Hmlet bags US$6m injection from investors in a 'down round' for turnaround; exits Australia

CO-LIVING operator Hmlet has received a US$6 million injection, which the company hopes will help turn the tides in its favour amid a recovering rental market.

Challenged by the pandemic, the embattled startup had previously lost its chief executive and many top management executives, downscaled its portfolio and faced a dwindling cash runway, The Business Times reported.

This latest round of new funding was raised from existing investors, including Burda Principal Investments and Sequoia Capital. Interim chief executive Peter Kennedy confirmed that the valuation from this funding round was lower than its previous Series B post-money valuation of US$154.4 million, but declined to reveal exact details. Former CEO and co-founder Yoan Kamalski’s 18.9 per cent stake in the company will be divested over the next 12 months, he added.

Now, with additional funds and a new management team, the startup is looking for a measured recovery. It is proceeding with a more data-structured approach to manage costs and push margins higher, said Mr Kennedy, who is also a senior investor at one of Hmlet's biggest backers, Burda Principal Investments. The startup will also streamline operations to focus on core markets in Singapore, Hong Kong and Tokyo. 

Hmlet recently pulled out of Australia, less than two years after its launch, as negotiations with landlords to restructure leases fell short. It has filed a winding-up notice for its Australian entity. Leases were terminated, but the company did not face any penalties, said Joshua Li, its chief real estate officer. The retreat from Australia, one of its newer markets, follows previous reports by BT that the company exited Malaysia and Thailand after less than six months.

Meanwhile, the team has been negotiating with existing landlords in Hong Kong and Singapore to restructure leases and provide some concessions to the startup, said Mr Kennedy. He declined to elaborate on these contracts or concessions.

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“The leases we negotiated previously were probably not as smart as they could have been,” he told BT. When Covid first hit, rental rates were depressed, he said. Hmlet thus had to cut prices and dangle discounts to get people to stay. But this ate into its margins. Meanwhile, occupancy rates continued to fall. 

But now, even amid a rising rental market, around 85 to 95 per cent of landlords in Hong Kong and Singapore have been “quite supportive” and have agreed to give Hmlet various forms of rent concessions, chief real estate officer Mr Li said. He added that this has been one of the important areas in the startup’s process for recovery.

The company also “reduced the headcount and cut the burn substantially”, which was also a mandate by the investors before they came into the round, noted Mr Kennedy. Earlier this year, BT reported that Hmlet cut around 20 employees in middle- and upper-management roles, in areas such as technology, operations and marketing.

A check showed that the company has listed about 20 open positions over the past month in areas such as operations, sales as well as product and engineering. These include upper management, middle management, entry-level and internship roles.

The next step would be to increase its margins, along with occupancy rates. “We are looking to bring up our average selling price, which has dropped (in previous years),” Mr Kennedy said.

A check by BT showed that Hmlet still lists some of its vacant rooms in Singapore for a lower price than for similar units on the market, consistent with previous reports.

For example, a master room at The Sail on Hmlet starts at S$3,000 a month. Similar rooms on PropertyGuru list for S$3,200 to S$4,000 per month. The startup previously offered customers up to S$600 off for a 12-month lease, BT reported. It now offers a 25 per cent discount for the first month’s rent for a four-month lease.

In response to queries about the lower rents Hmlet has offered, Mr Li told BT that the startup “had a lot of people who had leases at low prices''. It is now trying to renew those at higher rates, he said. “Rents are going up in Singapore. Now that we have a more healthy occupancy - of above 80 per cent - we are starting to gradually increase prices, as most operators do.”

Giselle Makarachvili, Hmlet’s vice-president of global operations, noted that the startup’s rental rates vary in the same way that a hotel does - that is, prices fall when  rooms need filling, and rise when occupancy is higher.

Things could be picking up.  Mr Kennedy said the startup has improved in metrics such as churn rates, occupancy rates and the average length of stay - which has risen to about six months. 

Sources told BT previously that the average lease period in 2020 was about 3.5 to 4.5 months - barely above its minimum lock-in period of three months (for most apartments). The startup hopes to increase the average length of stay to eight months over the next two to three months.

There is a delicate balance to find between pricing and occupancy rates. Hmlet will need to ensure that the price of its leases are not too high so that rooms will still be filled, but not too low that it depresses margins. “It's something that we've spent a lot of time on, trying to find the golden ratio,” said Mr Kennedy. 

He added that Hmlet’s business model is “very sensitive” to the small changes in occupancy and in the average price of leases. “These small changes, collectively, make a huge impact on the business”, he said, but declined to elaborate on how much these changes will fatten margins, citing confidentiality and the fact that there are varying conditions for different properties and markets.

With the fresh funds, the startup aims to widen its portfolio once again. Mr Li said that the company is now onboarding two more flagship buildings in Singapore, totalling over 300 rooms, and signing a management contract with a five-star hotel in Hong Kong.

Signing management contracts is a way to “de-risk” the business, said Mr Kennedy, since  occupancy risk is typically taken by the landlord instead of the operator. Hmlet hopes to move towards a balanced combination of head leases with landlords as well as management contracts, striving for a 50-50 mix between head leases and management contracts. 

READ MORE: 

• Hmlet: a hard lesson in hubris
• Co-living startup Hmlet loses CEO; hit by senior management exodus
• Hmlet backs out of Malaysia, Thailand less than six months after launch
• Hmlet lays off about 20% more staff amid financial woes