Will The We Company Work?
WeWork, now The We Company, is one of many organizations whose fortunes have climbed to dizzying heights by leveraging the sharing economy. With WeWork filing an amended draft registration with the SEC, an IPO is anticipated. So, it is timely to ask whether WeWork’s good fortunes are sustainable.
WeWork’s Place in the Sharing Economy
Before we drill down on WeWork, let’s take a brief look at a few other progenies of the sharing economy, Airbnb and Uber. Airbnb uses other people’s homes to host more than one million stays per night. Uber uses other people’s cars to provide 15 million rides per day. Airbnb pays hosts nothing for the use of their homes. Uber pays drivers nothing for the use of their car or the repairs or maintenance thereof.
In sharp contrast, as detailed below, WeWork pays handsomely for its use of other companies’ office space, and risks having to pay more with the passage of time. WeWork is a tenant, leasing office space from sophisticated, deep-pocketed landlords. WeWork signs long-term leases, then alters and subdivides the spaces. Finally, WeWork subleases the space on a short term basis. As a result, WeWork relies on short term income to finance long term financial obligations secured with leases negotiated with some of the most sophisticated landlords in the world. Historically, reliance on short term revenue to finance long term obligations is improvident, and often ends badly. What if the economy dips and the sub-lessees demand concessions, or, what if they move elsewhere? WeWork’s long-term obligations will continue.
What if the Cost of Space Increases?
Landlords have noted WeWork’s approximately $50 Billion valuation, and want a piece of the pie. Large sophisticated landlords typically view profits from space, in a proprietary manner, within their purvue. That is precisely why many leases include “profit sharing”, or similar provisions. Such provisions pertain to rents which are higher than the lease rent, and which arise due to an assignment of the lease or a sub-lease (“Surplus Rents”). Profit sharing provisions often divert a part or all of Surplus rents to the landlord. Variations on this practice may become increasingly common in the co-working world.
Landlords Want a Bigger Piece of the Co-Working Pie
Landlords have dipped their toes into the co-working waters, and are wading in further. For example, Tishman Speyer launched its own co-working brand, Studio. Studio was launched in six global markets, including New York City’s Rockefeller Center.
In other instances, landlords will continue to outsource co-working, but will enter into management arrangement with the growing cadre of co-working companies. For example, Blackstone Group’s EQ Office is teaming up with another co-working company, Industrious. Industrious will operate co-working facilities of up to 140,000 square feet at the 1.3 million square foot Howard Hughes Center in Los Angeles.
WeWork Seeks to Boost Confidence by Borrowing $3 – $4 Billion
Large sophisticated landlords are simply not going to leave tens of billions of dollars on the table. This could exacerbate an existing problem; WeWork is already bleeding cash at the rate of about $2 Billion per year. WeWork’s “solution” is to boost confidence by borrowing between $3 and 4 Billion, which, according to WeWork, is enough to see the company through to profitability.
Is WeWork worth anywhere close to a $50 Billion valuation? The company is losing about $2 Billion per year in a strong economy. What if rents fall, and sub-tenants demand cheaper rent to stay, or, move to less expensive premises? What if landlords cut into WeWork’s margin, for example, by adding Percentage Rent. Or what if landlords are willing to take over co-working spaces, managing such spaces themselves or with the assistance of competitors such as Industrious or Knotel?
WeWork must already grapple with myriad issues, some due to the company’s own success. This includes skittish lenders, leery of extending credit to those landlords who are overly dependent upon WeWork rent checks to fulfill their debt obligations,
Look for more posts on WeWork as it moves closer to an IPO.
Author: Randy Airst at Exceedant and Team.
Based in the Greater New York region and Tampa, Florida region of the USA, The Exceedant Group is an asset management and financial services firm. Exceedant specializes in private equity, credit and hedge fund investment strategies. Exceedant’s clients have included NYSE and NASDAQ traded companies, hedge funds, private equity firms, commercial real estate firms and other entities.
Randy has been involved in asset strategy and management with clients/investors for many years at Exceedant and its predecessors.
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