The Road to Scale - Neighbourgood San Francisco ??

Hey everyone,

I just returned from a week in San Francisco and wanted to share an update on our progress.??

San Francisco really is a long-term value play for us, and the more I visit the city, the more I love it. The local market there has been under pressure for a long time but my gut feels it's poised for growth over the coming years. What makes the San Francisco real estate market unique is it has had two macro issues that have affected its performance over the last 5 years: interest rate hikes and COVID-19’s effect on big companies leaving the city.??

Outside of interest rate pressure, there was a mass exodus of companies leaving downtown as a result of the pandemic; both of these things meant there was a complete reset of property valuations.?

Therein lies the opportunity for companies like Neighbourgood to take its place at the bottom of a real estate cycle in a market filled with so many opportunities, and in a city that couldn't be more exciting to live and work in. Our approach may be a little contrarian but we are sticking to our guns. We think the city has value.??

Starting out in San Francisco, we set up our company the same way we did in Cape Town—an Opco-Propco structure where the operating company (Opco) manages all of our properties that we own as well as selected third-party property owners. We raise equity on a deal-by-deal basis for assets we acquire but over time the strategy will be to partner with an institutional capital provider.??

We just need time to get there.

The blend of both operating cash flow and brand growth that comes from Opco deals, combined with the NAV we can generate through Propco, is the gold standard result. Real estate is in our blood and we like to take ownership.??

Right now, we’re still early in our process. We currently manage approximately 50 units across three buildings in San Francisco and another 1000 in Cape Town. Property management businesses are generally quite marginal. They are expensive to run and require a large labor force relative to the fees that are generated.??

But they are great tools to sharpen our operational processes and create a deal flow for Propco. ? Managing buildings for third-party landlords helps us to produce data as we continue to create incremental progress on the ground, learning every day as we do. Break-even for a property management business starts at north of 500 units under management so we still have a way to go in San Francisco. But go we certainly will.??

The Neighbourgood model is unique to the extent that we employ a per-room flexible rental strategy, that helps landlords (and ourselves as property owners) create better NOI versus traditional multi-family rentals, and in a market where NOI is under tremendous pressure, that's important. We're not just a traditional property management company; we are a consumer brand.????

I have always maintained, however, that sustainable wealth is only created through owning real estate rather than running a management business in isolation and so the goal for us is to acquire property deals that offer significant value-creation opportunities. But owning real estate also comes with its own risks and as San Francisco has learned over the past 5 years, if risk is not managed with care, ownership can also be a scary prospect.??

Interest rates and/or market conditions can move in the blink of an eye, and we need to be ready for any and all eventualities. Most importantly, we need to be risk-averse in our approach to execution. There are always potential landmines in every deal and we need to find them before we execute or pay the consequences thereafter.??

The starting point for us is to be fully immersed in the market, chatting to as many people as we can, looking at as many deals as we can, and building market knowledge that only comes from one thing–time spent on the ground. You just can't beat it. There’s no shortcut to this process we are going through—it’s about showing up every single day and getting the hard work done.??

To date, we have our 3 buildings open, and several stokes in the fire (for both Opco and Propco). We are working hard to raise capital for new deals and every day we get a little closer to achieving our goal: to open 2,500 Neighbourgood living and workspace units across the city over the next 5-7 years.??

The focus we have on operating in two markets only (Cape Town and San Francisco) is a huge advantage. We don't want to be far and wide. We want to run the same streets each and every day over and over again. I'm on my fourth trip to San Francisco and every time I go, we get a little bit better at understanding the market's opportunities and challenges. Give us another year and we will be flying.??

I love the city and everything that it has to offer.? The people, the culture, the buildings, and its ambitious spirit. Everything.??

One step at a time, we will get there!??

Here’s to bringing more GOOD to the world each and every day.