Comparing LTCH and SMRT

At risk of looking stupid for missing something obvious, I’m going to put this out there for your consideration and scrutiny.

It might be too early on these two companies, but I think they have a sticky runway into growth and ARR. The companies are Latch (LTCH) and SmartRent (SMRT).

Essentially these companies are competitors in the same market-- They install smart devices / hardware into buildings on a residential and commercial scale. This includes, but is not limited to, smart access, connectivity, sensors, lights, thermostats, security systems, cameras, speakers, plugs, et cetera. The installation / hardware acts almost as a loss-leader with very low margins (20%), but is the companies’ entry to SaaS level services. As each company uses individual equipment, their SaaS business is unique to the hardware installed-- encouraging continued business (as demonstrated by both companies’ 0% churn). This seems like a very sticky model for ARR through the higher margin SaaS business and both companies are working hard to gain market share with some of the largest multi-family, office, and student-housing REITS / developers.

From Latch Website:
“LatchOS is a full-building operating system of software, products, and services designed to make every building better.”

“Today, more than
1 in 10 new apartments
in the U.S. are being
built with Latch.”

From SmartRent Website:
“SmartRent is an enterprise smart home automation company developing software and hardware that empowers property owners, managers and homebuilders to effectively manage, protect and automate daily operational processes.”

“15 of the top 20 multifamily owners are SmartRent clients”

Both companies growing rapidly as they are still small relative to TAM.

I think I’ve read about as much as I can find on both companies, and I’m learning a bit about how difficult it can be to interpret the semantics of earnings releases–

I’m interested in taking starter positions in both companies and will keep them close on the watch list as-- With infrastructure spending and the real-estate market heating up, I believe accommodations and smart-building offerings will become commonplace in new construction.

Here’s a quick breakdown of some metrics for each Company. (I will also add a link to a spreadsheet I’m working on if it’s easier to view.)

Market Cap:

SMRT: 2.37B
LTCH: 1.92B

Revenue:

SMRT: $22M (+274% YoY)
LTCH: $9M (+227% YoY)

ARR:

SMRT: $7.0M/Q (+159% YoY)
LTCH: $1.2M/Q (+119% YoY)

Gross Margins: SMRT appears to be overall gross margin whereas LTCH only reported as ‘SaaS Gross Margin’-- The hardware / installation is obviously a very low margin.

SMRT: 50%
LTCH: 90%

Customer & Unit Information:

SMRT:
24,000 units installed during Q2 (+243% YoY)
38,000 units booked in Q2 (+302% YoY)
Over 600,000 units currently “committed”

LTCH: Latch offered more vague guidance referring simply to “booked” units and “cumulative” bookings which is essentially customers who have signed a letter of intent with a 24 month outlook. The CEO in an interview cited the delay in manufacturing and construction as cause for their lower than expected installations and revenue over H1’21.
“Cumulative 451,133 booked” (+108%)

Both companies are light on history and financials are not as readily available as I would like, but both seem to be executing and growing effectively. The model is intriguing to me and almost reminds me of Costco-- who makes all their money on memberships and essentially all merchandise acts as near loss-leaders. The provider-specific hardware makes the software and subscription service predictable and “sticky.”

Latch has outperformed in share-price, but both companies are very closely valued. Based on the metrics I could find, I actually like SMRT better than LTCH right now, but LTCH seems to have momentum and I think both will find their market share.

Some Links:

https://docs.google.com/spreadsheets/d/1jkeVDikyvS4-cxgZn5j1…

https://www.latch.com/

https://smartrent.com/

https://seekingalpha.com/pr/18453479-smartrent-reports-secon…

https://seekingalpha.com/article/4448869-latch-inc-2021-q2-r…

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Sorry, I just realized I did not specify the “Revenue” as being for Q2’21.

Revenue:

SMRT: $22M Q2 (+274% YoY)
LTCH: $9M Q2 (+227% YoY)

I’m not sure if there is an “edit” function, but I could not find it-- Please excuse my grammatical errors in the previous post–

MillennialFalcon

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My experience from investing in early stage company e.g. Slinger Bag is that it’s a not a good way to earn a consistent return. Sure, you may get a 10 baggers, 20 baggers or even 100 bags 1 out of 10. But what’s the probability? The return from investing in these kinds of companies is extremely volatile. Saul forum is not a venture capital forum. It’s a forum for market leading discrupting companies with large addressable market. Most venture capital investment failed to deliver good return. They depend on a small number of winnners and lots of losers to get an average return of 25% per year. We can easily beat that investing using Saul’s style.

Secondly, I’ll stay away from SPAC which both of them are. Most of them are pump and dump and largely related to MEME stock crowd. It’s hard to value them because of complicated warrant dilution.

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You are absolutely right regarding SPACs and I also stay far away from them— which is part of my concern regarding LTCH giving loosely defined numbers as I mentioned.

However, I won’t dismiss a company simply based on its entry vehicle to market. I’ll just be especially judicious with it.

Maybe it’s better to wait until the company has a longer history of revenue.

But— an I missing something in the fundamentals? This appears to be a disruptor / innovator with a large TAM, ARR runway, and sticky revenue based on the cost of hardware install and replacement.

Also the metrics in regards to this board’s criteria seem to be genuine and well met, at least in the early stages of the companies.

Based on the metrics and what I believe is an innovative and highly profitable business model, SMRT is worth a starter position in my portfolio.

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Building automation is going to happen. The hurdle has been the payback on the hardware investment vs cost savings from operations. SmartRent professes a 50% ROI with a 3 year payback. Given their record of installs, it appears the hurdle has been cleared.

In real estate, there is very much a me too attitude. If a competitor’s property has it, your property better have it. I’ve seen numerous start-ups trying to enter this space. Many have crashed and burned, trying to sow new ground. But now two leaders have emerged. I agree with MillennialFalcon that these companies are worth a look; thanks for bring them to the board.

I found a very nice write up on Seeking Alpha comparing the Latch vs. SmartRent: https://seekingalpha.com/article/4421236-smartrent-android-r…

The article contains links to the investor presentations used in the SPAC mergers. Between the two, the SmartRent presentation is much more impressive: https://s27.q4cdn.com/632832908/files/doc_presentations/Inve…

TAM: $30B, current offerings: $80B w/new products and other asset classes; $200B Global Expansion
CAGR: 123% to $1.3B in 2024 (from $53M 2020 and $119M in 2021)
No warrants issued via SPAC merger; founders continue to have significant skin in the game

SMRT reported on 8/30:


Company Achieves Record Revenue for the Quarter
Recent Highlights
   -- Increased second quarter revenue by 274% to $21.7 million from $5.8 
      million in the prior year 
   -- Grew deferred revenue 133% year-over-year to $74.5 million 
   -- Deployed 23,834 New Units in the second quarter up 243% year-over-year 
   -- Increased Committed Units to 606,000 as of June 30, 2021 
   -- Launched Smart Intercom and Alloy Access Solo to enhance and optimize 
      access control systems 
   -- Initiated vertical expansion into attractive Student Housing market 

Next on my list is to listen to the company conference call and review the 10-Q. If that passes muster, then SMRT is worth a starter position in my portfolio as well.

–John

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This is my third post to this Board; any off-board feedback is appreciated. This post solely applies to SmartRent where I’ve done a lot of deep digging. This digging has led me to conclude that SMRT provides for a very compelling investment opportunity. Thanks in advance for taking the time to read through my thoughts.

Just as the market has undervalued high growth SAAS companies, it is now penalizing SPAC companies. From CloudL: I’ll stay away from SPAC which both of them are. Most of them are pump and dump and largely related to MEME stock crowd. It’s hard to value them because of complicated warrant dilution.

But as I’ve researched Fifth Wall (https://fifthwall.com) and the SPAC that brought SmartRent public, I believe it to be a different animal. Imagine the largest multi-family property owners coming together and investing in a VC firm that advances the technologies that they are all using. Fifth Wall is far from a pump and dump; it is in the business of creating winners for its institutional investors. This conclusion is supported by the following transcriptions from Brendan Wallace, Fifth Wall’s Co-Founder, from his initial investor presentation (on 4/22/21) regarding the merger. Bolded text has been added by me for emphasis.


I thought maybe to kick things off, I’ll just give a little bit of context on Fifth Wall as a firm, who we are, how we first came to discover SmartRent as a venture capital fund, and ultimately how we effected this transaction over the course of the last couple months. So for those that aren’t familiar with Fifth Wall, Fifth Wall is the largest and the most active investor in real estate technology. What really makes Fifth Wall unique is the fact that about half of our capital comes from the largest owners and operators and developers of real estate globally, who are in turn the largest customers and end users and partners of the very technologies we’re investing in, frankly like SmartRent.

So what Fifth Wall does is we collaborate very closely with our strategic LPs. We understand their pain points, we understand which technologies they are imminently about to adopt, and then we invest in those companies and help shepherd their growth into these large institutional owner, operator, developers of real estate. We started the firm back in 2016. I think in many ways, Fifth Wall today has become synonymous with real estate tech. And really, our unique model of how we invest explains the track record that we have had. So we are early investors, and in some cases, the first money in to companies like Opendoor, and Hippo, and States Title, and VTS, and Clutter and Blend. And that, in some ways, explains how we first came to discover SmartRent.

So what Fifth Wall often does is we’ll run an RFP on behalf of one of our strategic home builder LPs, and we will evaluate different technologies within the tech ecosystem, identify which company we think is a relevant partner. We evaluated the smart home ecosystem in the early part of 2020. As we did so, it became just abundantly clear to us that SmartRent had emerged as the category winner for a number of reasons. One, the largest institutional national footprint owners, operators, developers of multifamily had, I would say, overwhelmingly endorsed, supported, and grown with SmartRent. But obviously, the management team and its hardware agnostic approach to building a solution for property managers was totally unique within the ecosystem.

And that what they’re really going to be looking for is a sponsor that intimately understands their business, can truly add value after the merger and can, I would say, very compellingly tell their narrative to the public markets**. And so SmartRent candidly is exactly the business we hope to take out. It is a category-leading business. It falls within the Fifth Wall portfolio. We understand the business, we can speak very competently to why the real estate industry has so overwhelmingly adopted this solution**.

I think one of the things that I think really impressed us as we were running that RFP on behalf of our home builders strategic LP was that when you look at the smart home ecosystem, it’s clearly a secular megatrend that consumers want smarter devices in their homes. And there’s obvious benefits on the landlord side as well. But the challenge is that most of the ways to articulate that thesis from an investment perspective are either betting on large incumbent tech businesses like Google or Amazon, or they relate to betting on individual smart hardware solutions. And the challenge in making such a bet is that you face the challenges of hardware investing, which is hardware margins, hardware competition, hardware replacement cycles.

What’s really compelling and I think unique about the SmartRent story is that this is a company that allows investors to articulate a secular bet around smart home adoption at an enterprise level, selling an enterprise grade solution and capturing that upside with really attractive recurring revenue characteristics in a hardware agnostic way where you get to free ride to some extent on the tailwinds of all of this; that is pouring into smarter and smarter devices for homes.

But what’s just really powerful is that you have this quadruple threat of value proposition here, which is real estate owners are fundamentally simple, predictable animals in so far as their adoption decisions with respect to technology. So you have top line revenue growth, you have OPEX savings, complexity reduction, so just reducing the complexity, the number of applications, the number of logins the property manager needs at the asset level, and then really fast paybacks and ROIs. This is almost the quadruple threat that makes it a very no-brainer adoption decision for these large institutional multifamily owners.

Today, obviously, smart home adoption is relatively under-penetrated, so the TAM here is massive. But I think a lot of what you see from an investor perspective when you do look at the smart home ecosystem, is there are companies that have had some traction, but that fraction is in new development in Miami or New York or it’s in very, very high-end residential in Aspen, Colorado. I think those are obviously technologies that have much smaller TAMs [IMO, this is a direct reference to Latch]. What’s profound here is just this [SmartRent] applies to all of the multifamily and residential building stock in the U.S. today. This is a solution that is applicable and adoptable for those owner operators today.

We are in many ways in the business of trying to know what the real estate industry is going to do before it does it, so to understand its adoption decisions of technology prior to it becoming obvious to the entire market. That comes obviously from the 70 strategic LPs that have invested in Fifth Wall’s funds.

As I mentioned, we ran this RFP looking at the entire ecosystem. About a year ago, it was pretty abundantly clear to us that I think about five of these dominoes had fallen. There are probably five check marks on this page. But having surveyed the rest of the institutional national footprint, owner, operator, developers of multifamily, we recognized that SmartRent was going to be the industry standard solution.

The same dynamic takes place with respect to enterprise sales to the real estate industry. Which is, whichever company can overwhelmingly sign up and engage the top 20 owners in a given space wins the category. That company quickly is running downhill and becomes market standard for the entire real estate ecosystem. It’s an artifact of the fact that the real estate industry is a late-adopting industry, so there are a number of owners that own 10,000 units, 5,000 units. These are smaller regional owners. Typically, what they are going to do is they’re going to look to the names on this list to see which smart home operating system have they adopted to ultimately make their decisions. You have this very profound signaling effect and this herding behavior that overwhelmingly leads to one company becoming a market standard technology. When you look at a page like this in light of that dynamic, this looks like game, set, match for the multifamily industry when it comes to a smart operating system. I think the other dynamic that’s probably important to call out here is that for the multifamily space, these multifamily assets trade fairly liquidly. They almost trade like stocks between different institutional owners. But what’s different about SmartRent versus other kinds of enterprise software is it’s both a software solution, but it also is on premise. This is installed. It goes with the asset. So you almost have this negative churn dynamic, where there’s this cross-fertilization opportunity, where when one of these large institutional owners trades an asset to a smaller, more regional owner, they obviously get that asset with SmartRent. It becomes obviously almost, like I said, a downhill foot race where you’re just growing into the rest in the long tail of the multifamily industry, which is, as you can see on the left side of this page, enormous. There are a lot of units where nothing is installed today. So this early lead, typically, I would say almost categorically, becomes deterministic over time. The same pattern plays out in real estate tech over and over.

And just something to highlight here, this dynamic again, plays out over and over in real estate tech when you’re talking about these large national footprint owner operator developers, it’s almost like you know the starting point, the starting point is no units, or a pilot. And you know the ending point is something like 95% penetration and full saturation within a portfolio. And that’s dependent on a lot of different variables, but the same dynamic takes place where you have this highly predictable revenue growth that happens organically within these large national footprint owner-operator developers of real estate. And so almost the easiest way to say that is that your most expensive tax, costs of customer acquisition, are in your rear-view mirror. These are the most expensive customers to win, to get, to do pilots, to have successful pilots, because once you get them, you are again running downhill into full portfolio saturation.

And I think that’s one of the things that is, I would say excited us so much about being an investor in SmartRent, both from our venture fund, but obviously in sponsoring this transaction, which is the companies that emerge as category winners use financing events exactly as you have. And I think this merger is just so interesting. One, because you have these really high-quality financial investors that clearly see this kind of downstream revenue growth that you have and just the compelling financial characteristics of this business. But I mean, this is a hits list of the most relevant players in the real estate industry who are coming into this financing through the PIPE.

Obviously Fifth Wall is the largest, most active, kind of most synonymous investor with real estate. In fact, is the sponsor of the transaction. But then beyond that is Starwood, Barry Sternlicht, one of the most iconic names in the real estate industry that is this anchoring this PIPE. In addition, Lennar, which is both the Fifth Wall LP and investor in your business and I think one of the most strategic residential investors in new technologies has given their track record, they are coming in a big way, and Invitation Homes is coming in.

So I just think this is so exciting because it not only is this an IPO effectively, but it’s also just such a validation from the demand side of the real estate industry to everything that SmartRent represents and the potential of your business. And so, as a firm that loves rolling up their sleeves and driving collaboration between the real estate industry and new technologies that have emerged as category winners like yours, I would say we could not be more thrilled to be introducing this to the public markets. We are just so excited to be sponsoring this.


The complete investor presentation transcript is found here: https://s27.q4cdn.com/632832908/files/doc_events/Investor_Tr…
There is also a webcast view that requires registration. It has lots of supporting charts and visual documentation. https://services.choruscall.com/mediaframe/webcast.html?webc…
I highly recommend the entire presentation, as it includes commentary from SmartRent’s CEO, Lucas Haldeman. Here are a few highlights from what he said. Again, bolded text added by me for emphasis.


So let’s talk about the connected community, which is what we call our entire platform. So really from the parking lot all the way into the living room, we’re able to bring better management to these properties. If you look across the landscape of what we’re offering, we’re the only comprehensive platform solution. And what I love about this business is any one of these products can be a landing point. So we have the unique ability to sit down with an owner and an operator and say, “What’s the most acute pain point? What are you really struggling with today? Let us go solve that problem.” That’s an introduction to our platform and then we can expand that over time.

So you may start with building access control because your system is 30 years old and it needs replaced today. You may start with smart apartments because you realize all the benefits that that brings. But ultimately, what we’re seeing is owners and operators are adopting multiple solutions and continuing to bundle this to really create a comprehensively connected community. And one product that I think oriented to a great landing spot and especially coming through this global pandemic that we’re all living through, self-guided tours, this is something my background in single family homes, we had to embrace this early on.

We invented the idea of a self-guided tour in institutional rentals because we didn’t have any offices. We didn’t have any leasing agents. So it was, necessity is the mother of invention.

What we found though in multifamily is that this can actually have huge operational efficiencies on the property and actually the ability to close more traffic. Through COVID when the leasing office was closed and people couldn’t give tours, this was keeping a lot of people in business, a great landing point for our product.

What’s the value to owners and operators? This is where we talked about the different drivers of ROI. To me, one of the exciting things about starting this company was there were so many different ways to drive ROI. I’d never really seen a platform where you could underwrite it in so many different ways and get to a positive ROI experience.

The first one that that owners are experiencing is they get a higher rent if they have a smart apartment. They’re able to get a rent premium for offering an amenity that residents want. It’s an upgraded apartment. It comes with an upgraded price. It’s a great way for owners to drive top line revenue.

The other side of that is around expense savings, decreasing complexity, and better protecting our assets. If you look across this, there’s actually 20 or 30 different ways that we can drive value, but a couple big ones to highlight today.

One is water. I mentioned it earlier, putting leaks sensors into these units and mitigating against water damage has a huge impact on the P&L. Water is the number one cause of damage in multifamily. 70% of the damage done in multifamily is done by water damage, and decreasing that is not only highly impactful to the P&L, also creates a better resident experience. No one likes living in an apartment where their belongings are ruined as water comes down the ceiling from an upstairs apartment.

Then the other side, we touched on where we’re seeing owners able to drive cost out of the business and better convert their traffic and better convert their marketing spend is using that self-guided tour.

Yeah, that’s right. And so let’s talk about what that embedded growth looks like for us, because it is an important, this sort of concept of running downhill, it was really an important distinction in how we view ourselves different from a lot of things that have come to market this way. And that is really a unique opportunity to invest. So if you look at our total customer base, these are customers who have signed a master services agreement with us. They’ve started to roll out. These are customers who are in the process of rolling out our product. Those customers own almost 3 million units, 2.9 million units in the U.S. and Canada. Of that we’ve installed about 176,000. We have another 752,000 of committed units. So that’s near term that owners have said, “Hey, we’ve done our pilot. We verified it works. It’s back to this part of the curve. We’re through our pilot, we’re ready to get going. And this year or next year, this is what we’re going to do.” And so really, as you’re sitting there as a potential investor looking at this, you say, “Well, there’s already,” to Brendan’s point, “the customer acquisition cost has already been done. Now, it’s just a matter of going in and harvesting that organic growth.” I like to think about it. If we didn’t sign another customer ever, this would be an incredibly impressive business. This would be a great, long-term durable going concern.

If you expand that out and you look at some of the new products we’re bringing to market, we’re going to talk about that a little bit later, and moving into other asset classes, student housing, military housing, senior housing, offices, that actually becomes an $80 billion market opportunity. And then if you take that and the other important thing here, and part of why we’re so excited to have Fifth Wall as a sponsor is if you look then internationally, this is not a domestic only problem that we’ve solved. This is a global problem. And if we take this to the globe, as we plan to do, it’s a $200 billion market opportunity. Just staggering numbers.

So let’s just recap because we’ve talked about a lot. So I think it would make sense to just kind of bring it home, which is the ability to access capital markets through this transaction and through having ongoing public currency will allow us to hyper charge the growth of this company. And we plan on investing in sales and marketing, in the installation services team, and continuing to invest in our software development team and our engineers. But also it’s going to allow us to go into the other trajectories of growth that we’ve talked about, expanding internationally, expanding by acquiring companies, and expanding by moving into other verticals of commercial real estate.

We just couldn’t be more excited about all of the embedded growth we have, and then all the other additional inorganic opportunities that are out there that we haven’t talked about. And I just think it’s really important to bring home that while we think there’s all these incredible ways we can grow and new areas we can get into, and new verticals we can penetrate, that really if you come to the financial overview slide, we’re not asking investors to pay for that today. We’re asking investors to participate in that upside.

So all of these numbers that we’ve put out, all of the financial projections really are oriented around selling our core business, harvesting that internal growth, harvesting that embedded growth that we already have. And I think that really, the KPI here is 85% of '21 and 75% of 2022 business is already in our committed pipeline.

So while we think there’s an ability to grow much faster and grow in new ways, we’re not relying on that for you to get comfortable with this transaction. That’s actually upside that we’re all going to share in and all investors are going to share in, not just previous investors or current, all of us are sharing that.


Revenue, Q1 ’21: $19.2M; Q2 ’21: $21.7M. Q2 hampered by supply chain issues. Per 8/30 earnings call, CFO states on track for $119M for all of 2021. To get there, something like this is needed: Q3, $32M or 46% qoq, Q4, $46M or 47% qoq. Those are knock it out of the park numbers.

Another interesting tidbit is the following insider transaction by one of SmartRent’s Board members. On 9/2/21, Bruce Strohm, EVP/General Counsel at Equity Residential, purchased 10,000 shares at $12.20-$12.25.

In conclusion, offsetting the positives, is a red herring. The 6/30 10-Q on file only provides info on the SPAC. The merger closed on August 25th. The 9/30 10-Q should shed light on the specifics of the transaction. Although I’m sure too high risk for some members this early on, I believe SMRT is an excellent watch list candidate. IMHO, it has the type of hyper-growth/SAAS business that this Board looks for, with the following characteristics:

  1. Easy to understand
  2. Category leader with industry backing
  3. Founder led
  4. Predictable, built-in pipeline with ability to sell new services to existing customers
  5. Small Cap ($2.5B or so) with 10x possibilities

But as I didn’t arrive here until mid-May, I could be totally off (be kind in your criticisms). As Saul says, do your own diligence; make your own decisions.

–John
Long, SMRT, 0.1% on way to 3% starter position

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