October 23, 2019
WeWork has a math problem, and investors and landlords are finally accepting it.
The coworking giant’s penchant for signing long-term leases as it gobbled up large blocks of office space in major cities across America while subleasing that space in smaller chunks on a month-to-month basis to dozens of companies has now become a massive financial liability.
WeWork may run out of money as soon as next month, Bloomberg and other financial media have reported.
WeWork investor SoftBank now plans a takeover bailout package that would value WeWork’s parent, The We Company, at around $8 billion — an 80% plunge from its $47 billion valuation earlier this year when SoftBank made its last investment in the company.
JPMorgan Chase & Co. was promoting a $5 billion junk bond package, which is the riskiest form of debt, for WeWork earlier this week. Some of the debt notes had a 15% coupon, which is unusually high and is often viewed by investors as a sign of distress.
WeWork’s fall from grace in just a few short months is a stark reversal from its outlook heading into the summer when the company was planning a much-anticipated initial public offering (IPO) of stock.
Wooing hip startups and fast-growing companies with flexible office space, free lunches and beer on tap all day, WeWork quickly grew to 528 locations with 527,000 members as of June when the company filed pre-IPO registration paperwork with the U.S. Securities and Exchange Commission.
WeWork bragged to prospective investors that its revenue run rate rose to $3.3 billion, an 86% improvement year-over-year.
But dig deeper and the math gets alarming.
WeWork’s expenses are around $6 billion a year, nearly double the amount of revenue it brings in.
The company is hemorrhaging cash, and lost almost $1 billion in the first half of this year alone.
While WeWork’s average commitment term from members has more than doubled in the past couple years, it’s still only 15 months — whereas most of WeWork’s own leases with landlords are 15 years long.
WeWork’s future obligation to landlords is a staggering $47 billion as of June, according to its SEC filings.
That’s a backward math equation, where long-term fixed expenses far outstrip near-term committed revenue.
“Substantially all of our leases with our landlords are for terms that are significantly longer than the terms of our membership agreements with our members,” WeWork said in its risk disclosures. “If we are unable to replace members who may terminate their membership agreements with us, our cash flows and ability to make payments under our lease agreements with our landlords may be adversely affected.”
You can say that again.
WeWork’s IPO plans almost immediately fell apart when investors got a close look at the company’s financials, sending investment bankers scrambling to cobble together alternative funding plans.
WeWork’s co-founder and CEO Adam Neumann stepped down in September, and there have been a flurry of reports that the company is going to make significant job cuts and rein in growth to slash costs.
There have also been more mundane problems like the discovery of formaldehyde in 2,300 of its phone booths, which serve as “private work space” amid WeWork’s cavernous and noisy open offices that some tenants say impedes concentration.
So what happens next?
In our opinion, WeWork will shed non-core assets and locations and hopefully get to profitability in the short term. There is definitely a need for flexible workspace, and WeWork has done a lot of right for this segment of the industry.
But in the long term, there is still a business model problem with long-term liabilities and short-term revenue contracts.
What we hope to see is larger owners partnering with WeWork and others to build out coworking centers and let the coworking companies do what they do best, which is to manage these spaces and not have long-term liabilities on their books. The owners can spread out the risk of short-term leases over a larger porfolio. That solves the business model issue but allows the flexible workspace segment to survive during a possible economic downturn.
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