WeWork Valued at 35 Billion

[alpha]

 

WeWork provides offices on demand for tech startups and small businesses. It does not actually own any real estate, it leases large sections of office buildings then: subdivides the space, adds a few basic office necessities, like coffee and wifi, etc,  and then rents them out through it's service on short term basis. In 2017 it lost 993 million dollars. This company is now raising more capital and being valued at 35 billion dollars!

 

Would you invest?  ;D

 

https://www.bloomberg.com/news/articles/2018-06-13/softbank-executive-says-wework-is-raising-funds-at-35-billion-valuation

[Gregmal]

Sounds a lot like Regus, which is valued at 1/10th of that...

[Saluki]

I don't know who's crazy enough to invest in the equity, but I wouldn't even want the debt.  They don't own the buildings, most of their locations are leased, so if your bonds don't pay you can repo the leases and do what?  Make more payments?

 

And $35 billion?  I need to come up with an old idea with no moat, but market it with some tech buzzwords because if WeWork is worth $35 billion then I'm in the wrong business.

[Guest cherzeca]

I don't know who's crazy enough to invest in the equity, but I wouldn't even want the debt.  They don't own the buildings, most of their locations are leased, so if your bonds don't pay you can repo the leases and do what?  Make more payments?

 

And $35 billion?  I need to come up with an old idea with no moat, but market it with some tech buzzwords because if WeWork is worth $35 billion then I'm in the wrong business.

 

The leases have value but the mismatch in term between lease and sublease/rental creates huge risk. This is tsla for the real estate crowd.

 

[Cigarbutt]

Interesting name. Yield 7,875% over 7 years.

Poster child of an era?

 

Indeed, there is a clear potential duration mismatch between long term commitments to property owners of office space and subleases to various clients (typically small business owners) by the day, week or month…

 

 

interesting features:

-typically set up off-balance sheet SPVs for leases with minimal retained interest by parent with little recourse to the office space owner

-use new era "community-adjusted" EBITDA measures

-describe an asset-light model sold as a technology-like firm associated with goodwill related to the "enjoyable" workplace they create

-thesis rely on a rapid growth "story" and renowned investors (SoftBank)

 

Numbers:

-cash flows are hugely negative with revenues comparable to development costs, growth will depend on more funding

-estimating valuation if WeWork would equity own the real estate that is sub-leased, the valuation would be a fraction of what is implied now in presentations and capital-raising initiatives

 

https://ftalphaville.ft.com/2018/04/24/1524606395000/More-on-WeWork-and-its-bond-offering/

 

Huge opportunity or a mirage of prosperity?

Maybe I lack vision but it smells like dogma over thought.

 

 

 

 

[Pelagic]

Having been to a few of the WeWork locations in my area my impression was that they are almost exclusively catering to startup tech companies - most of which have received some funding in an angel or seed round. Unfunded tech companies probably can't afford them or if they can are wise enough to weigh their options and find somewhere cheaper that suits their needs. With that said, whether or not WeWork succeeds is heavily dependent on new funds flowing into tech, especially into early stage companies. If funding dries up, paying $300 a month for a "hot desk" isn't in the budget but if you're looking for a leveraged real estate play leveraged to startup tech companies then WeWork is worth a look.

 

The networking opportunities at a WeWork location and their events can be great for early stage tech companies but I just don't see any of these tenants being particularly sticky in terms of lease duration. A company either quickly outgrows WeWork or it burns through funding and WeWork's expensive monthly lease is one of the first expenses to get trimmed with a more economical office rental being able to suit their needs. I didn't see anything regarding the average lease duration for WeWork's users in the FT article but I would be curious to know what it is.

[Jurgis]

And $35 billion?  I need to come up with an old idea with no moat, but market it with some tech buzzwords because if WeWork is worth $35 billion then I'm in the wrong business.

 

I find comments like this quite funny.

 

Yes, go ahead and do it. It's easy to write a forum post saying "oh this is an old idea with no moat". It's not that easy to actually get it done and raise these $35B. So if you believe you can do it, go ahead. You'll get the $35B and we'll cheer your success.  8)

[Guest cherzeca]

Then again if you can get nice yield senior to Softbank's billions maybe it is a grit your teeth hold your nose thing

[cameronfen]

May not be worth 35 billion I have no idea but it certainly has a moat.  It is known as the space for tech start up coworking space.  Part of the rent pays for the networking oportunities.  Bc it is known as the place for tech tech people go there and thus it has network effects.  This differentiates it from traditional temp offices.  Is it a really impressive moat?  Idk.  But it can certainly charge more than regus. 

[johnny]

I'm in LA and I'm seeing a lot of higher-end coworking spaces sprout up. Everybody keeps insisting to me a major component of WeWork's value proposition is the networking opportunities offered to members, and the Community Value. So how do we project the qualify to that community when all the richer or price-insensitive people are Hoovered up by some place with more comfy couches and in-house baristas?

 

The only non-cost advantage WeWork has is that they can say that members have access to coworking spaces all over the world. But I'm trying to visualize that Venn diagram: People that need coworking space, live such a jet-setting lifestyle that a Xintiandi, Shanghai office has real option value, and also don't want to just pony up the extra few hundred bucks for the nicer space at NeueHouse?

 

I guess it's just a matter of time until WeWork tries to thread the needle and open up some WeWork Reserve Centurion spaces, or whatever.

[JanSvenda]

This comes to mind - If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem

 

The same applies to WeWork's landlords - https://www.bloomberg.com/news/articles/2017-12-06/wework-bets-london-s-costly-offices-won-t-be-bitten-by-brexit

 

 

[Spekulatius]

Shame on me, I thought that WeWork was a tech company, and it’s just a glorified landlord.

 

Where is the plug for the bathtub?

[Guest notorious546]

I think he is losing it.

[Jurgis]

I think he is losing it.

 

You mean Masa Son?

 

Yeah, some of his investments are head scratchers.

 

Then, Vision Fund is not (just) his (Softbank's) money.

 

Then, Vision Fund structure is pretty funky and Softbank could be bag holder.

 

Then, some of his exits are pretty great.

[LongHaul]

High probability WeWork's investors are totally insane.  $35b for what - losses?  No competitive advantage, likely long term leases and dependent on stupid VC funding bubble. 

 

Tesla is similar.  Insane market cap for losses with Icarus at the helm. 

 

It is a totally insane time in so many areas.  Irrationality rules and the craziest part is that people think this is now normal.  It is like a blackhole of thinking.

 

 

[DTEJD1997]

Hey all:

 

We Work has been around for a while now, about 8 years.  They've got about 300 locations.  They have about 2,000 employees.  This is not some crazy startup in it's infancy.

 

We Work will probably work well in NYC & LA.  It also probably works well in large cities, say those of 1MM+ residents.  However, would We Work do well in Toledo OH?  I am skeptical of that.

 

So I guess what I am getting at is that if We Work is not profitable now...when ARE they going to be profitable?

 

Then, if they DO get profitable, just how profitable will they be?  Say they raise rents, cut expenses & get things together, and they only wind up making a few million a year?

 

35 Billion market cap seems just "silly".  Of course, maybe making a profit is not the goal here?

[Guest longinvestor]

High probability WeWork's investors and totally insane.  $35b for what - losses?  No competitive advantage, likely long term leases and dependent on stupid VC funding bubble. 

 

Tesla is similar.  Insane market cap for losses with Icarus at the helm. 

 

It is a totally insane time in so many areas.  Irrationality rules and the craziest part is that people think this is now normal.  It is like a blackhole of thinking.

+1

 

We’ve been here before. We’ll see how the movie ends. Tides come and tides go. Who’s swimming naked?

[LC]

What about a business model like Uber or Lyft. WW gives landlords a branded platform to attract customers. Landlords provide certain standards of service (minimum sq. footage, internet access, desk space, coffee etc.). WW takes a cut when clients book.

 

[DTEJD1997]

Hey all:

 

I am just thinking about WW valuation...

 

I wonder how much the company is being valued at on a per square foot basis?  Might it even be higher than the actual value of the real estate that they lease?

 

If so, than I would think that is a pretty sure indication that valuation has gotten "silly".

[johnny]

14M sqft as of April '18, giving us a very clean $2,500/sqft valuation, before community adjustments of course.

[DTEJD1997]

14M sqft as of April '18, giving us a very clean $2,500/sqft valuation, before community adjustments of course.

 

Well that certainly is interesting!

 

I bought my 2 office buildings for about $11/sq. ft.  Obviously, my buildings are not as nice, and in an inferior location...but they are NOT in the vast wastelands...and they are operating buildings (electric, air condition, plumbing, and so on).  Hard to believe that there are differences that great in valuation in the same country.

 

I look to buy other commercial real estate....nicer buildings in good shape WITH rent paying tenants can be had for $60 sq. ft.  Once again, these are NOT buildings in the wastelands, tenants are professionals...

 

I suspect that one group is "under priced" and another set is "overpriced"...time will tell...

[gokou3]

14M sqft as of April '18, giving us a very clean $2,500/sqft valuation, before community adjustments of course.

 

This is insane.  WW is basically in a spread business - pay long-term rent to a landlord, do something to the premise, and then sub-lease it short(er)-term at a hopefully higher price while taking all the hassles and risks of vacanies, dealing with small tenants, etc.  If they are successful at it, then 1) the landlord would rise its rent at renewal, and/or 2) the landlord will copy the not-so-secret sauce.  In fact, large landlords like Brookfield must be already thinking about it, per below (i think the deal has been called off since though):

 

https://www.ft.com/content/2e670bea-e82a-11e7-bd17-521324c81e23

 

 

Does anyone know how much spread WW earns, i.e. what's the rent difference between their premises and a comparable space?

[johnny]

I'd say the locations I've seen seem to be something like maybe 65% "rented" space v. 35% community space. But the rates on the 1 person offices are pretty silly high on a per square foot basis. I'd say you're paying something like $800 for 60 square feet in DTLA. So add 40sqft of shuffleboard or couches to that and you're paying $8/sqft in a market where comparable office rents are probably like $2-3.

 

Their pricing on substantially higher occupancy arrangements don't seem to decay very much on a $/sqft basis either, so going off of the 1-person office is not as distortive as it may intuitively seem.

 

I bought my 2 office buildings for about $11/sq. ft.  Obviously, my buildings are not as nice, and in an inferior location...but they are NOT in the vast wastelands...and they are operating buildings (electric, air condition, plumbing, and so on).

 

You're never going to be able to drop bonds in half-billion dollar increments being that boring bro

[johnny]

Since everybody here is so skeptical, thought I'd drop this take on the company--not exactly a screaming bull case, but it presents the important components of the bull case in a reasonable way: https://www.cbinsights.com/research/report/wework-strategy-teardown/

 

 

Some things I thought were interesting:

 

1) There is an implication 4 years ago that they're basically turning around and leasing, all-in, at about 2x what they pay.

 

2) Related to 1, this article mentions a 30-40% operating margin

 

3) They're really leaning hard on software to try and extract as many "desks" from a space as possible--this is probably a meaningful advantage they have over the competition, it's palpable if you just tour a few different coworking spaces.

 

4) This claim, for which no elaboration is offered:

 

"This technology, combined with increasing buying power from constructing at scale, has lowered the cost of adding a new desk to $9,504 in September of 2017, from $14,144 a year prior, representing 33% savings."

 

Though hunting those numbers down they seem to be a "gross capital expenditures / desk" calculation.

 

[moneyball]

Could someone post or dm the bond prospectus, I know it’s out there but had it saved in a place I no longer have access to. Thanks if you have it!