Real estate tech company Latch has garnered lots of attention as it prepares to go public through the special-purpose acquisition company (SPAC) TS Innovation Acquisitions (NASDAQ: TSIA). Former Facebook exec turned venture capitalist Chamath Palihapitiya called the start-up the “best SaaS [software as a service] company I’ve ever seen/invested in.” Latch is picking up lots of new business, it’s raising $450 million in fresh cash from going public, and it could get an extra boost if the Biden administration’s more than $2 trillion infrastructure bill gets passed (in its current form, hundreds of billions are being earmarked for building new or modernizing more than 2 million homes and commercial buildings).
Nevertheless, this is a story stock with a lot riding on Latch’s ability to execute on its growth plan. With little in the way of current revenue, shares got caught up in the tech sell-off in March. If you’re OK with a high level of volatility and have at least a few years to wait patiently, this could be the growth stock for you.
An operating system for buildings
What exactly does Latch do? The company has created an end-to-end operating system for apartment buildings (which it intends to adapt for duplexes, single-family homes, and commercial buildings). According to co-founder and CEO Luke Schoenfelder, Latch has partnered with the likes of Google Nest and UPS to create access hardware (locks and such) and sensors (thermostats, light switches, intercoms, and connectivity devices). All of these integrate with Latch’s app for residents, property managers, and delivery services.
No big deal, you say? Sure, this isn’t the first attempt to introduce some cloud-based software and smart hardware into the real estate industry. A traditional sale of apartment devices involves more than eight vendors and a complex patchwork of systems that don’t always play well together. But Latch is a truly complete offering that was designed to seamlessly integrate into the entire operation of an apartment building, and make access and security for residents a cinch from a single app accessible from a smartphone. Schoenfelder wrote this in the founder’s letter:
Our mission is deeply personal to me, as I’ve spent almost my entire life, from my childhood onwards, as a renter in apartment buildings. This experience motivated me and the team to start Latch, as we’ve worked to upgrade and improve the world’s oldest subscription product experience, renting an apartment. While so much of our economy has been transformed by technology, real estate has been a slow mover, and we create tools that make buildings truly better.
The cloud-based subscription model has transformed the software industry over the last couple of decades, but the ancient real estate renting model is clinging to its archaic ways. Latch aims to improve the resident experience and thus help landlords reduce renter turnover, as well as simplify operations and save money. And for service providers (like aforementioned parcel service UPS, for example), easy and secure access to densely populated multi-family complexes could unlock time and money savings too.
Early signs this is a real estate tech pioneer
Since Latch is designed to be built directly into complexes, its go-to-market strategy thus far has targeted apartments currently under construction. Seven out of the National Multifamily Housing Council’s top 10 developers are customers, and more than 1 in 10 new apartment buildings in the U.S. are being constructed with Latch.
It’s a good start, but there’s room for this tech firm to deepen its relationship with its customer base. With some 47 million rental homes in the States, Latch has only garnered a fraction of a percent of the available market. And that’s not including commercial real estate and international markets.
There are compelling reasons more developers might decide to sign up, too. Latch says real estate operators are generating up to an extra $200 to $500 in revenue per apartment each year with the system, all the while reducing operating costs by $100 to $300 per apartment each year. Since it started selling in 2017, Latch says it has never lost a customer and reported an incredible net booked revenue expansion rate of 154% last year (implying the average customer spent 54% more with Latch than the year before).
Total booked revenue (revenue under contract but not yet realized) was $167 million in 2020, a 49% increase over 2019. Initial outlook is calling for an 84% increase in 2021 to $308 million. But remember when I said this is a story stock? Because Latch books a sale up front but realizes the revenue over time (roughly $7 to $12 per apartment each month, signed on an average contract term of over six years), actual revenue was only $18 million last year and will be an estimated $49 million in 2021. However, realized revenue is expected to balloon to $368 million by 2023, in which time the company expects to start generating positive free cash flow.
With an implied equity value of $1 billion once the SPAC merger closes, this will be an “expensive” stock out the gate given the tiny revenue stream — but a small-cap growth stock at a long-term value if the company can pick up the kind of traction it’s expecting to garner in the coming years.
I’d expect a counter-offering from competitors in the connected hardware/smart home space, but Latch is clearly on to something with its integrated ecosystem of products and recurring revenue service built on top. Mind the fact that this will be a very volatile stock. Keep any initial purchase very small (I started with 0.5% of my portfolio value) so you have room to add more over time if the story plays out positively for Latch.
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