homes.com’s delayed path to profitability, which CoStar now does not to expect to achieve until 2030, several years later than initially expected.

“[T]he Company points to the returns on its past investments, claiming that it has ‘never failed’ before and, therefore, ‘won’t now,'” the letter states. “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 seeming inability to accurately project the Homes.com business.”

D. E. Shaw & Co. also said in its letter that the company recently met with the board to share steps it believes could be helpful in strengthening the company’s capital discipline and rebuilding shareholder trust, including “exiting, spinning off, divesting or dramatically reducing spending” on Homes.com to break even by 2027; adding new independent directors to the board; and separating Homes.com with new leadership and increased board oversight.

However, the investors said the board expressed a “troubling disregard” for the drop in value shareholders have had to withstand in the past year, and was dismissive of their concerns.

The board also refused to meet with D. E. Shaw & Co. alone without Florance present when requested, so they could give honest feedback on the company’s leadership, which, in the investors’ eyes, showed that the board directors “are far too deferential to Mr. Florance and incapable of providing effective oversight or holding him accountable.”

The letter also criticized the annual cash and equity incentive awards that have been paid to Florance, even as the company’s stock price has suffered, allowing him to earn about $130 million in compensation to become one of the highest-paid CEOs in the S&P 500. Similarly, the investors called out Florance’s use of multiple private jets for personal travel, which they said was more than three times the rate of executives at similar companies.

In closing, D. E. Shaw & Co. urged “urgent” change for CoStar, and wondered why, if Florance believed so much in Homes.com, he had not been adding to his holdings of CoStar stock, “instead of leaving other shareholders to hold the bag.” Florance has net sold about $27 million in stock since November 2022, when the company launched Homes.com.

Email Lillian Dickerson

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