- Analysts and potential investors have had some big questions about WeWork. They now have some answers.
- In its public offering paperwork that it released last week, WeWork addressed many of those questions.
- One of the sections in the document was entitled “Expected Resilience in a Downturn.”
- But the company’s answers didn’t necessarily provide a lot of reassurance to its skeptics; many analysts instead found reasons in WeWork’s IPO paperwork to be even more skeptical of the company than before.
- “Their list of risks [in the document] for the company going forward were kind of a greatest hits of what everyone has been thinking about it,” according to Walter Johnston, who focuses on the real-estate market as a vice president of credit ratings at the research firm Morningstar.
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Analysts and potential investors have had some big questions about WeWork. They now have some answers.
The coworking giant has faced scrutiny over everything from its basic business model, to its valuation, to its CEO Adam Neumann. In its public offering paperwork that it released last week, it addressed many of those questions. The filing even attempted to answer one of the biggest head-on — one of the sections in the document was entitled “Expected Resilience in a Downturn.”
But the company’s answers didn’t necessarily provide a lot of reassurance to its skeptics. Although the filing attempted to play down or paper over the weaknesses in WeWork’s business model and dubiousness of its $47 billion valuation, many analysts instead found reasons in WeWork’s IPO paperwork to be even more skeptical of the company than before.
Read this: Here are the 5 biggest questions facing WeWork as it prepares for its IPO
There had been plenty of “rumors and whispers” prior to the paperwork that the company was losing copious amounts of money and its growth was unsustainable, said Walter Johnston, who focuses on the real-estate market as a vice president of credit ratings at the research firm Morningstar. The filing basically confirmed those suspicions, he said.
“Their list of risks [in the document] for the company going forward were kind of a greatest hits of what everyone has been thinking about it,” Johnston said.
Here’s how WeWork answered some of the biggest questions about its business and offering — and what analysts made of its answers:
SEE ALSO: Why WeWork’s $47 billion private valuation could be a key stumbling block for its IPO — and might even derail it completely
Just what is WeWork?
Prior to the release of WeWork’s IPO filing, many wondered whether the company was more like a tech firm or a real estate one. The difference isn’t just semantic; investors tend to pay a much steeper premium for tech companies than for real-estate firms. They also tend to be more tolerant of losses for tech companies, especially if they’re growing quickly and can promise a big payoff down the road.
WeWork wants to be classified as a tech company.
As you might expect, WeWork attempted to pitch itself as being square in the middle of the tech industry. It mentioned the word “technology” 93 times in its IPO document, including in the very first paragraph of the very first real page of the document, right after the table of contents.
“We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure,” it said.
But that wasn’t all. Latching on to one of the industry’s buzzwords, WeWork described its service as a “platform,” mentioning that word 170 times. Seemingly riffing off another industry catchphrase — software as a service, used to describe services offered on a subscription basis over the web or through apps — WeWork described its business as “space-as-a-service.”
“We offer a space-as-a-service model that we operationalize by using a global-local playbook powered by technology,” it said in the part of its IPO filing where it describes its business.
WeWork isn’t a staid old real-estate company, it assured potential investors. Instead it’s using it’s using its technological savvy to revamp the workplace.
“We are reinventing the way people work and transforming the way individuals and organizations relate to the workplace,” it said.
“We imagined,” it continued, “the future of work: dynamic, well-designed workspaces for less, a suite of value-added products and services, all powered by data, analytics and deeply integrated technology that helped our members unlock creativity and productivity.”
Analysts think that’s ridiculous.
Regardless of what WeWork said in its IPO paperwork, its numbers make clear that it’s not a tech company, analysts said. All you have have to do is look in the document at where it’s spending its money, said Robert Siegel, a lecturer in management at Stanford Graduate School of Business.
In the first six months of this year, it spent $1.2 billion on “location operating expenses,” which includes such things as the rent it pays its landlords, its utility bills at the properties it rents out to its clients, and its costs for repairing and maintaining those properties. Those expenses consumed 80% of its revenue in the period, according to its IPO filing.
By contrast, the company spent $370 million, or 24% of its revenue, on “growth and new market development” costs. That’s a grab-bag term the company uses to describe a wide range of expenses, from finding, designing, and developing new office spaces to technology research and development.
Even if you assume that half of the money WeWork is spending on growth is going toward technology, it would represent a small fraction of the amount it devotes to its real-estate costs, said Siegel.
“I don’t think there’s any way you can look at this company today and say it’s a tech company,” he said.
WeWork does offer an app that helps tenants report problems, book conference rooms, and find and attend events. But lots of companies theses days — including in the real estate sector — offer apps or rely heavily on technology, said Daniel Morgan, a longtime tech investor and a senior portfolio manager at Synovus Trust.
Sure, it has lots of tech companies as tenants. And its revenue growth rate (100% in the last six months), soaring losses ($690 million in the same period), and heady private valuation (nearly 16 times this year’s expected sales), resemble that of a tech company.
But it doesn’t depend on technology for its revenue, and its technology doesn’t distinguish or protect it from competitors.
WeWork’s effort to try to pitch itself as a tech company is akin to an illusionist’s trick or like the idea that if you repeat something enough times, people will believe it, said Scott Galloway, a professor of marketing at New York University and former startup founder.
“It feels like there’s a total lack of respect for the intelligence of investors,” Galloway said.
What happens in a recession?
Long before WeWork released its IPO paperwork, analysts and potential investors worried about how it might fare if the economy goes south.
Its business model would seem to leave it vulnerable in a recession — it signs long-term, traditional leases and turns around and sublets space on short-term, flexible deals, often to small startups. The company runs the risk that its clients will close shop, downsize, or demand better deals even while it’s stuck in much longer leases.
WeWork hasn’t ever experienced a broad economic downturn; it was formed after the Great Recession. But Regus, which pioneered the coworking market, offers a cautionary tale. After thriving during the dot-com boom of the late 1990s and early 2000s, its US operations went into bankruptcy after that boom went bust.
This isn’t all just theoretical. Investors, economists, and politicians are growing increasingly worried that the US economy may soon go into recession.
WeWork says it will be fine and could even thrive.
WeWork attempted to address head-on the fears about how its business will fare in a recession.
Its paperwork included in the boilerplate risk section warnings that its business may be adversely affected in a downturn. But the filing also included an unusual section entitled, “Expected Resilience in a Downturn.” In that area, the company argued that — standard risks aside — its business will do well no matter what the economy is doing, because of the value it offers clients.
But business could even pick up in a recession, WeWork said in the filing. In a downturn, companies will likely want to avoid signing long-term leases and will be attracted to the short-term office deals WeWork offers, it said. Not only are they less costly that what companies would have to pay for traditional leased space, but because of their short-term nature, companies don’t have to show them as long-term obligations on their balance sheets, it said.
WeWork said it would also be buoyed by its growing number of enterprise customers, which now represent some 40% of its client base, and by its $4 billion in revenue backlog from longer-term deals its customers have signed.
And the company disputed the notion that it hadn’t weathered any downturns. During the economic uncertainty in Great Britain that followed the Brexit vote, its operations in London saw increased occupancy rates, it said. After the monetary crisis and subsequent economic downturn in Argentina that began in 2017, it was able to keep its occupancy levels there above breakeven levels, it said.
“Going forward, we believe that we are well positioned to navigate through further economic downturns,” the company said in its IPO paperwork.
“Not only do we believe our business model mitigates the pressures of an economic recession,” it continued, “we also believe that our model could position us well in a downturn.”
The company has also taken steps to protect itself in a recession. Most of its leases are held by specially created subsidiaries that are legally separate from WeWork. If it had trouble paying leases on particular buildings in a downturn, it could send the subsidiaries that signed those leases into bankruptcy, protecting the parent corporation. Of WeWork’s the $47.2 billion in outstanding lease commitments, $41.1 billion is essentially unguaranteed by the parent company.
Analysts aren’t convinced.
Analysts generally don’t buy WeWork’s arguments that it would do fine in a recession. The nature of the deals it offers its clients makes those deals relatively easy to break — much easier than traditional leases.
In a downturn, analysts say, many of its startup and solo entrepreneur customers could close shop or just go back to working out of their houses. Even its enterprise customers are at risk. If they decide to scale back their operations, their much more likely to shut down their coworking spaces than try to get out of their traditional leases, especially if they only have a handful of people working out of them.
In downturn, when companies are looking to scale back their office space, “you do the quick discretionary ones first,” said Tom Smith, a cofounder of Truss, an online commercial real-estate marketplace.
WeWork’s plan to lure companies away from traditional leases to its spaces in a downturn could have an unintended consequence, Smith said. It likely will be touting low prices. But its existing clients will likely see those promotions and badger it for lower rates, he said. And, because they’re not locked into long-term deals, but could bolt at basically anytime, they could have a relatively easy time getting better rates.
This isn’t just a theoretical danger, Smith said.
Renegotiation “happens in commercial real estate all the time,” he said.
And he and other analysts aren’t impressed that WeWork’s business held up in Argentina and in London after the economic problems in the two places. Neither was a global or even a regional downturn, they noted. London’s problems had little to do with and didn’t seem to much affect the real estate market and the company had little exposure to Argentina at the time of that country’s downturn, analysts said.
“Brexit and Argentina were not the Great Recession,” Morningstar’s Johnston said.
How much can and should investors trust Adam Neumann?
Even before WeWork made its IPO paperwork public, people were raising questions about Neumann.
The Wall Street Journal reported earlier this year that Neumann had made “millions of dollars” buying personal stakes in buildings and then turning around and leasing them to WeWork. The Journal reported last month that he’d cash out to the tune of $700 million by selling or borrowing against his shares in the company.
Then the Financial Times reported earlier this month that Neumann and WeWork had created a new corporate structure for the company right before its expected IPO that would decrease the tax liabilities of Neumann and other insiders for any profits the company made while increasing the tax liabilities of outside investors. Neumann already had majority control of WeWork, and the arrangement looked like it would further cement that.
Analysts and potential investors worried what such moves said about Neumann’s management of the company and WeWork’s overall corporate governance.
WeWork says he’s a ‘visionary’ and ‘critical to our operations.’
In its document, WeWork portrayed Neumann in glowing terms and central to its success.
One indication of the importance the company places on Neumann was just the sheer number of times it mentioned his name in the filing — 169 times. By contrast, Uber’s IPO filing mentioned “Dara” — the first name of its CEO — just 29 times, Galloway noted in a blog post.
But there was more. In one of the risk factors, the company warned that it didn’t have an employment agreement with Neumann, but said that “our future success depends in large part on [his] continued service,” calling him “critical to our operations.”
In the section where it described the various transactions Neumann and his family members have engaged in with the company, WeWork explained that they were a function of “his deep involvement in all aspects of the growth of our company” and prefaced its descriptions of them by talking about how crucial he is to WeWork.
“From the day he co-founded WeWork, Adam has set the Company’s vision, strategic direction and execution priorities,” WeWork said in the filing. “Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator.”
The document acknowledged that Neumann had sold shares of WeWork in the past, but said he hadn’t sold any since 2017, wouldn’t sell any in the IPO, and had committed to not transfer any of his shares or options for a year after the offering.
In terms of his real estate purchases, the company said he did them with its interests at heart.
“In the early days of our business, at a time when landlords were reluctant to recognize the benefits of WeWork as a tenant, Adam bought four buildings in order to help prove WeWork as a viable tenant to landlords,” the company said in the filing. “In December 2017, Adam expanded his participation in purchasing real estate by buying a majority interest in downtown San Jose development projects, a first step in pursuing the Company’s vision for the future of cities.”
Neumann has since agreed not to purchase any additional properties with the intent to lease them to WeWork, the company said. Wanting to address any conflicts of interest with the past transactions, he and the company set up a real estate fund primarily owned by WeWork that will manage his interests in 10 properties, including four leased by the company. The fund has an option to buy the properties for a year.
On the governance front, the company said it adopted its new corporate structure to allow it to more easily expand into new areas, acquire new businesses, or enter into partnerships. It also said the structure would help insulate each one of those business lines from each other so the failing of any one of them wouldn’t necessarily bring down the whole company.
While acknowledging that Neumann would retain majority control of WeWork after the offering, the company said that was good, because it is “a founder led company.” It also said that Neumann had committed to giving up majority control if the number of shares he owns dips below 5% of the outstanding number.
Analysts say Neumann is surrounded by red flags, and one said he clearly shouldn’t be trusted.
WeWork’s document did little to reassure those worried about Neumann’s management and its governance. In fact, it added to the worries of many.
Among the new information that the company disclosed in the document was that Neumann had gotten a trademark on the word “We” and then sold the rights to it WeWork when the later — under his direction — decided to rebrand itself as The We Company. WeWork gave Neumann $5.9 million in additional ownership interest for the trademarks.
But the document also revealed a whole collection of loans, related party transactions, and other eyebrow raising deals and agreements. The company hired two of Neumann’s immediate family members, the filing reported. It gave him a massive grant of 42 million stock options, then gave him a $362 million to exercise those options early and take possession of the shares, then handed him profit interests in the newly restructured company in exchange for those shares, cancelling the loan in the process. It also revealed that he will maintain majority control in WeWork by holding stock that gives him an unusual 20 votes per share.
That last bit was the biggest red flag for Jeff Langbaum, a real estate analyst with Bloomberg Intelligence.
Having that kind of control will allow “him to effectively do what he wants,” Langbaum said.
WeWork under Neumann has already made some questionable moves, ones that “make me wonder if every decision is made with bottom line of shareholders in mind,” he continued. “If shareholders don’t have a say, that could be worrisome.”
Galloway thinks the situation is worse than that. The document makes clear that Neumann shouldn’t be trusted, he said.
“How can you claim to be a good fiduciary for someone when you’ve been selling as if you’re about to flee the country,” he said, referencing Neumann’s $700 million cash-out.
Not only is Neumann untrustworthy, Galloway said, WeWork’s board of directors, whose nominal job it is to oversee him in the interests of shareholders, is “incompetent” and “flaccid.”
“Does this board lack all backbone or domain expertise in business,” he said. “I think the answer is yes.”
Will this be another Uber?
One of the big worries about WeWork is that its IPO will have a similar fate as Uber’s.
Late last year, bankers for the app-based taxi company were hyping the notion that the company could see a valuation of as much as $120 billion when it went public. It ended up being valued at much less than that. It priced near the low end of even its far less ambitious range, which gave it an initial market capitalization of $75.5 billion, only about $3 billion higher than its peak private valuation.
Things got worse from there. The company’s stock slipped in the days following its IPO and have fallen farther since. It now has a market capitalization of $57 billion, a valuation it surpassed in the private markets three years ago.
To appease nervous investors worried about mounting losses, the company’s been slashing jobs and looking for other ways to cut costs.
And it’s not the only giant startup that’s struggled after going public. Slack and Lyft are also trading below their initial prices.
The worry has been that WeWork will perform similarly. It’s the most highly valued company to attempt to go public since Uber, has similarly massive losses and cash burn, and similar questions about its business model.
WeWork dodged the question.
At least in its initial paperwork, WeWork give any indication of the value it’s seeking in its IPO. It didn’t set a price for its shares and didn’t say how many it would be selling.
The company did offer some boilerplate warnings about things that could make its stock price decline after it goes public, including fluctuating quarterly results, not effectively using the money raised in the offering, future sales of stock by the company or employees, its multi-class stock structure. And it said that it and its management are focused on building long-term shareholder value.
But other than that, it said little about how it expects its shares to perform and nothing about why it won’t be the next Uber. In fact, it didn’t mention Uber at all.
But analysts are worried its IPO could be as bad — or even worse.
WeWork’s $47 billion valuation is out of sync with its business — and setting it up for a big fall, analysts said.
The company is valued at nearly 16 times its expected revenue this year. By contrast IWG, which owns Regus and is WeWork’s closest competitor, is profitable and trades at only 10 times its earnings. It’s valued at around $3 billion — or less than 1/15th the value of WeWork.
WeWork may well be a better company than IWG, but that doesn’t mean it’s necessarily worth 15 times as much, analysts said.
It’s not just that the company is posting big and mounting losses. It’s that the company is being valued like a tech company even though business model shows it isn’t like one at all. On top of that, its valuation — in terms of price-to-sales — is even higher than that of Uber or Lyft when they went public, Morgan said.
“That’s going to be a hurdle for them to try get through on the roadshow” when WeWork officials meet with potential investors, he said. “Because a lot of guys are kind of burned out right now on these unicorn IPOs.”
Indeed, Galloway thinks there’s a chance there will be so much pushback on that valuation that WeWork either doesn’t go public at all or sees its stock drop by as much as 90% after it goes out.
“You could see this thing lose $40 billion” in valuation, he said.
How is competition affecting the market?
WeWork isn’t the only coworking provider out there. Regus pioneered the space thirty years ago. More recently, a growing number of both startups and traditional landlords have been getting into the market.
According to Smith, last year 69 different coworking companies listed space on Truss. This year, that number has jumped past 256.
Growing competition could affect WeWork in several different ways. It could struggle to find new places for its offices or have to pay more for its leases than it would otherwise. It could lose clients to competitors or be forced to offer them lower rates to get them to stay. It could also lose key employees to rivals.
Regardless, the company could see its business take a hit from competition — either from decreased revenue or increased costs.
WeWork largely dismissed the threat.
WeWork said little about competition in its filing. In fact, it only mentions the word seven times and “competitors” just 14 times.
It includes dangers of competition in its list of risk factors, but it portrays them more as theoretical than actual threats. It could lose clients or employees to competitors in the future and that could hurt its business, it acknowledged.
But the company generally argues that it has a leg up on its rivals.
“Our investments in our global platform, coupled with purpose-built technology and operational expertise, provide what we believe is a significant first-mover advantage over our competitors as the pioneer of the space-as-a-service model,” the company said in the filing.
It’s too soon to know, analysts say, but some see warning signs for WeWork.
WeWork’s done a great job of establishing its brand and becoming something like the Kleenex of the coworking business, analysts said. It’s become kind of the default option when people are looking for a coworking space.
But its basic business model — renting space longterm and subletting it to other companies on a short term business — is easily replicable, as dozens of rivals have already shown.
WeWork didn’t offer investors “a ton of comfort there in terms of what their competition can do,” Johnston said.
There’s not enough information in WeWork’s IPO document to know how it’s being affected by competition so far, analysts said. Any kind of effects it might be seeing in terms of rising lease costs or pressure on the rates it charges tenants are basically overwhelmed by the sheer number of new facilities it’s opened — 314 in the last two years — and all of the new customers those are attracting.
“It’s very difficult to be able to know the impact that competitors are having on them, because they just keep going out in front of them into new markets,” Smith said.
Still there are some potential red flags. The company acknowledged in its filing that its average revenue per client has declined and it expects that figure to continue to drop, although it attributed that fall to its expansion into lower-priced markets.
Additionally, its sales and marketing expenses have ballooned at a rate even faster than its revenue growth. While its revenue in 2018 was about four times larger than it was two years earlier, WeWork’s marketing expenses were nearly nine times higher.
The basic problem for WeWork is that “nothing’s stopping anybody from trying get into that business,” Langbaum said.
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