I Work, You Work, WeWork
The hottest real estate start-up of 2018, We Company—the parent company of WeWork—has taken the globe by storm. Founded in New York in 2010 by Israeli entrepreneur Adam Neumann, the company now has investors preparing for what could be one of the largest Initial Public Offerings (IPO) of the year. However, after initially looking to list their shares on the NYSE in late September for $27 a share, WeWork has decided to delay their IPO. Why would a company that was so hell-bent on expediting its IPO process suddenly have cold feet?
WeWork has garnered much interest from outsiders with their aggressive business model, which can be broken down into three simple steps: lease large spaces, transform and renovate them and rent them out to individuals and companies at a higher price. Because WeWork has a diverse group of tenants, they provide a number of renting options, ranging from a single office space to an entire property. Larger companies also have access to a service called Powered by We, in which companies can custom design the look of their office buildings. As of 2018, WeWork managed 35 million square feet in 528 locations across 29 countries.
Despite their intriguing business model, many doubts surround WeWork. For starters, they have a severe debt problem. In 2018, they brought in $1.8 billion in total revenue, compared to $3.5 billion in total expenses. Recently, many startups that have turned public have been unprofitable. In 2018, Uber, Lyft and Pinterest all went public but lost $1.8 billion, $911.3 million, and $63 million, respectively. Large amounts of debt will often bring down a company's stock price, but there are certain metrics that can foreshadow growth despite a lack of profit. One of the strongest examples is a company’s ability to continuously reduce annual operating losses while increasing revenues, something that Uber, Lyft, and Pinterest have all managed to do; however, WeWork’s expenses keep amassing, owing $47 billion dollars in lease obligations alone.
Additionally, WeWork has an occupancy issue. When leasing office spaces in the United States, WeWork commits to an average of 15 years, while renting out the renovated space for an average of only 15 months. To make matters worse, WeWork’s occupancy rate fell 4% in the last quarter of 2018, down to only 80%. This can be problematic, as it takes about 18 months to find a new tenant. To minimize these losses, WeWork must focus on a more established clientele, as opposed to catering towards technology start-ups, whose volatile nature fails to secure long-term rent commitments.
Investors are also skeptical about the company’s sustainability. With a business model that simply allots large cash balances to leases and construction, WeWork’s success can easily be replicated. One main competitor, Knotel, has recently been valued at $1 billion and is quickly looking to expand internationally. While WeWork’s rapid expansion has allowed it to become the industry leader, it is only a matter of time before that status is put to the test.
But the most concerning factor of all is profitability. WeWork has yet to turn a profit despite receiving $4 billion worth of funding as of January 2019. These funds have come from respected parties such as Jefferies, JP Morgan, and SoftBank. We Work did not release any details about their financials until August, when they filled an S1, a financial statement issued to the public by the company prior to its listing. This listing revealed the grave extent of WeWork’s losses and sent investors scratching their heads for answers. Analysts are struggling to find an appropriate valuation method, let alone an accurate price, given WeWorks’ updated financials. When comparing We to Swiss-based rival IWG PLC, We’s valuation is ten times higher, despite having similar occupancy rates. Investors became more anxious when Neumann sold $740 million worth of stocks tied to the We Company. Due to these factors, We Work’s evaluation dropped from $47 billion to $20 billion on what would have been the eve of their IPO. After many investors voiced their concerns, WeWork announced that it would delay its public offering until late 2019.
For We to succeed, they must implement modifications to their business plan to maximize profits by reducing expenses.To diversify themselves amongst their competitors, We can capitalize on their acquisition of Managed by Q—a platform that assists tenants in hiring workspace services—to create a more comprehensive leasing platform. In the coming months, We hopes to turn into the Wall Street darling that so many financial analysts fell in love with.
Photo Caption: WeWork Has Decided to Delay Their IPO
Photo Credit: Pixabay