Special purpose acquisition companies, or SPACs, have been a force to be reckoned with in the capital markets world, accounting for a record $83 billion of fundraising activity last year and more than $50 billion in less than two months of 2021.
Sponsors of these structures, also known as blank-check companies, raise money from public market investors specifically to take another company public or merge with it. They have largely been focused on software-centric start-ups, but several prominent real estate firms – including Tishman Speyer, CBRE and Simon Property Group – have launched SPACs of their own, and proptech groups such as Latch, Porch and Opendoor have been acquired through these vehicles.
Hard asset acquisitions have been noticeably absent from the recent flurry of SPAC activity. But there is good reason for that, Jocelyn Arel, a partner with New York-based Goodwin Procter who leads the law firm’s SPAC practice, told PERE. “People had more to grapple with in the real estate industry than other industries in March and early April of 2020,” she said. “It was a challenging year and it disproportionately affected real estate, so the natural reaction was to be slower to jump at these types of opportunities.”
Once a SPAC holds an initial public offering, it only has two years to find a company to acquire. While that has been of little issue for the broader market, which multiple market observers described to PERE as a “target-rich environment,” the limited timeframe would be problematic for groups focused on hard assets, Arel said. With global real estate sales at a seven-year low in 2020, according to transactions house Real Capital Analytics, and existential questions raised about the future demand for office, retail and hospitality assets, there was simply too much uncertainty in the asset class.
“If you’re premature coming into the marketplace in an area where there are just so many unknowns, you’re just wasting cycles, so you’re better off having clarity about where the market is going before jumping in with both feet,” Arel said. “You’re putting your own money at risk and if you don’t consummate a transaction, that money is gone.”
Some are skeptical that hard assets will ever play a substantial role in the SPAC universe. Investors in this space are looking for cheap exposure – units typically run about $10 each – to companies with high-growth potential, which are harder to come by in the real estate industry. “Real estate is already priced pretty efficiently,” one capital raiser told PERE. “The next Amazon is not going to be a real estate company.”
Still, the pandemic has highlighted the promise of certain niche property types, particularly those with strong ties to emerging technologies, such as data centers, life science labs and more specialized industrial assets such as last-mile fulfillment centers, so-called reverse logistics warehouses and cold storage for food delivery.
Evan Hudson, a partner with New York-based law firm Stroock & Stroock & Lavan who specializes in real estate capital markets, said real estate acquisitions in the SPAC market will center on these sectors with strong appreciation potential rather than steady-yielding traditional properties.
“Think of a Venn diagram with overlapping circles,” Hudson told PERE. “On the left is non-correlated real estate, the domain of private equity real estate. To the right is proptech and fintech, the domain of many SPACs. In the middle, where the circles overlap, you will find real estate with a tech-linked growth component. That is an asset class where SPACs and PERE overlap.”
SPAC vs IPO
Although blank-check companies are just now having their day in the sun, the structure has existed for decades. In fact, an IPO through a SPAC is a type of reverse merger, which has existed since the 1970s. Arel said SPACs became mainstream in 2004 as investment banks such as Citigroup, Merrill Lynch and Deutsche Bank adopted the practice. At that time, SPACs filled the capital void for taking fledgling companies public after the dotcom bubble burst, she added.
Refined structures – pertaining to redemptions, voting and issuers having skin in the game – and oversight to root out fraud, helped SPACs gain traction with a broader pool of sponsors and investors in the years following the global financial crisis, Arel said. The market surpassed $10 billion raised in 2017, according to the analytics firm SPAC Research, with both the number of IPOs and the amount raised through them increasing year after year.
Being acquired by a SPAC is a faster, more cost-effective way for target companies to go public. It also allows for a “more intimate dialogue with investors,” Arel said, in which companies can pitch the future projections for their business models to voting unit holders, rather than being limited to current performance. This distinction is why WeWork is seen as a viable acquisition target despite the co-working firm’s failed IPO attempt in 2019. The structure also proved more resilient than traditional merger and acquisition deals during the onset of the pandemic.
“We really had a confluence of factors in 2020, in which the advantages of SPACs were borne out,” Arel said. “We had been saying for years that having a pre-determined valuation and well-structured deals would allow them to survive through volatility and close on the negotiated terms, and in the spring of 2020, when we saw lots of M&A deals being terminated, SPACs deals closed.”
Tishman Speyer was among the biggest names in real estate to enter the SPAC market in 2020. Last September it announced the creation of TS Innovation Acquisition Corp, which it subsequently took public in November and raised $300 million. It used that capital to acquire Latch Inc, a company that makes keyless entry systems.
This year, Tishman Speyer created a second SPAC, TS Innovation Corp II. Initially targeting $250 million for the vehicle, it upsized to $300 million in February. The New York-based company declined to comment on its activity in the space but has stated its intention to acquire a second proptech firm.
In December, CBRE raised $350 million for a SPAC of its own, CBRE Acquisition Holdings, expressing a desire to target “high-growth companies,” but did not commit to focusing on the proptech or hard asset spaces. The following month, mall specialist Simon Property Group filed paperwork to raise $300 million for Simon Property Group Acquisition; it also offered limited stipulations for potential targets, stating it would look for a group that would benefit from its expertise.
Some SPAC sponsors have deviated from their core businesses for acquisitions. Property Solution Acquisition, a blank-check company created by multifamily investment and management firm Benchmark Real Estate Group, purchased Faraday Future, an electric vehicle start-up. Similarly, non-real estate companies have made acquisitions in the real estate space. The largest SPAC merger to date is Gores Holdings IV, a $425 million SPAC sponsored by the private equity firm Gores Group, combining with United Wholesale Mortgages. Likewise, the homebuying start-up Opendoor merged with a SPAC associated with renowned tech venture capitalist Chamath Palihapitiya last September.
Trinity Merger Corp, sponsored by Honolulu-based manager Trinity Investments, was one 46 SPACs to go public in 2018. The vehicle raised $345 million and acquired Broadmark, a Seattle-based hard money lender, which is now traded as a mortgage real estate investment trust. Sean Hehir, chief executive of Trinity, said he felt it was important to target groups that can generate revenue through something other than simply collecting rents.
“Pure real estate is efficiently priced in the private world already, and when you layer on the warrants of the SPAC and the sponsor promote, it gets a little bit more difficult,” he told PERE. “There’s absolutely a market for real estate SPACs, but if a company has other components in addition to real estate, it makes it a much more viable target. It could be an operating component, it could be franchising, it could be real estate finance or development, there’s a whole swath of what can be done.”
In the near term, Zach Aarons, founder of the proptech venture capital firm MetaProp, expects firms focused on innovative real estate software and hardware to be the prime acquisitions targets for SPACs. Also, because of the reliance on retail investors, he said the process will be most advantageous to groups with strong brand awareness or concepts that are easily digested by the public, pointing to Latch and Matterport, a virtual touring platform, as prime examples.
Meanwhile, as more of these proptech firms are listed on public markets, it becomes easier to value the start-ups that are still privately held. “If you have companies where you can point to a Yahoo Finance ticker and see every minute what their multiples are for revenue, EBITDA and earnings, it’s a lot easier to comp the stuff that’s private,” Aarons said. “Now, instead of only 10 or 12 publicly traded firms in the space, we’re going to have 30. It’s just going to be a lot easier to get benchmarks for stuff that’s still private.”
As for SPACs that focus on hard assets, the outlook is less clear. But, with large sums of retail capital flowing into vehicles sponsored by sophisticated real estate owners and managers, the potential to invest in hard assets remains strong, Hudson said. “When a SPAC targets real estate, it looks for a growth component,” he said. “That could mean investing in the real estate backbone of the online economy, be it real estate with a nexus to digital infrastructure, or novel ‘reverse logistics’ solutions. Other sponsors might target severely distressed assets, or levered assets. Any real estate class that enables a sponsor to cover the load, so to speak, looks like fair game.”