US Property Tech Preview: Refinancing boom sparks consolidation in residential real estate
Enticed by rock-bottom mortgage rates, homeowners and buyers are rushing to refinance mortgages and buy new homes through digital transactions, sparking a sector reshuffle that could lead to more consolidation.
The Mortgage Bankers Association’s refinance index was 122% higher than one year ago, and its purchase index was 19% higher. The rise in home transactions is benefiting providers in home listing, mortgage origination, home equity, title, closing and escrow services. However, social distance is testing providers’ tech capabilities in remote home inspection, appraisal, insurance underwriting and transaction closure.
To grab market share, buyers are leveraging capital resources to make acquisitions. Last month, personalized property recommendations software provider OJO Labs raised USD 62.5m and used some of the proceeds to acquire real estate brokerage Movoto; real estate technology provider Inside Real Estate, backed by Lovell Minnick Partners, acquired pricing tool DashCMA; Alpine Investors-backed ASG (Alpine Software Group) acquired Denver-based mortgage lending and real estate software Homebot. On 27 July, Black Knight [NYSE:BKI] acquired mortgage data analytic site Optimal Blue from GTCR for USD 1.8bn, payable in cash.
In the past, the largest mortgage providers and banks dominated the residential real estate space. Technology has made the space more fragmented, said a sector investor. With digital acceleration from COVID-19, the space will start to see more technology-driven consolidation, he said.
Real Estate Webmasters recently told Mergermarket it expects struggling businesses with up to USD 5m in revenue to come to market, and it is on the lookout for acquisitions. EasyKnock said it plans to raise up to USD 100m and use some proceeds to make an acquisition in the next 12 months. Homie recently said it will look at both bolt-on acquisitions and another capital raise as it pushes into new markets.
Homeowners are also tapping home equity to get more cash on hand during the coronavirus pandemic. Home equity platforms Noah and Haus Services recently told Mergermarket they are actively raising debt from limited partners as customer demand is outstripping the number of transactions they can do.
by Xinyi Jiang in Charlottesville, Virginia
Here’s a list of residential real estate startups that have been active in the venture capital market (Data collected with best efforts):
|Name||Total raised funds(USD)|
|Patch of Land||24.9m|
Openly, a homeowner insurance platform and managing general agent, could raise more equity to enter new US states, add auto products or establish its own insurance carrier, said Ty Harris, CEO and co-founder. Boston-based Openly sells homeowner insurance through its agency network. Harris said the company is not actively seeking a sale. Logical buyers can be a giant carrier that wants to build a homeowner insurance product, enter the US or add tech capabilities, Harris said, pointing to Allstate [NYSE:ALL]’s acquisition of National General Holdings for approximately USD 4bn in cash in July and Tokio Marine Holdings [TYO:8766]’s acquisition of Privilege Underwriters and its subsidiaries Pure Group for USD 3.1bn in October.
CoreLogic [NYSE:CLGX] has drawn informal interest from financial sponsors over the years, but the information services company has not appeared receptive to third-party approaches, three sector advisors said. The Irvine, California-based company’s board and management have been resistant to the idea of exploring a sale, maintaining that CoreLogic can unlock more value for its shareholders by executing on its standalone plan through repositioning its portfolio, these advisors said. However, with the company’s shares generally staying flat over the past five years, it was bound to become an activist target, two of the advisors said. The real estate and mortgage data provider last week rejected an offer from Bill Foley-led Cannae Holdings [NYSE:CNNE] and Senator Investment Group to acquire the company for USD 65 per share, or an enterprise value of around USD 7bn. The bid came in at a roughly 23% premium to CoreLogic’s closing price the day prior. CoreLogic’s shares closed on Friday at just under USD 68, above the bid. News of the bid came after CoreLogic increased its guidance for 2Q20 earnings. The company subsequently raised full-year 2020 guidance, increased its buyback program to USD 1bn and adopted a short duration poison pill.
Optimal Blue, a GTCR-backed fintech company that helps lenders price and resell mortgages, has mandated Morgan Stanley to explore a sale, said two sources familiar with the situation. The Plano, Texas-based mortgage data and analytics company may be able to fetch a USD 1bn valuation if a deal is struck, said one of the sources and two sector advisors. Optimal Blue is one of the largest stand-alone assets of scale in the space of mortgage pricing solutions, which makes it an attractive target for financial sponsors, said the first source and second sector advisor.
EasyKnock, a New York City-based residential sale-leaseback company, plans to raise USD 50m-USD 100m in 12 months, said Jarred Kessler, CEO and co-founder. The bulk of the proceeds from the next round will be used to further automate its transaction process and to expand sales channels, Kessler said. It welcomes approaches from bankers, he said. EasyKnock also plans to use proceeds to support acquisitions in the next 12 months, Kessler said. The company is considering two types of targets: Real estate investment trusts (REITs) and property management firms that have intellectual properties in lead generation, transaction management, underwriting, and customer data analysis. In the next two to three years, EasyKnock plans to own more than 10,000 homes, Kessler said. While the company has been approached multiple times by interested buyers in the past 12 months, it is not actively seeking a sale or an initial public offering before achieving that milestone, he said. Logical buyers of EasyKnock include banks, REITs, lending platforms and real estate platforms, Kessler said.
Homebot, a mortgage lending and real estate software company, will pursue add-on acquisitions as part of a growth strategy with its new private equity owners, said Mark Strauch, a partner at Alpine Investors. Alpine Investors-backed ASG (Alpine Software Group) – which is focused on buying, building and operating SaaS businesses – announced 25 June it had acquired Denver-based Homebot. Strauch said Homebot would target real estate technology focused on residential real estate brokers and mortgage officers. “We would evaluate companies from USD 2m-USD 50m in revenue with all types of backers,” he added. That would include other venture-backed, seed stage companies looking to grow like Homebot, he agreed. Homebot's software platform helps loan officers and real estate agents offer homeowners personalized wealth management insights.
Haus Services, a San Francisco-based home equity investment platform, is in talks with investment bankers to close a USD 100m debt round soon, and could pursue a Series B next year, said CEO Jonathan McNulty. Haus is in talks with institutional banks, insurance companies, credit providers, family offices, and sovereign wealth funds for the debt round, McNulty said, adding that investors have shown strong interest in owner-occupied residential real estate because of their healthy cash flow. It welcomes approaches from additional investment bankers, he said. Haus generates revenue by collecting 20% of homeowners’ monthly payments, the remainder of which goes to investors, McNulty said. While Haus has not started talking to investors for a Series B, the round will be “a much larger round,” McNulty said. Haus plans to use proceeds from a Series B raise to enter new regions and expand marketing channels, he said. McNulty said the company is not actively seeking a sale. Logical buyers are banks that want innovative technology in the residential real estate space, he said.
Spruce, a New York City-based online real estate title and escrow services firm, is benefiting from the increasing digitalization of real estate transactions during the coronavirus pandemic, said Patrick Burns, CEO and co-founder. The shift from in-person closings to digital proceedings, combined with a surge in mortgage refinancing as interest rates fall, has caused revenue to increase 20% month-over-month so far this year, he said. While the insurance tech firm has seen a slowdown in new home purchase activities, it has been more than offset by an uptick in refinancing activities, Burns said. While Spruce has received occasional inbound inquiries from suitors, it has no plan to sell, Burns said.
Real Estate Webmasters (REW) expects to gain significant revenue through acquisitions amid the fallout from COVID-19, said Morgan Carey, CEO. Nanaimo, British Columbia-based REW provides out-of-the-box software to create customized residential real estate websites. REW could potentially add USD 20m or more in revenue with tuck-ins, according to Carey. The company aims to reach USD 50m in revenue within three to five years, organically. REW is projecting revenue of approximately USD 24.5m for its fiscal year ending 30 June 2020, with an EBITDA margin of approximately 20%, Carey said. More than 70% of revenue is recurring via its software-as-a-service platform, with the rest stemming from services. About 70% of revenue is from the US, with 20% from Canada. Valuation multiples in the real estate marketing software and technology space can reach up to 3x-5x revenue, the CEO added. REW has no plans to sell in the near term, though Carey said he has “done the road shows to know ‘who is who’ in the market”, in anticipation of a potential event down the road.
Noah, a San Francisco-based home equity investment platform, has seen application volumes spike 3x-5x and transaction sizes surge in the past few weeks as homeowners seek more cash during the coronavirus pandemic, said founder Sahil Gupta. Pre-coronavirus, the average transaction size was about USD 100,000, and that figure has grown 30%-40% in the past few weeks, he added. Noah has enough cash to grow through next year, and it may have conversations with investors next year for an equity raise, Gupta said. Noah also plans to grow its technology and data science teams to analyze risk patterns of customers, he said. Noah would consider a new capital infusion to help accelerate these developments and grab more market share, he said.
Homie, a South Jordan, Utah-based real estate technology company, will look at both bolt-on acquisitions and another capital raise as it pushes into new markets, said Mike Peregrina, CFO and co-founder. Besides M&A deals that could add licensed professionals for different portions of the process of buying and selling homes, Homie could also look to add capabilities if it feels it cannot develop them internally quickly enough, Peregrina said. It would like to add services for commercial real estate and a way to connect customers with workers for repairs and remodeling. Peregrina said it is likely Homie will raise more capital in about 12 months to continue with expansion. Peregrina said any investors need to be comfortable with the cyclical nature of real estate, which cools off in the winters. Homie facilitated more than USD 1bn in real estate transactions in 2019, grew revenue by 150%, and has more than 250 employees in three states, according to a company spokesman.
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