Show Notes
Summary
Chris Moreno - Primary Venture Partners
Special mentions
Company: KKR, WeWork, Yardi, RealPage, Buildium, Softbank, Entrata, MRI Software, Industrious, Switchyards, IWG, Regus, Tishman, Thesis Driven, Silver Lake, Propexo, H&R Block, IMN, Housing Innovation Summit, Apartmentalize, CRETech London, AIM 2024.
People: Adam Neumann, Brad Hargreaves, Remen Okoruwa, Lisa Nickerson, Dennis Cogbill, Steve Lefkovits.
Transcript
(Disclaimer: Please be advised that this transcript may contain unintentionally confusing, inaccurate, and/or amusing transcription errors.)
[00:00:00]
Matt Knight: Hey guys, Matt here, another quick episode with me and Chris talking through a couple of recent industry transactions that were, well, one's a transaction, one's a new policy from Entrata, which in retrospect is not surprising. But anyway, I'll let you listen to what Chris and I chat about on this sort of episode four of me doing PropTech Chatter with Chris Moreno.
All right, Chris, thanks for being back, man. Excited to chat. I know we have some breaking news as of this week that we should discuss. And so I'll let you lead off. If you have one of these two headlines that sort of caught both of our eyes.
Chris Moreno: Yeah, man always you know, as some people think PropTech and real estate are boring.
They're anything, but there's always movement. Obviously with the KKR big acquisition happening recently, but the big news this week Yardi and WeWork the acquisition. And so I'm kind of [00:01:00] curious to get your thoughts, Matt, how you think about this move, Adam Neumann looking at possibly buying it, I think SoftBank still involved, but Yardi seems like a pretty big leap for them to be, getting into it.
What are your thoughts?
Matt Knight: Well, you know, I used to have an incubator with WeWork back in the day in Atlanta and got to know them decently well. And what was interesting about this to your point is Adam going after. But the problem I understand was there was a huge debt load that SoftBank had to forgive restructure, whatever, right? There's like 4 billion in debt that had to be worked out. So Adam's cash offer that ignored the debt load was sort of, I understand. And I wasn't there just rejected out of hand, but Yardi buying the company I thought was interesting and Brad Hargraves will be much more eloquent on it than I can be.
But if you have any initial reactions, I'm curious your take on it, but I had a couple of quick thoughts on it. If you want me to share those.
Chris Moreno: Yeah, no, I'd love to hear your thoughts first and then I can chime in after.
Matt Knight: Yardi to me with what it is historically is [00:02:00] multifamily property management system, right?
Like they have other things they do companies they acquire and point solutions that they build into their PMS, right? But at their core, they were multifamily property management system, right? And so their market share is, I don't know, huge 50%. Like it's a huge, especially at the institutional level, right?
If you get down to the mom and pops in the sub couple hundred units, it's at Bolio and building them in Excel. Right. But at the institutional level, Yardi and Realpage and now Entrata kind of dominate. And so my thought is if they want to get deeper into the office property management part, which MRI seems to have a stronger hold into, This is not a bad toe in that water with the amount of landlords they will be exposed to, if that makes sense.
Chris Moreno: Yeah, it does. I mean, definitely you're seeing Yardi ,Realpage, Entrata others, MRI seeming to go much further beyond multifamily. What's great is the spaces are growing and they need more help, larger move for people for integrations, you know, we'll talk about in a moment, but agree with you.
[00:03:00] I think. It seems like WeWork's aspirations were a little bit too large. So what do you think , are they already, do you think they'll be consolidating by half? Do you think, Yardi's going to come in and be able to help with a lot of the data and analytics to like, look at how profitable they can be?
And looking at new models, you know, business models , what are your thoughts around, I think first on the real estate side? In their knowledge their connections within the industry. And then number two, how do they look at it from a data and analytics and how much can they actually help from a software perspective?
Have you, have you thought about that?
Matt Knight: Yeah, two very different questions. And I think that the key thing to understand about WeWork in terms of assets is the main thing that I think they have is they have liabilities in terms of long term leases. In office buildings, right? And then they have short term leases or sub leases to 10, 000.
However, many smaller tenants, right? That's kind of the quintessential arbitrage play. I'm going to lease it out for 10 years from Boston properties, and I'm going to lease it out by the month to Matt and Chris's podcast company. Right? And [00:04:00] so what's interesting is when you have access to that many small and medium sized businesses, to your point, that's a pretty good data set.
And I think lenders were starting to get more comfortable with underwriting credit and those leases, even if they were maybe not month to month but six and 12 month leases, instead of five and seven year leases. So, I think the question to ask is, what can you already learn from having access to all of these SMBs and to WeWork's credit, a few very large companies put WeWork labs together. And how does that benefit their growth in the office sector? I think that's the question I would be asking.
Chris Moreno: Yeah, spot on. I believe they're going to, and as part of the bankruptcy, be able to get out of a lot of those leases. People will have to negotiate or they'll give it up. And I don't know how many people I was thinking does Industrious. Like, who else could take on those spaces?
I know Brookfield had a, they didn't have this similar model as WeWork. They had a larger, like, you know, tenants can sign a quarter of a [00:05:00] floor, half a floor a floor and a half, things like that. I just don't know who could take those leases at scale from, from them. Number one. And number two. I mean, I would think people would want to, you know, all the tenant improvements they'd want to stick with it for the long term.
But, yeah, I think also you're seeing these other models pop up, right? Like, Switchyards, I think, just announced they're going to open 200 locations in the next couple of years, right? Local Atlanta company. Their model is not the massive coworking space. It's more of the drop in for coffee, meet a friend, but do you think that we're going to see more of that model and that's going to sustain, or do you think WeWork shrinks in size per location?
Do you think they have to grow in size?
Matt Knight: The analogy that comes to my mind is buying property is if you are trying to buy a property in 2024, you are buying with the current interest rates available with the current rental growth projections that are realistic in this economy. And I think that changes the math on what you can buy versus what you could buy in [00:06:00] 2019, right?
Same exact thing with WeWork is those leases. They signed in 17, 18, 19, 20 were underwritten at those numbers and may not make sense anymore. And the beauty or the harshness of bankruptcy is you get to throw all out and say, what is it actually worth? To you creditors now. And so a lot of these landlords have to come back to the table and say, I know you signed for whatever 100 and foot and 2018, but we are, we are signing leases lower than that.
Now we're ready to talk. Whereas they might not have been before bankruptcy. So the question is, to your point, IWG that owns Regus and Industrious are the two obvious ones. Tishman has their own brand. There's a couple of office landlords that have their own brand, but yeah, there's some obvious buyers, but they're doing the same thing real estate guys are doing right now is they're saying, what does the current underwriting support?
And so the question is who wins the war of attrition, right? The stubborn landlords trying to stick to those 2019 terms or the tenacious buyer that [00:07:00] says I'll transact, but I'm transacting at 2024 terms. It's like, that's. That's the battle you'll see, and whoever can move the furthest in the direction of a deal is going to get what's left of WeWork, in my opinion.
Chris Moreno: And they were once valued upwards, I thought it was like 60 or 70 billion, and then they were, I think, IPO'd around 8 or 9 billion, and now I think acquired roughly 400, 450 million, something like that, by Yardi. So, they obviously see an opportunity here. Probably on the customer side for, relationships of those places, they can try to be the good guy.
And then number two they probably see some opportunity to create value in the longterm. So, maybe now is the right time to pick up this kind of asset, this type of company and then build it out. You know, out of a downturn per se in the economy or downturn in real estate, and they can create value.
I agree with that statement. What are your thoughts around creating value for the long term and do you think this is a 5 to 7 year play for Yardi? Do you think it's a longer term or shorter term? [00:08:00]
Matt Knight: When you're yardy size, I don't think it matters that much. I mean, I think if you can buy a distressed asset with cash right now, you're in an extremely strong position.
And that's what WeWork was. But I still get back to what I said earlier. I think it's just, we want more intimate relationships with landlords. WeWork, if nothing else, knew and did deals with them. 90 percent of the institutional landlords in America having intimate negotiations and deals with them and their subtenants is a great foray into, Hey, have you tried our property management system?
Right. Oh, you want, you want us to give on that lease a little bit? Let's, let's talk about what property management system you use, right? Like, I feel like that's a good lever to pull. And again, Brad Hartgraves wrote on this. You should go read it on Thesis Driven. He's a lot more eloquent than I am, but I can see the angle there.
Chris Moreno: Got it. I know we have a couple other things you want to tackle. Do you want to, I feel like we could, we could spend a lot of time on, on WeWork. I, I also, you know, one of the things I love to talk about is like the WeWork And the anti WeWork thesis of [00:09:00] models around businesses. So like scaling at all costs to grow and eventually finding a business model and profitability and the other model of actually becoming profitable early on, before you scale to more markets, more verticals, more products.
Do you want to cover that now? Or do you want to think about that in a future episode?
Matt Knight: I mean, so I want to get to Entrata cause I think it's important, but I think your point. Is one that's a false narrative, I think, to a lot of people outside the ecosystem, because what we do is we retroactively look back at these companies.
And it's easy to point the finger at Adam Newman, right? And Masa, who sort of challenged him to be more aggressive. But what people don't understand that aren't in this game every day is almost every company has competition, right? And almost every company is living with existential dread, meaning that I built this up from nothing.
I remember the days I was sleeping on my couch and not being able to eat well because I was trying to grow this and we had payroll for another two days, that sticks with founders. And [00:10:00] so when they have the opportunity to grab cash, right, and grow, or their competitors will grab it and beat them, I don't necessarily begrudge that of them within reason.
But the argument is Adam went beyond what is within reason, right? So fair enough, right? In retrospect, he did, but to just kind of throw shade at people who took more money or grew faster than they should have, I think ignores the reality of market dynamics, you are competing and you might not exist next year, like.
Whatever keeps that engine going is worth considering. In my opinion.
Chris Moreno: I completely agree with that. I think, you know, I have not met Adam. I think people oftentimes paint him in a very bad picture. I wasn't in the room and I think VCs do sometimes push people, especially with that kind of capital, right.
To do things and you have to make hard decisions. So you're trying to keep that momentum. You have thousands of people, depending on livelihoods you have these rents you have to sustain and then you have investors who are looking for a return. So I, I agree with you.
I think, you know, the growth at the [00:11:00] end of the day you know, maybe he could have handled some partnerships better, but my thought was like, sometimes you bring the founder back, you bring the founding team back, you bring some of those people who actually have a unique perspective who can will it into existence.
And I completely agree with you, Matt. For me, it was always, it was stressful, right? You want to make sure that you're growing and to make sure that you have capital for paying your team, you want to make sure you can do what you tell your partners and your vendors you're going to do and follow through and then, yeah, it's a risk every time you think about innovating or going to a new country or going to a new city.
You know, in essence, a lot of people didn't know who Regus was. So I think of WeWork in a way that they did create a market, a new type of market, a new type of model. I think people are still doing that too. So I'm excited to follow this along.
I'm glad. WeWork is not shutting down. I think many people like we're like, good riddance. I completely disagree. I think it's great to keep things going and then have new leadership, maybe new perspective to come in. So I'm going to follow this one. I think it's something we'll talk about again.
But yeah, let's jump from Yardi to Entrata the [00:12:00] other big name. Software and a big behemoth who's grown out of Salt Lake City. They've done a great job of growing and I know a lot of the folks over there. I wanted to get your thoughts on Entrata's announcement of the API, you know, integration fees and kind of following in Yardi and RealPages footsteps.
What do you think about this? You know, what are your thoughts in this space?
Matt Knight: I didn't see it coming and I should have. Like in retrospect, it's inevitable. It's inevitable. Because anybody who's been around tech or private equity for a while knows the private equity playbook. And when Silver Lake bought, essentially all of Entrata, their goal is to increase margins, which means charging for things you're not charging for, raising prices, cutting overhead.
Like that's, there's only so many levers you can pull in private equity. And that's not to vilify. I think there's a narrative online of like, you guys bankrupted Toys R Us, bye bye. I don't buy that, but there is a playbook of how do we cut costs. How do we increase margins so that when I sell this in two years, it's for double what I paid for it, [00:13:00] right?
And Silver Lake's, no fools are very sharp. So I guess my take is I feel bad for the people. In our startup world, whose margins are dependent upon that API being free. But I totally understand. And in retrospect, probably should have seen this coming and I think we should take it as a lesson for anyone who is private equity owned, it's probably going to follow a similar path in my opinion.
Chris Moreno: Yeah. I mean eventually I think it's similar to the conversation around WeWork, you have to figure out monetization. And I think, there's one thing to think about, which is, there's pros and cons to everything. And so I think about one of things I learned when we were integrating with, the big companies, there is management costs on both sides.
There's management costs to them to integrate with other people, and you can't have bad integrations. You can't have poor integrations. They have to work, and someone has to monitor that. Number two. The startups also have to figure that out. And then if you have a third party, like, you know, any of these companies that do third parties, I think of like actually the, the article, we may have to link the LinkedIn post where there were probably no less than than 60 or [00:14:00] 70 founders like chiming in about this, but like, you know, I think it was Rimin I think Brandon at 5th wall has chimed in on this quite a bit.
Jindou Lee, you know, we know Derek Merrill, so a lot of different folks were chiming in Tyler Christensen down in Tampa. And , what does it mean? You know, I think it's still early and they have an opportunity to maybe set the new stage. Are they going to follow in the footsteps of Yardi or Realpage?
Are they going to set a new model? But it seems like from what I was reading that there's a lot of, Yeah. New angles, so paying a lower amount per se, but also paying for what you use. And then there's you know, but I think there's a lot of uncertainty to these folks. So how do you maintain integrations, but how do you allow new companies and startups to integrate and bring awesome technology to the industry?
Right. Those are kind of seems like the two issues are, do you see those as the issues or are there other issues too, that I'm missing?
Matt Knight: That's why I invested with Remen, because I love what they're doing [00:15:00] at Propexo to kind of solve this problem, as integrations are hugely important. And how you monetize that is an existential question.
So, yeah I don't know that I have a wise answer other than it's important and I watch it closely and I bet on smart people like Remen to see it before I will.
Chris Moreno: Yeah. I'm pretty impressed by what they're doing and how they're doing it. I think there's definitely You know, it affects many of these businesses on a day to day and obviously it's affecting their business too.
But , I think giving people time, giving people opportunity and then any change like this creates new jobs. I also think about that if their IRS was to simplify taxes. You know, H&R Block may cease to exist, but, you know as they complicate taxes, there's more accountants.
So, obviously same thing with integrations , is how do you manage these things, especially around APIs and is it fair for some companies to have to pay, substantially more and then and I think that properties, the other thing that I noticed. Is you know, some of the [00:16:00] stories are every company out there, whether you're an office building, whether you're self storage, whether you're a hotel, or if you're a multifamily, the key, all of these owners have been trained, you know, hey, do you integrate, do you integrate with our software?
Because it may be too difficult for our onsite staff to be able to, roll this out to understand it. Do they have to manage another dashboard? So that's what I actually learned from Salvas over at Capri in DC. He talked a lot about that is, you know, he's really looking for technology to integrate.
So again, I think, it's early days well, keep our eyes and ears peeled on LinkedIn. I think also at the, at the trade shows, you know, we were talking about trade shows coming up and , seeing what the big companies are doing behind the scenes, but getting to see what they're talking about on stages and at these conferences , what conferences do you have coming up, Matt, that you're focused on.
Matt Knight: Yeah. Well, quickly, cause I know we're out of time. I have the Housing Innovation Summit in June in Denver, and then I'll be doing a couple happy hours one in SF around the 4th of July, and then I'm not going to Apartmentalize in [00:17:00] Philly and I'm not going to IMN in Atlanta, but I think you are.
So I got just two coming up.
Chris Moreno: Okay, I
Matt Knight: usually go to Cretech in London. I'm not going this year. That's like, okay,
Chris Moreno: we'll have to hit up. If you know, Lisa Nickerson, we'll have to ask her. I know she's going, to CRE tech in London. It'd be good to hear her thoughts. Number two. Yeah, I'm going to, IMN next week in Atlanta.
I will actually be doing some recordings from there. So , I'll be sure to share some of that. And Aim next week. I'm excited about Dennis and Steve Lefkovits conference in Huntington beach every year. I know a lot of folks in marketing will be there, so it'd be great to see the updates and hear the thoughts.
And then I'm really excited about Apartmentalize. Apartmentalize is probably the largest, you know, I think it's around 17 to 18, 000 people while I'll be descending on Philadelphia, I think that's around, I think it's June 17th and 19th or something like that, and there's going to be what I think like 700 supplier partners, startups there.
And then sessions galore for 3 days and then meetings. So [00:18:00] that's always when I look forward to, because you get to see so many people at 1 time in just a couple of days.
Matt Knight: Agreed. Well, I think we are out of time, but I got a couple more things that we can talk about next time.
Chris Moreno: Love it. Can't wait, man. Thanks for joining me and having me on.
Matt Knight: Appreciate it.
PropTech Chatter - Round 4 with Chris Moreno