INVH - SmartRent: The Smart Way To Invest In Smart Homes And Proptech

2023-06-01 07:00:00 ET

Summary

• SmartRent, Inc. is the dominant smart home technology company focused on rental housing, and demand for SMRT’s products and services is blasting higher.
• SmartRent’s platform is unique and proven. The six largest rental housing companies in the U.S. are all SmartRent, Inc. customers. SmartRent’s only direct competitor, Latch, Inc., is going bust.
• SmartRent is growing new orders so quickly that the company is battling to fulfill them.
• Losses are rapidly narrowing. Liquidity, at $200 million of cash, is strong.  The runway to positive free cash flow is clear.
• A large and growing backlog of orders means SmartRent’s free cash flow growth is visible for years.

This article was published at iREIT™ on Alpha on Tuesday May 30, 2023. This article is coproduced with Tonor (aka John Murphy).

John is a new contributor to iREIT™ and we're very excited to have him on the team. Please welcome him to iREIT™ on Alpha.

John is an investor in real estate companies in the United States, Canada, and Mexico. John served as Vice President at Cohen & Steers from 2005 to 2020 directing investments in real estate securities.

Prior to joining Cohen & Steers, John worked at Simon Property Group in its international division, building outlet shopping centers in Mexico and Japan. John earned a BA at Rutgers University and an MS at New York University and is a CFA charterholder.

About SmartRent

Founder and CEO Lucas Haldeman launched SmartRent, Inc. ( SMRT ) in 2017. Previously, Lucas ran technology at Invitation Homes Inc. ( INVH ), where he created the industry-leading technology platform for the emerging single family rental business.

SMRT makes money by: 1) selling hub device hardware packages to landlords and installing them inside rental units; and 2) generating recurring software as a service, or SaaS, revenue from software applications. These apps streamline tasks, save money, and make life easier for owners and tenants.

Over the past five years, the best rental operators in the U.S. have chosen SMRT to be their smart home technology provider. SMRT counts as customers the majority of the top 20 U.S. owners of multifamily real estate, including the top 7 U.S. apartment REITs. The largest owner of single family rental houses, Invitation Homes, is also among SMRT’s client base of 500 customers.

Dominant Competitive Position

SmartRent, Inc.’s customer base is the who’s-who of the U.S. rental housing market. The country’s most sophisticated rental housing owners have decided, en masse, to make SMRT their smart home solution. SMRT’s investor base matches the stature of SMRT’s clientele. Cornerstone investors include U.S. housing visionary Starwood Capital, dominant multifamily owners UDR, Inc. ( UDR ) and Essex Property Trust, Inc. ( ESS ), and INVH, the leading owner of single family rentals.

SMRT does not have direct competitors.

• Latch, Inc. ( LTCH ) is SMRT’s closest stock market peer. Latch went public in 2020 as a smart home SaaS company. How is LTCH doing? LTCH hasn’t filed financial statements four quarters in a row and disclosed that the financials it released in 2019, 2020, and 2021 are unreliable.
• The largest owners of rental housing could have created smart home technology in-house. Instead, they are choosing to partner with SMRT.
• Big tech has been quiet in the smart home space. Bill Gates debuted his smart home in 1997, but Microsoft Corporation ( MSFT ) has not emerged as a SMRT competitor. Amazon.com, Inc. ( AMZN ) bought home security company Ring in 2018 for $1 billion but hasn’t pursued growth into SMRT’s target rental housing market.

The onboarding of customer units onto SMRT’s platform is in its infancy. A handful of early movers, including UDR and Aimco, have more than 90% of their 50,000+ unit portfolios up and running on SMRT’s technology, confirming SMRT’s pilot projects with its customers quickly turn into to full portfolio rollouts. However, a large majority of units SMRT customers have committed to putting on SMRT’s platform are yet to be deployed and generate revenue.

As of March 31, 2023, SMRT had 603,000 units deployed and generating revenue, compared with a pipeline of 809,000 units that customers have committed to but have yet to be deployed. Collectively, SMRT’s customers own or operate 6.7 million of the 45 million rental units in the U.S.

SMRT’s achievable ceiling for growth is sky high.

SMRT’s pricing power is improving, according to details in SMRT’s most recent annual report . In 2021, SMRT sold hub device hardware for $361 per unit. Last year, SMRT’s hub device prices rose to $436, a 21% increase. SMRT’s SaaS revenue per unit is growing at an even faster pace, nearly doubling from $30 per unit deployed in 2021 to $59 in 2022. Both unit volume and per unit pricing are growing at the same time.

SMRT’s biggest challenge is customer orders are coming in so fast, SMRT has struggled to meet the demand. This is illustrated in the above chart. It shows SMRT customers are committing to adding units to SMRT’s platform faster than SMRT can bring them on board. Not a bad problem to have, especially when there are no competitors who might soak up potential business.

And SMRT is getting better at converting orders into revenue – in 2022, SMRT deployed 208,000 units compared to 168,000 in 2021.

Brightening Financial Outlook

SMRT reported Q1 2023 revenue of $65 million, easily a post-IPO record and 74% above last year. In addition, SMRT affirmed its 2023 revenue guidance of $225 million to $250 million, a conservative range given the $65 million of revenue earned in Q1 2023.

Losses continue to narrow. Gross margins advanced for the fourth consecutive quarter, hitting 14%. Operating margins, which reflect expenses such as markets and research & development, improved for the sixth quarter in a row to -24%.

In the next few quarters - likely in early 2024 - SMRT’s operating margins and free cash flow will turn positive. The key timing variable is how quickly SMRT converts its enormous backlog of orders into revenue-generating deployed units.

Cash on hand remained stable at $204 million as of the end of Q1 2023 , more than enough cushion to finance the company’s shrinking losses. SMRT is debt-free, meaning its cash flows will not be impacted by higher interest rates. The company’s liquidity position is strong.

A recession would have a relatively small impact on SMRT’s financial outlook, compared to other industries. The reason is that SMRT’s business is secular, driven by rapidly growing demand for smart home technologies. SMRT’s customers are financially strong and have committed to years of future business growth with SMRT.

Valuation

SmartRent, Inc. is valued attractively against its peers. Top peer LTCH is on its 3 ^rd CEO in a year and letting go its employees.

On the enterprise-value-to-sales ratio, a key metric for valuing tech stocks, SMRT stock stands out at 1.4x.

Recommendation

SmartRent, Inc.’s stock price has fallen since its 2021 IPO for two reasons. First, technology stocks and the stock prices of companies bought by special purpose acquisition corporations, or SPACs, have performed terribly over the past two years, beaten down by unrealistic valuations and rising interest rates.

SMRT was purchased by a SPAC, Fifth Wall, that agreed to buy and take public SMRT at $11.10. Second, SMRT did not achieve its 2022 profitability target because of supply chain bottlenecks – which have since eased – that delayed the timing of SMRT’s hardware installations.

More recently, SmartRent, Inc. is demonstrating the ability to turn its stockpile of committed units into revenue. Free cash flow profitability is in sight, with profitability growing rapidly in 2024, 2025, and beyond, as SMRT installs more units onto its platform and generates rising recurring revenue and cash from its SaaS business.

BUY – SmartRent, Inc.’s dominant position with disappearing competition in a solid industry, along with the stock’s valuation, make SMRT a strong buy.

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