Strategic Real Estate Investments: Trends, Opportunities & Considerations

Special Purpose Acquisition Companies (“SPACs”) are the hottest asset class in the United States right now—and there is growing interest within the hospitality industry. EisnerAmper recently hosted the webcast, “Strategic Real Estate Investments: Trends, Opportunities & Considerations,” that examined key influencers affecting the commercial real estate market today, with a specific focus on SPACs and the hospitality industry. (See also, What You Need To Know About SPACS and the Real Estate Industry)  

Panelists

• Michael Morris, Director, EisnerAmper (Moderator)
• Kimberly Grant, Director, Performance Food Group and Co-Sponsor & Chief Strategy Officer, FAST Acquisition Corp.
• Garrick Brown, Managing Director, West Region Research, Newmark
• Phil Colicchio, Executive Managing Director, Specialty Food, Beverage & Entertainment Consulting Services, Cushman & Wakefield

Overview

A SPAC, also known as a “blank check” company, operates like a shell company with no actual commercial operations and is created solely for raising capital through an IPO to acquire a private company. This is an alternative route to the IPO or direct listing. SPACs are usually led by sponsors who are often former corporate executives with expertise in the sector in which the SPAC intends to operate. The success of a SPAC comes down to the due diligence and the strength of the sponsors and management team.

Advantages and Risks

There are number of advantages to going public via SPACs, including the significantly lower expense involved in creating a SPAC, which makes it easier to create and get listed on a stock exchange. SPACs also face fewer restrictions, meaning the process is faster than the traditional IPO route. Additionally, SPACs have better liquidity, since the process of raising funds is already taken care of.

On the other hand, the recent popularity of SPACs may lead to disadvantages. The large number of SPACs could lead to too many SPACs chasing the same opportunities, which can lead to questionable acquisitions, negative media publicity regarding a potential SPAC bubble, and the likelihood of increased regulation. Additionally, the most critical success factors remain the strength of the sponsors and their ability to follow their strategy. The two-year window to deploy capital can also result in the SPAC returning the funds to the investors if they are not able to acquire companies according to their plan.

Trends

The weak performance of some unicorn IPOs in comparison to the advantages of SPACs have made them very attractive in the market. Since last year, SPACs have taken over the IPO market and account for 75% of the activity. The volume of SPACs has increased by $8 billion in the last few days, and as of March 11 the amount raised through SPACs in 2021 is almost on pace with last year; since 2020 it has nearly quadrupled compared to the previous decade.

The popularity of SPACs is catching on in the real estate industry, especially within commercial real estate. We have seen some big market players forming their own SPACs and getting into the game. There are many similarities between the SPAC model and the traditional real estate private equity fund. The vast majority of these SPACs are aimed at acquiring companies in the proptech space, which has seen tremendous growth over the last few years. Many real estate firms are using these vehicles to diversify and allocate a portion of their portfolio toward the efforts to control technology that’s going to influence the market in the decade to come. SPAC-targeted industries in 2020 included startups and hospitality.

While the pandemic is greatly impacting the hospitality industry, it is also creating long-term opportunities for publicly traded companies focused on investing in the restaurant sector. Before the pandemic, there was an oversupply of restaurant companies fighting for their share. This contributed to commercial rental rates achieving all-time high levels, with landlords contributing modest levels of tenant incentives for new lease commitments. For many years, the environment was favorable to landlords, and the pandemic opened up the real estate market—making it more affordable and allowing those who survived with liquidity to secure below-market deals and potentially develop them faster than pre-pandemic.

Considerations

Below are a few considerations that both target companies and SPACs must consider before jumping into the market.

• Be aware that not all privately held companies are made to go public.
• Evaluate if the team in place is ready to go public via thorough due diligence.
• Develop a business strategy that is conducive to the public market, consistent in growth and disciple in earnings.
• Understand risks are involved in the acquisition of a company that has no track record.
• Stay true to the brand and company’s original objectives without giving into momentary temptation in the current market.

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