|Bid||392.00 x 0|
|Ask||392.60 x 0|
|Day's Range||391.10 - 395.00|
|52 Week Range||199.00 - 428.70|
|Beta (3Y Monthly)||1.86|
|PE Ratio (TTM)||9.73|
|Forward Dividend & Yield||0.07 (1.64%)|
|1y Target Est||222.14|
(Bloomberg) -- On its way up, WeWork poached customers with free rent and rich broker commissions, trampling on less wealthy and aggressive competitors to gain a seemingly dominant position. Now the tables are turning, and rivals are struggling to contain their glee.“Happy birthday to me, happy birthday to me,” sang a senior executive of another co-working company who asked not to be identified.In the aftermath of WeWork’s scuttled initial public offering, rivals such as IWG Plc, Convene, Industrious and Knotel are pitching themselves as more stable providers of flexible office space for landlords across New York, Toronto and Los Angeles with WeWork leases.Three large U.S. landlords have reached out to Novel Coworking in the last week to gauge the company’s interest in either buying buildings leased to WeWork or managing their space if it becomes necessary. Novel, which has 34 locations across 26 cities, has taken over co-working spaces from other operators in the past, Chief Executive Officer Bill Bennett said in an interview. Unlike many of its competitors, Novel shuns leases, preferring to own real estate.“Everyone is having conversations behind closed doors,” Bennett said in a phone interview. “People are trying to find their plan B and plan C.”It’s a contrast to the days when WeWork employees would visit competitors’ spaces posing as prospective customers, photograph their tenant lists, then contact all of them with offers of incentives to move. Sometimes they’d set up outside rivals’ offices with games and couches and pitch clients as they passed by. Through this summer, WeWork was adding more than a million square feet a month, according to Jones Lang LaSalle Inc., and had become the biggest private-sector tenant in London, New York and Washington.A WeWork representative declined to comment for this story. At two Manhattan locations, several WeWork members said they hadn’t even heard of the company’s IPO woes. Clients say that their day-to-day feels normal: Offices are still stocked with free coffee and beer, and the company still intersperses the workday with events for members.Just a month ago, New York-based WeWork was the fastest-growing co-working firm in the world with a highly anticipated IPO expected to unlock cash for growth. Now, its plan to go public has collapsed, co-founder Adam Neumann has stepped down as CEO and it could run out of cash as soon as next spring given its current pace of spending.The uncertainty is weighing on landlords, investors and tenants with ties to the company. Deals for two large London office buildings leased mostly to WeWork are on the ropes, and the firm has pulled out of an agreement to rent space in a Dublin office block. In New York and London, WeWork’s most concentrated markets, landlords are bracing for any drop in demand.WeWork, which leases and owns spaces in office buildings and then rents desks and rooms to customers, has raised more than $12 billion since its founding nine years ago and has never turned a profit. The company had been targeting a share sale of about $3.5 billion in September, people familiar with the matter have said. The withdrawal ends a turbulent process that turned one of the most hotly anticipated debuts into a cautionary tale of the public market’s reticence to pay up for an unproven business model.For rivals, it’s the perfect opportunity to grab market share.“WeWork was a competitor vying for space in Nashville, San Francisco, London and Boston but since filing their S-1, they’re no longer in the mix,” Ryan Simonetti, CEO of New York-based Convene, which specializes in flexible meeting, events and office space. “This has created a tremendous opportunity for us to tell our story and show not just existing landlord partners, but potential ones, how different our model is.”It’s a theme echoed by Laura Kozelouzek, CEO of Quest Workspaces.“I see this as a much-needed return to pragmatism for the industry,” she said. “It’s going to be a rough ride for a number of owners and landlords as WeWork pulls back, but there will be some great opportunities as well.”Flexible SpaceIWG, formerly known as Regus, has been through many recessions and is publicly-traded with far less debt behind its growth. New York-based Industrious has pivoted to only using management agreements with landlords instead of outright leases, sharing in the profits. And Knotel only focuses on large enterprise clients.“There’s no question it’s a good thing for Industrious,” Jamie Hodari, the company’s CEO, said. “WeWork is still going to be a big formidable business, but they’re going to be a big formidable business that behaves more accordingly to the typical confines of how businesses behave, as they’re trying to march toward profitability and trying to sign prudent deals.”Partnership ModelSimonetti said it’s unlikely to see an extensive industry shake-up anytime soon, but the tenor of conversations is changing with landlords and flexible-space operators. “We’re seeing landlords that are more committed to thinking about a partnership format instead of signing a new lease. The noise is forcing landlords to ask real questions, including ‘How profitable are you at a unit-level?’”WeWork also has been shifting to more management agreements and deals with enterprise clients. Its new CEOs Sebastian Gunningham and Artie Minson are reassuring clients that the turmoil is just a bump in the road. Plus the firm is still hitting back at some rivals, though perhaps not as aggressively as before.Eduard Schaepman, CEO of Oaktree Capital-backed Tribes, said some of Tribes’s prospective tenants are being offered steep discounts by WeWork. One company, which he declined to name, citing confidentiality, agreed to a 10,000 euro ($11,000) a month deal in Brussels for about 50 desks, roughly a third of the 30,000 euros Tribes would have charged.Schaepman turned down WeWork as an investor in 2016 in favor of Oaktree. Tribes, which has 23 locations and is profitable, has hired three sales executives from WeWork since July, he said.It may be hard to find a competitor to take over a traditional WeWork office, which often has many partitions and tiny rooms aimed at co-working companies. For companies like Knotel that cater to clients with 100 or more employees, the layout is not ideal.“They’ve spent billions of dollars building out co-working facilities,” Eugene Lee, chief investment officer and global head of real estate at Knotel, said. The “millions miles of glass partition that they used to be proud of, is now just something they have to deal with and you can’t make those partitions disappear.”(Adds comment from CEO of Quest Workspaces.)\--With assistance from Jack Sidders, Gwen Everett and Jacqueline Gu.To contact the reporters on this story: Natalie Wong in Toronto at firstname.lastname@example.org;Gillian Tan in New York at email@example.com;Patrick Clark in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Rob Urban at email@example.com, Alan MirabellaFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
WeWork's decision to abandon its initial public offering and the resulting turmoil at the shared office space provider has created an opportunity for major competitor IWG , said IWG's founder and Chief Executive Mark Dixon. This contrasts with the large losses reported by WeWork in its filings for the IPO, which also triggered questions about whether its business model worked.
(Bloomberg) -- WeWork’s landlords in New York and London, the two biggest markets for the troubled co-working firm, are preparing for any drop in demand from the company, which had arrived in both cities just when vacancies were poised to rise.WeWork is the largest private-sector tenant in both cities. In Manhattan, the company has 7.2 million square feet of space, according to brokerage firm CBRE Group Inc. In London, the company has leased about 3.7 million square feet since 2014, according to data compiled by broker Savills Plc, making it a major source of demand that’s helped the U.K. capital weather the uncertainty following the 2016 Brexit vote.“The flexible-office sector as a whole has accounted for 20%-25% of leasing across London in the last three years of which WeWork was a major contributor, so it is significant,” said Mat Oakley, Savills head of commercial research. “When WeWork began growing in London, the leasing market was relatively weak so landlords were grateful for that source of demand. But now you have a fairly strong market and they are probably not as needed to keep occupancy high.”Doubts about WeWork’s future have emerged after its plans to go public this month collapsed. In the past few weeks, several executives left the company, with co-founder Adam Neumann stepping down as chief executive officer. Deals for some office buildings largely leased to WeWork are on the line, a round of job cuts in the company was made in New York City and its valuation continues to drop. At the same time, WeWork parent We Co., which needs to raise cash, is selling the $60 million Gulfstream G650 that it bought last year for Neumann.Short-Term Benefit“The office markets have had a short-term benefit over the last few years from the uptick in leasing,” said Danny Ismail, an analyst at Green Street Advisors. “There’s definitely a downside risk, but I don’t think it’s an existential risk to markets like New York or others that are exposed to co-working.”After the Brexit vote, many in London feared there would be a sharp drop in demand for office space and a decline in rents as jobs shifted to Paris, Frankfurt and Dublin. While some banks have established new hubs in continental Europe, the projected exodus hasn’t happened. That, along with demand from WeWork and expanding technology companies such as Apple and Facebook, has kept leasing volume and rents largely stable.About 5.1% of office space in the City of London and 3.8% in the West End is currently vacant, Savills data show, below the long-run average. Ultimately, London still may be harder hit than New York by a WeWork retreat, though traditional landlords, brokers and rival providers of flexible space in both cities would step in.Pending DealsWeWork currently has about a half-dozen pending deals in London that landlords are awaiting clarity on. The largest of those is for space in Peterborough Court, the current London headquarters of Goldman Sachs Group Inc., that the bank will soon vacate. Talks are progressing and WeWork hasn’t notified the building’s owners of any change, people with knowledge of the talks said.Sage Realty Corp, a unit of the William Kaufman Organization, announced Friday that it finalized a long-term lease with WeWork for 362,197 square feet of space spanning 12 floors at 437 Madison Avenue. The deal was done 15 months ahead of a lease expiration with an existing long-term tenant, the firm said in a statement.“In this environment where large blocks of space can sit on the market for months, if not years, our talented leasing team has brought in several interested parties and now successfully negotiated a deal 15 months before vacancy,“ Jonathan Kaufman Iger, CEO of Sage Realty, said in a statement. Some London landlords have clauses in their leases with WeWork that would allow them to essentially operate the company’s space independently, two people with knowledge of the contracts said. Land Securities Group Plc, British Land Co. and Great Portland Estates Plc, three of London’s largest real estate investment trusts, have also launched their own short-term rental units, as have traditional office landlords in New York such as Silverstein Properties Inc., Tishman Speyer, and Durst Organization.“Even if they vanished off the face of the earth it wouldn’t really impact this market -- it might create some decent vacancy, but I don’t think they’re going to vanish,” said Jordan Barowitz, a spokesman for Durst, which recently created Durst Ready, a flexible-office service aimed at tenants seeking 2,500 square feet to 25,000 square feet. “What we’re doing is a way of capturing some of WeWork’s market.”Providers such as IWG Plc, Knotel and Industrious are pitching themselves as safer flexible-office options. IWG, owner of the Regus brand, is one of the oldest co-working firms and one of the few that has survived several recessions. A key danger is growing too quickly in concentrated markets, according to IWG CEO Mark Dixon.“Our network’s been put together over 30 years on these cycles,” Dixon said. “We’d accelerated too much at the top of the market and haven’t ever done that again since, but it was painful and costly and it was very expensive to get out of the problem.”Now, IWG focuses on keeping its liabilities low and its growth balanced, Dixon said. “If you are a very large occupier in very large cities, these are danger zones. If you have a seismic event, call it a recession, it tends to hit those liquid cities.”(Updates with new WeWork lease in Manhattan starting in ninth paragraph.)To contact the reporters on this story: Jack Sidders in London at firstname.lastname@example.org;Natalie Wong in Toronto at email@example.comTo contact the editors responsible for this story: Rob Urban at firstname.lastname@example.org, Christine MaurusFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
The high-profile start-up built its real estate portfolio with long-term leases. The problem is that WeWork’s customers are far less committed.
(Bloomberg) -- Does WeWork work?After the office-sharing company sidelined co-founder Adam Neumann to resolve governance and leadership issues, the next question is a more traditional one for prospective IPO investors: Does its business model make sense? It all depends on execution.WeWork shook up the world of co-working spaces with more amenities and efforts to create communities for its tenants, who are frequently small groups or even individuals. Since its inception in 2010, the company has expanded at such a rapid pace that it’s become one of the biggest office tenants in places such as Manhattan and central London. At the same time, it was burning through cash, its path to profitability was unclear and it was committing to long-term leases that could blow up in an economic downturn, leaving landlords with wide swaths of empty space.The model is “extraordinarily risky,” said Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, who specializes in valuing enterprises. “If WeWork had been a mature company, you’d be less worried,” he said. But “this is a company where 80% to 85% of its value is based on what you think they can do in the future.”For WeWork rival IWG Plc, the world’s largest operator of serviced offices, the business of offering customers short-term office space around the world has made Chief Executive Officer Mark Dixon a billionaire. Founded three decades ago as Regus, for much of IWG’s history, its spaces were pretty plain vanilla -- shared office equipment, someone to answer phones -- compared with WeWork’s flash, its kombucha on tap and other amenities.Less RiskMuch of WeWork’s business revolves around signing long-term leases with landlords, fixing up the space and renting it out. IWG and other competitors responded with similar offerings, but found ways to mitigate the risks. IWG is pursuing franchise agreements that allow it to expand with less of its own capital at risk, while Industrious, a newer entrant, has shifted to management contracts with landlords instead of outright leases, splitting the profits. Companies like Knotel are focused on leasing space only to large corporate tenants, eschewing startups that tend to proliferate at WeWork locations.“A fixed lease for co-working operators is a bit of a double edged sword: it’s great for operators in up markets, but pretty painful in down markets, whereas management agreements reduces some of the inherent volatility in a fixed-obligation structure,” said Danny Ismail, an analyst at Green Street Advisors. “By having these alternative structures compared to a traditional lease, it does reduce capital expenditures and makes it more asset-light.”WeWork is also starting to pursue more management contracts. It’s also shifted its tenant base in the past year toward more corporate and enterprise clients. In these management agreements, landlords fund the buildout of spaces to WeWork’s specifications and maintain responsibility for them. WeWork then collects a fee for managing the office. WeWork generally forms a subsidiary to represent each lease deal, which means individual locations could fold without leaving the company itself with much risk.New York-based Industrious, which was founded in 2013, is months away from profitability, according to CEO Jamie Hodari.“We don’t sign leases, we sign management agreements with landlords and partner with them,” Hodari said. “If we spend any capital, it’s capital to build out new spaces, but there’s no operating losses or burn rate to cover.”Most ExposedInvestors across markets like Manhattan, London, San Francisco are among the most exposed to WeWork. Deals for two big London office buildings leased mostly to WeWork are on the ropes. Several large landlords and brokerages who invest in and lease space to WeWork declined to comment for the story. Other landlords with less exposure to WeWork aren’t too concerned.“We’re not spooked,” said Michael Cooper, CEO of Dream Office REIT, which leases space to WeWork in Toronto. “There’s a question around the funding of the growth of co-working but not as big a question around the value of the business to customers and ability of co-working businesses to pay rent.”Regardless of what happens with WeWork, co-working “is here to stay,” said Sylvain Fortier, chief investment and innovation officer at Ivanhoe Cambridge Inc., the real estate unit of one of Canada’s biggest pension funds. It has invested $1 billion alongside ARK, WeWork’s real estate investment and management arm, but isn’t an investor in the company.“It’s been a disruptive business model for the industry; we want to understand it, and we want to participate in it,” Fortier said.Steadier InvestmentsWhile WeWork is the dominant flexible-space operator in terms of size and growth in the U.S., adding nearly 11 million square feet to its portfolio since the second quarter of 2018, other rivals have also capitalized on the shift to flexible offices over the past decade, including IWG’s Spaces and Knotel, which each added more than 1 million square feet in the U.S. during that period, CBRE Group Inc. said.In the U.S., flexible office supply jumped by 34% in the second quarter from a year earlier, but still accounts for just under 2% of the country’s total office inventory, according to a report by CBRE. The brokerage firm predicts that by 2030, flexible office space could account for 13% of the total U.S. office supply. It even launched its own business to help landlords create their own flexible offices last year.Firms like Industrious and Knotel have attracted backing from large investors like Newmark Knight Frank and Wells Fargo Strategic Capital.WeWork’s troubles may be severe but the co-working model is still viable if done right, said Michael Emory, CEO of Allied Properties REIT, which leases space to IWG in Canada. “These businesses need a more rational valuation, not a multi-billion dollar valuation that simply isn’t sustainable in the public markets under public scrutiny.”To contact the reporters on this story: Natalie Wong in Toronto at email@example.com;Noah Buhayar in Seattle at firstname.lastname@example.orgTo contact the editors responsible for this story: Rob Urban at email@example.com, Kara WetzelFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- As WeWork contemplates listing on the public markets at a far lower valuation that previously expected, its biggest backer—Japan's SoftBank Group Corp.—is bracing for a potentially staggering loss, a stark reminder of the risks of an investing strategy that inflated startup valuations across Silicon Valley.SoftBank has a roughly 29% stake in the We Co., WeWork’s parent, said one executive at an analyst call on Wednesday, after the company plowed a total of $10.65 billion into the startup. The Tokyo conglomerate’s massive stake is a vote of confidence in the unprofitable company, which lost about $1.61 billion last year.Perhaps more than any other startup, WeWork has come to symbolize the brash investment style of SoftBank and its $100 billion Vision Fund, known for making huge bets on promising but unproven companies, and spurring others in the industry to follow suit to compete. The success or failure of WeWork’s initial public offering is likely to be read as a statement on the overall standing of SoftBank, the judgment of its executives and its ability to raise cash for future ventures.Now, SoftBank’s big bet may already be turning sour as WeWork mulls an IPO that would peg its worth at less than half its $47 billion valuation when SoftBank invested earlier this year. The New York-based company is now said to be considering a market debut at just $20 to $30 billion, fueling tensions among SoftBank employees. The WeWork IPO comes at a critical time for SoftBank, which is currently trying to convince investors to bankroll a second $108 billion iteration of its Vision Fund. The company is already mopping up the fallout from another poorly performing IPO. SoftBank put $7.7 billion into Uber, whose market value promptly fell after shares listed publicly at $45 in May. That price has since fallen to about $35, well below the price SoftBank paid for part of its stake. Some staffers at the Vision Fund are now concerned that WeWork’s valuation could fall further, to even below $20 billion—the valuation of SoftBank’s original investment made by the Vision Fund, according to people familiar with the company who asked not to be identified discussing private matters. Because the Vision Fund is so exposed to WeWork, it will play a substantial role in compensation for employees of the fund. People at the Vision Fund are not paid on a deal-by-deal basis, as with some other venture firms. Vision Fund employees, including high-profile bankers and investors, receive base salaries and bonuses, but only get payouts when profits are booked. They are also on the hook for potential losses, facing clawbacks of 20% and above for some senior staff, and 7% for more junior employees. There is also a possibility that WeWork could delay its IPO. Adam Neumann, WeWork’s larger-than-life chief executive officer and co-founder, pledged to SoftBank CEO Masayoshi Son earlier this year that WeWork will have a valuation of no lower than $47 billion when it goes public, people familiar with the matter said. A SoftBank spokeswoman declined to comment for this story. Neumann also met with Son in Tokyo last week to discuss a potential capital infusion, the Wall Street Journal reported, citing unidentified people familiar with the matter. The possibility of SoftBank investing money to enable WeWork to delay the IPO until 2020 was also raised in the discussions, the paper said.SoftBank’s massive bet in WeWork is emblematic of Son’s overall approach. “Why don’t we go big bang?” he told Bloomberg in an interview last year when asked about his investing style, and added that other venture capitalists tend to think too small. His goal of swaying the course of history by backing potentially world-changing companies requires that those companies make large outlays in areas from customer acquisition to hiring talent to research and development, a spending tactic that he acknowledged sometimes brings him into conflict with other investors.“The other shareholders, they try to create clean, polished little companies,” Son said. “And I say: ‘Let’s go rough. We don’t need to polish. We don’t need efficiency right now. Let’s make a big fight. Let’s make a big, successful—a big win.’”Sometimes, though, the other investors he comes in conflict with are his own. The Vision Fund’s backers, particularly Saudi Arabia’s Public Investment Fund and Abu Dhabi's Mubadala Investment Co., scuttled a $16 billion investment early this year in WeWork that Son had championed, something Son alluded to in an interview with CNBC in March. SoftBank ended up making only a $2 billion investment separately from the Vision Fund.SoftBank’s huge bet on WeWork has also caused friction between members of the Tokyo company itself. While Son has the final say on investments, WeWork is seen internally as the bet of Ron Fisher, the Boston-based SoftBank executive and a longtime aide to Son, the people said. Fisher, who grew up in South Africa, was SoftBank’s highest-paid executive with $31 million in compensation in the last fiscal year, 62% more than a year earlier. Before SoftBank first invested in WeWork in 2017, Fisher met with executives at IWG Plc, a European competitor with a much lower valuation and—at the time—10 times as many sites, people with direct knowledge of the matter said. Some Vision Fund employees were surprised when instead of convincing Fisher not to invest in WeWork, the unfavorable metrics seemed to encourage him, leaving him convinced that tremendous growth lay ahead for the fledgling company. Son agreed. A month later, the Vision Fund led a $4.4 billion investment round into WeWork at a $20 billion valuation. Fisher and Mark Schwartz, the former Asia Pacific chairman at Goldman Sachs Group Inc. who was appointed to SoftBank’s board that year, joined WeWork’s board. WeWork, by far the largest in the grouping of SoftBank's real estate investments, serves as the linchpin of Son’s broader strategy around real estate. In all the sectors where SoftBank makes big bets, including financial services, transportation, health, and others, it believes that too many small companies with outdated technology drag down the industry, creating opportunities for bigger, updated iterations. SoftBank has also backed startups like brokerage-services provider Compass, mortgage lender Social Finance Inc. and construction-tech firm Katerra Inc., with the belief that these companies could funnel business to each other and boost growth in the sector overall.But Fisher and Son’s plans weren’t wholeheartedly shared by investors in the Vision Fund. That’s part of the reason that SoftBank’s WeWork stake is split between SoftBank itself and its giant tech fund. Of SoftBank’s 114 million WeWork shares, about 64 million are owned by the Vision Fund, and the rest by SoftBank Group, according to financial filings. Once SoftBank completes a contract that will result in it buying more shares next year, SoftBank Group’s stake will increase to roughly the same as the Vision Fund’s, the filings said. A spokeswoman for SoftBank declined to comment on the reasons behind splitting the stake.In its results for the quarter ended in June, SoftBank said the Vision Fund’s fair value was $82.2 billion. The cost of the investments in the most recent results was $66.3 billion, up from $60.1 billion the prior quarter, and the fair value doesn’t reflect the Vision Fund’s handful of exited investments such as the 146.68 billion yen the Vision Fund made when it sold its stake in the Indian retailer Flipkart to Walmart last year. For the most part, the fair value includes the portfolio companies that have held IPOs, because the Vision Fund typically holds onto most of its shares rather than selling them in the IPO, as was the case with Uber. That means as the price of those listed shares declines, the drop will hit the Vision Fund’s fair value in the next reported results. The Vision Fund will be able to book some increases due to successes like Guardant Health, a portfolio company that listed last year with a steadily rising stock price, but that still falls far short of offsetting the expected declines in other holdings. Similarly, any decline in that valuation at WeWork’s listing will hit the Vision Fund’s fair value. Son, a famously long-term thinker who has outlined 30- and 300-year plans for humanity, could conceivably brush off a poor showing for WeWork as a bump along the long road toward changing the world. It's not clear the Vision Fund will be able to do the same.To contact the authors of this story: Giles Turner in London at firstname.lastname@example.orgSarah McBride in San Francisco at email@example.comTo contact the editor responsible for this story: Anne VanderMey at firstname.lastname@example.org, Mark MilianTom GilesFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- How to make sense of the whopping $47 billion in lease liabilities that WeWork disclosed ahead of its planned IPO?That figure makes WeWork one of the world’s largest lessees, according to Bloomberg data, which is pretty astonishing considering the flexible office space provider was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.There is, however, a more charitable way to look at that eye-watering bill for future rent: These liabilities will sit on WeWork’s balance sheet so they don’t have to appear on yours. Until recently, so-called operating leases didn’t have to be included on corporate balance sheets but were tucked away in the footnotes to the financial statements, where they languished unread by most people.That always seemed like a glaring oversight as these commitments can be massive – in total, the world’s publicly traded companies have almost $3 trillion in operating lease obligations, according to Bloomberg data.(1)Plus, paying up isn’t optional – a bit like with money owed to a bank or bondholder. Hence ratings companies and securities analysts have always taken these obligations into consideration when assessing the riskiness of a business.The accounting rules have now caught up, and companies are now having to start adding the liabilities and a corresponding asset (reflecting the right to use the property) to their balance sheets.(2)There’s one big exception, though: The new rules still permit leases shorter than one year to remain off the balance sheet. For WeWork and rival IWG Plc, this is potentially a big selling point when talking to clients, albeit one that exploits a loophole in accounting rules.Lately, both companies have been talked up the potential boost to demand for short-term leases triggered by the change. IWG’s annual report notes that the new accounting standard is “already driving significant increases in demand for our services from enterprises.”It’s an open question whether an accounting rule change will really provide such a big fillip for these businesses: Auditors are likely to scrutinize short-term lease arrangements more deeply if there’s a likelihood they will be renewed. WeWork also is increasingly targeting large corporate clients that tend to require longer leases than a one-person start-up.And the downside for both these companies is that they have to take the accounting hit themselves. IWG has been forced to include a 5.5 billion-pound ($6.7 billion) discounted lease liability on its balance sheet, which has boosted its net debt and leverage ratios. Under the old accounting rules, it could claim net debt was about equal to Ebitda. Now it’s four times that amount. (3)Of course, IWG has been at pains to stress that the rule change won’t impact its cash flow – the lease payments remain the same.But anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.(1) This refers to companies with a market cap of more than $100 million.(2) The relevant accounting rule changes are IFRS 16 and ASC 842 for companies that use GAAP. They differ in some respects but both have exclusions for leases shorter than one year.(3) WeWork's balance sheet as of June 30 2019 includes around $18 billion of long term operating lease obligations. WeWork arrived at that seemingly low figure by using a high discount rate of 8.2%.To contact the author of this story: Chris Bryant at email@example.comTo contact the editor responsible for this story: Edward Evans at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- The Emperor’s New Clothes is a story about people refusing to acknowledge reality lest they lose standing at court. WeWork Cos Inc.’s prospectus for its initial public offering, published on Wednesday, is a similar tale.The “hip” office space provider makes huge losses but its individual locations are somehow deemed profitable thanks to flattering accounting adjustments. While there was no mention this time of the company’s “community-adjusted Ebitda,” a much-maligned metric that boosted its profit shamelessly, it came up with an equally problematic “contribution margin” even though that positive figure excludes some hefty corporate operating expenses.Meanwhile, WeWork’s description of Adam Neumann, its co-founder and chief executive, stops short of claiming he can walk on water, but only just: “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,” it says. That’s a lot of headgear.Just because Masayoshi Son’s SoftBank entities and other backers believe this company is worth at least $47 billion (or perhaps twice that if the targets of a recent stock incentive plan are any guide) doesn’t just make it so. The reality is that that WeWork operates in a cyclical sector with few barriers to new competitors, and it remains both a corporate governance nightmare and a cash bonfire. Its main listed rival, the U.K.’s IWG Plc, is capitalized at just 3.75 billion pounds ($4.4 billion). And that’s despite it generating more revenue than WeWork and making a profit.Prospective WeWork investors should channel the spirit of the child in Hans Christian Andersen’s tale and point out that its fabulous garments aren’t all they’re cracked up to be. Neumann’s grip on the company is equally troubling as he’ll still control most of the voting rights after the listing. That gives him the power to remove directors and executives who displease him and, of course, to dictate strategy. It’s an unequal relationship too. Despite his apparent importance he doesn’t have an employment contract, meaning he could leave at any time in theory.Various eye-opening “related-party” transactions (in this case, WeWork taking out leases on buildings owned by Neumann) are declared, as my colleague Shira Ovide points out. Meanwhile, three of the banks underwriting the IPO have extended Neumann a $500 million credit line secured against his shares. If he were ever unable to satisfy a margin call, the lenders could seize and sell stock, the prospectus notes, putting downward pressure on the share price. In other words, the interests of Neumann and other investors aren’t necessarily aligned.But how can one put a value on the shares anyway? The company doesn’t plan on paying dividends, which is hardly surprising in view of the $2.5 billion of cash it burned through in the first six months of this year. And you can’t easily apply a multiple of earnings to estimate its value because WeWork doesn’t have any of those either – and won’t do for the foreseeable future.Net losses, which totaled $1.6 billion in 2018, “may increase as a percentage of revenue in the near term and will continue to grow on an absolute basis,” the company said, ominously. This all matters because WeWork has a growing pile of debt and $47 billion of mostly long-term lease obligations. Unlike a WeWork membership, those leases can’t be cancelled easily. Revenue that’s been committed covers less than one-tenth of that total obligation. Doubtless aware that this huge financial commitment on leases is perhaps one of the biggest flaws in its investment case, WeWork dedicated a part of the prospectus to explaining why it should still be okay even if there’s a recession. It’s plausible that during an economic downturn some businesses will want to use the cheap, flexible office space that WeWork provides. Equally plausible, though, is that companies will go bust or no longer need as much space. Enterprise customers – big firms that use external office space for staffing overspill – might also chose to bring more of their employees back in-house, notes the Fitch ratings agency.With bond markets indicating that a recession may well be on the horizon, one wonders why investors are being asked to take a punt on WeWork before we really know how the firm would cope. What’s the rush?Earlier this year SoftBank’s Vision Fund was reported to have passed up the chance to pour even more money into WeWork. Public market investors should ask themselves if and why they’re being invited to fill the gap.In fairness, WeWork has an impressive brand and its membership has doubled every year since 2014. But that growth has been enabled by unlimited supplies of capital and not having to worry about the bottom line. Warren Buffett mused famously that you only discover who’s swimming naked when the tide goes out. WeWork investors might be about to find out.To contact the author of this story: Chris Bryant at email@example.comTo contact the editor responsible for this story: James Boxell at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.