PropCo Investment Framework: Top-Down Approach
Authors: Daniel Fetner, Ryan Freedman, Adam Donahue
There are two main constructs in which we think about PropCo investments. We’ve dedicated a substantial amount of time to the first avenue, explained below:
Bottoms-Up Approach: source and underwrite from a subset of startups that have either a) preemptively bifurcated their capital structure into PropCo/OpCo or b) are willing to bifurcate in conjunction with seeking new investment.
In this instance, we are evaluating OpCo and PropCo simultaneously, thus we are wearing our Venture Hat and our Real Estate Private Equity Hat at the same time.
From an OpCo perspective, the rigor of diligence is analogous to a typical venture investment as we are evaluating common items such as founder, team, fundamentals, TAM, traction, pricing, etc.
From a PropCo perspective, we are looking at the real estate through the same lens in which a private equity fund manager would (think cap rates, replacement cost, cash flow, IRR, fees, etc).
To the extent we are able to get comfortable with both the OpCo and PropCo portions of a specific company, we will typically move the opportunity through our diligence funnel and think through investment structures with the founder. This continues to be a common path for sourcing and underwriting investments.
Can PropCo Be Looked at Through a Different Lens?
But what happens when we really like a particular OpCo, and there is no corresponding real estate in their portfolio at the moment (i.e. real estate software companies that don’t own physical assets themselves)?
Or what if we are bullish on a certain real estate sector (say Multifamily) in a specific geography (say Denver), but have not found a PropCo/OpCo that fits our investment thesis just yet?
Here’s another path to consider:
Top-Down Approach: Start with a well-researched real estate thesis, and begin to acquire traditional assets that fit those criteria in the same fashion that a typical real estate fund would. As the real estate portfolio expands, start to layer in OpCo’s that will make the portfolio more efficient and valuable.
The Landlord Tech Stack
As cap-rates continue to compress, technology enhancements that drive efficiency are more important than ever. This dynamic has caused landlords to experiment with, and deploy technology across their portfolio to streamline operations and attract quality tenants. As a real estate owner, there are a number of tools at your disposal to aid in the operation of your portfolio. For a multi-family or single-family landlord, these platforms generally come in the form of rent prediction tools to better understand forecasting, backend software to enhance tenant experience and rent roll management, client-facing software to help with marketing, listings and touring, hardware products, as well as various monetization platforms.
One of the simplest examples to point to sits at the intersection of hardware and software. Smart Lock company Latch, which runs on LatchOS2, offers tenants the security and convenience of remote keyless entry. As a landlord, this appeals as it provides a single management platform to control your spaces, which in turn saves time, streamlines logistics, and attracts tenants by offering an amenity solution that a competing building may not have.
Tying it Back to PropCo
We’ve seen countless examples of how, when integrated properly, technology products can offer increased efficiency, drive occupancy, and demand higher rents. As an investor, anytime you can capitalize on these initiatives, there’s a strong case to be made for your property being worth more.
By taking a “Top-Down” approach to PropCo investing, you’re able to start with the physical real estate in which you have the strongest conviction around, and then assess solutions from the entire OpCo Landlord Tech Stack (not just PropTech companies that own real estate). As the real estate owner absorbs and rolls out a specific product across their portfolio, there may be opportunities to gain warrant exposure to the OpCo itself in exchange for providing the company with scale.
In summary, we believe the immense whitespace currently found in the PropCo landscape is vast enough and autonomous enough to give founders and investors the flexibility to pursue multiple frameworks when thinking through structuring and investing.
Stay Tuned
In the coming weeks, we will build on our existing PropCo framework by double-clicking on why we believe certain sectors within the real estate market are poised to break out within PropCo.
Please Reach Out!
If you’re an entrepreneur considering a PropCo-OpCo structure or an institution exploring the PropCo space, please reach out as we’d love to speak with you! Daniel@alpaca.vc + Ryan@alpaca.vc
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