A Journey of Unfortunate Events: RentPath’s Downgraded Credit Ratings
With the National Apartment Association conference in Denver, CO underway, a closer look at RentPath reflects real estate business realities with the internet and private equity.
NEW YORK CITY— Summer marks one peak period of tenants moving apartments with the highest rents generally trading up through early fall, according to RentHop, an online rental guide. Although the seasonal renting pattern has remained consistent, ways of getting the word out on vacancies has drastically changed. For 30 years, printed hard copies of Apartment Guide dominated rental multifamily marketing, sitting in wire racks in major cities.
Then came the internet, and it wasn’t just about e-commerce disrupting retail. Founded in 1989, and headquartered in Atlanta, GA, RentPath now runs ApartmentGuide.com, rent.com and rentals.com. It’s owned by Texas Pacific Group Capital and Providence Equity Partners. For the year ended June 2018, RentPath’s revenue hit approximately $259 million.
But as the Yellow Pages and White Pages have learned—competition is tough with online information and that goes for online apartment listings as well.
RentPath’s Q1 2019 adjusted EBITDA sank 34.5% year-over-year from $16.8 million to $11 million according to a May 2019 Debtwire article. The financial publication reported the company’s revenue for the quarter had dropped 8%, declining from $63.3 million to $58.2 million.
This followed Moody’s October 2018 downgrading of RentPath’s corporate rating from B3 to Caa1. According to Moody’s its B ratings are “considered speculative and are subject to high credit risk.” The Caa ratings are for obligations “judged to be of poor standing and are subject to very high credit risk.”
The investor services company stated RentPath’s downgrade to Caa1 “reflects competitive pressure by a substantially larger and better capitalized competitor within the apartment rental listing market.” It also pointed to continued marketing expenses, strong occupancy trends and the resulting loss of operating earnings. Moody’s also predicted weak liquidity for RentPath. It anticipated leverage to remain high above 9x over the next 12 to 18 months, stating an upgrade was unlikely.
Standard & Poor’s November 2018 ratings anticipated marketing costs and high annual fixed charges would deplete the company’s limited liquidity resources in the following 12 months. S&P also lowered RentPath’s issuer credit rating from B- to CCC+ citing weakening liquidity and a negative outlook. Guidelines state a B rating means the company currently has the capacity to meet its financial commitments. But adverse business, financial, or economic conditions will likely impair its capacity or willingness to meet financial commitments. A CCC rating puts the company status as “currently vulnerable,” and dependent on favorable business, financial and economic conditions to meet financial commitments.
S&P identified RentPath’s largest competitor as the CoStar Group, which owns ForRent.com and Apartments.com. It noted RentPath lowered its subscription packages and increased marketing spending “in response to CoStar’s much larger marketing budget.” In addition, as RentPath depends almost completely on subscription-based fees for its revenue and is focused solely on apartment rentals, it has more limited diversification for revenue opportunities. Debtwire pointed out that it could add value in a merger or acquisition with a competitor such as CoStar or Zillow or find another buyer.
Similar to Moody’s reporting RentPath’s increasing leverage, S&P noted it rose from 6.5x to 8.8x in the course of a year.
In addition, the agencies have also downgraded ratings of RentPath’s first-lien credit facility and second-lien loan facility. The first lien is trading at roughly 59 cents to the dollar, and the second lien is trading at approximately 17 cents to the dollar, according to a chart compiled by Bloomberg in June 2019. Plus, RentPath is paying an 11% coupon according to DebtWire.
Andrew Florance, the CEO and founder of Co-Star, explains that “RentPath’s private equity owners have saddled RentPath with a large debt burden. This means that RentPath is using cash to service interest in lieu of investing in product and essential marketing the way Zillow and Apartments.com are. It is sad, but I believe that this has really weakened their ability to compete.”
As to whether Co-Star would acquire RentPath, Florance says, “Apartments.com’s top priority is investing in B to C marketing, search engine marketing and product innovations. We have built a strong network of 12 Apartment websites with 60 million monthly visits and growing. It is highly unlikely we would have a need to acquire additional sites.”
RentPath did not respond to GlobeSt.com by this reporter’s filing deadline. This article will be updated if a response or more information is received.
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