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Nine Four Insights

The OpCo/PropCo Evolution

In the summer of 2019, we wrote about the increasing volume of OpCo/PropCo offerings coming to market. Startups and tech-enabled operators pitching their ability to operate real estate assets at scale were hunting for pools of real estate capital, and investors started listening. We won’t rehash everything from that post here, but in summary, the ideal OpCo/PropCo relationship is symbiotic: PropCo investors bought the real estate, OpCos ran it efficiently and at scale. Everyone wins: OpCos scale quickly and no longer need to find creative ways to access real estate on an asset-by-asset basis, and PropCo investors can deploy their capital in meaningful ways with an operator they’re comfortable with. PropCos no longer needed to fight the same asset-by-asset battles to fill it with great tenants that could pay them the right amount, and the one-to-many underwriting advantage can be taken advantage of.

Since then, the world has changed for real estate owners and operators. COVID happened, a new administration took office, inflation fears began running amok, global supply chain issues continue, the under housing of America isn’t being solved, and a trillion dollar plus infrastructure bill passed, to name a few.

These dynamics appear to be building even more momentum for the OpCo/PropCo, although where we were seeing more demand from OpCos to find PropCo investors, the tables appear to have turned: it’s the PropCo investors hunting for the right OpCos to work with. We believe this is happening for two big reasons:

  1. PropCo investors are looking for better relative investment performance of an asset versus the way it may be traditionally monetized
  2. As more money floods into real estate, PropCo investors need to deploy meaningful amounts of capital in an efficient way

The pair of events that highlight this are:

  • The Mynd/Invesco deal. This seems meaningful to mention because of the dollars and scale involved. Managing as many properties as Mynd will be doing – in ideally a more efficient and tech-enabled way – highlights the progress that the traditionally low-margin and painful business of property management is making. No traditional operator at scale is likely capable of doing this, so Mynd is in a pole position to see if the way they manage properties really can scale. If that’s the case, it will be very lucrative for them.
  • Nine Four portfolio company Bungalow’s agreement with Deer Park Road. Bungalow operates single family homes at scale, in a differentiated way relative to a traditional institutional owner such as Invitation Homes. While the asset is the same (a single family home), the hypothesis is that the way the asset can be monetized, in this case through a co-living model, implies different cash flows, operational complexities, and profit. The ability to operate at scale, and with greater NOI, could be even more lucrative than for traditional managers or operators.

If real estate is going to be seen as an inflation hedge, which appears to be the case right now, then there will be more dollars flowing into the space and more pressure to deploy that capital across real assets. That would result in an increased opportunity for tech-enabled operators of real estate to prove their ability to scale. In some cases it seems likely that those startups that are currently in the game and have proven they can scale to some degree might have the opportunity to scale in a much more significant way. It will be sink-or-swim time for them. This will also likely unfold across every real estate asset class. We’re obviously seeing it already (Mynd on the more traditional side, Bungalow in SF co-living), but retail and office are close behind. Retail operators such as LEAP are taking big strides, while flexible office operators are popping up in markets across the US, along with self-storage (Stuf).

Pairing the opportunities that tech-enabled operators have with the current SPAC dollars sitting on the sidelines, you get a feeling that there might be more publicly traded real estate operators coming to market soon, even despite what SPAC performance of late has been. We’re excited to observe how performance unfolds. We’re biased here, but we believe that technology will have the opportunity to shine and prove that it can, in fact, drive meaningful change in a historically slow moving and lower margin industry.

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