The Renters Warehouse Sale & The Rise of PMs Going for "The Big Exit"

"Pigs get fat, hogs get slaughtered"

There was a fantastic recent episode of Jordan Muela’s “Profitable Property Management Podcast” that left me feeling compelled to comment. If you haven’t seen the episode, I’ve embedded it below, and I strongly recommend a watch.

Now, it’s no secret to people who follow me that I've never been a Renters Warehouse fan. While I think they’ve done some innovative things in the space, such as fantastically successful radio ads, I also think they’ve hurt the industry significantly with their bargain basement flat-rate pricing model and an aversion to ancillary revenue that is an absolute necessity in this industry. That said, as always, Jordan gives great interview, and there is a lot of fantastic information here that is worthwhile for everyone in the industry to listen to. What I’ll be commenting on, though, is the company’s sale to GA Technologies last year after their disastrous attempt to go public through a SPAC.

Note: this article only focuses on Renters Warehouse corporate, and individual franchisees who didn’t sell back to corporate are obviously excluded from my commentary, and many have gone a very different route than corporate and have revenue maxed and streamlined their operations to run great businesses.

Some Background

For those who aren’t familiar with the history of Renter’s Warehouse (we’ll just call it “RW” for brevity’s sake), it is a property management company that started up in 2007 in Minnesota. By 2011, they had launched a franchise model and sold nearly 30 franchises by 2015 before they started re-acquiring many of those franchises in 2016 and focusing on bringing on institutional clients. At the peak, they managed somewhere around 20,000 doors. Along the way, they also decided that they wanted to become a “PropTech” company and developed their own technology along with making a couple of tech acquisitions.

By 2022, RW decided that it was time to “go public.” At this point, they were down to around 15,000 doors and $31 million in gross revenue (for those who follow my revenue maximization guidance, yes, that revenue figure is absolutely atrocious for that number of doors, which goes back to my earlier criticism of their aversion to ancillary fees). There are two ways for a company to “go public.” The traditional model is called an Initial Public Offering (IPO), where a company works with an investment bank who underwrites the company’s offering and then takes the company public on the stock market by selling shares in the business. This is an EXTREMELY expensive undertaking, frequently costing the company tens of millions of dollars in legal and banking fees. The other option is something that has become increasingly popular in recent years called a SPAC (Special Purpose Acquisition Company). A SPAC is essentially a public company that is created from the start with the sole purpose in mind of merging with a private company to bring it public. It has been called “the poor man’s private equity fund” by many investment analysts. This costs the private company that is acquired only about half as much as a traditional IPO would, and it carries less underwriting scrutiny, making it a lot easier for a relatively small business like RW to be taken public. The average company going public the traditional IPO route has somewhere in the neighborhood of $250 million in annual revenue. RW was barely over 10% of that number. This might have given some people some pause, but RW pressed ahead and was taken public in 2022 via a SPAC.

As Mr. Ortner discusses in the interview, this did not go well. Investors in a SPAC know up front when they buy in only a general idea of what kind of business they will end up investing in. In this case, when buying in to the PropTech Investment SPAC, investors basically knew that the SPAC would be looking to acquire some sort of technology-focused management company, but that was all they knew until the SPAC targeted RW and then announced the merger. One of the unique things about a SPAC is that the investors have a period of time before the merger is finalized when they can essentially back out and get their money back (with interest!). This is essentially what happened, en masse. The investors who had initially bought in to the SPAC got really skittish when they saw that RW was the targeted company and they got a good look at the numbers. Part of the problem with RW’s model is that since their property management revenue is so low, they are dependent upon other revenue streams, namely brokerage transactions. If you read the presentation that was provided to SPAC investors, you’ll notice how heavily it focuses on their “marketplace” component, to which they allocate about 40% of their projected revenue. This component of their revenue model is basically the idea that investors will use their platform to acquire new properties that RW would manage, and then later sell that property also through RW’s platform. RW was relying so heavily upon this component because their actual PM revenue was abysmal at around $175/door per month. For those who aren’t familiar, the NARPM average is about $50/door higher than that, and the NARPM benchmark is roughly $150/door higher than that. RW was essentially operating as the bargain basement property manager and then trying to supplement the abysmal revenue with brokerage transactions and renovations. You know, basically the exact opposite of what you really should be doing with a PM company. This became an even bigger problem when investors realized that interest rates spiked shortly before the merger, and the prospect of all of that brokerage transaction revenue was in serious jeopardy going forward.

When the SPAC investors saw the presentation and had their meetings with RW executives, they were spooked by what they saw, and by the time the deadline was reached for redemption, 99% of the SPAC’s shares were redeemed. What started out as the hopes for a 9-figure capital raise instead turned into a few million dollars, which was less than the actual cost of the merger itself, leaving the new public company, now called Appreciate, with massive debt. In fact, by the next year, the amount of debt on the books exceeded the total market cap (the total assumed value of the business based on share price and number of shares). The NASDAQ de-listed the company in October of 2023 because they failed to meet the minimum requirements to be listed on the exchange, a truly humbling and embarrassing “accomplishment.”

In dire straights at that point, and signaling potential disaster in their SEC filings, RW had to go looking for a way out of the mess that had been created. What they found was a company called GA Technologies (in Japan of all places) who agreed to acquire them and take them back private for around $8 million. Again, think back, this was a company that was hoping to raise hundreds of millions of dollars by going public. Instead they acquired only massive debt and then had to be bailed out for a measly $8 million by a company that even they had never heard of before.

Of course, Mr. Ortner tries to make this sound like a much more rosy situation than it actually was in his interview, talking up GA Technologies and how well positioned they supposedly are now, but the facts are pretty plain that this was nothing more than a complete disaster for the business and its investors.

The Siren’s Song of Going Public

Now, I don’t want to trash Mr. Ortner or anyone else involved in RW. Because frankly, they aren’t unique. At all. SPACs have developed a reputation now for notoriously high redemption rates from investors. A simple Google search will find a whole lot of articles talking about various SPACs that saw the same 99% redemption rate after the acquisition target was announced. This is a necessary evil in the SPAC game, because otherwise no rational investor is going to dump money into a SPAC not knowing any of the fundamentals of the business that is going to be acquired. Providing a redemption window is a necessity to draw investor cash. But this leaves the business in a very precarious situation. If the investors don’t like what they see after the merger target is announced, they’re screwed, just as RW ended up being.