Top 10 Biggest Risks in WeWork are Revealed

Posted on 08/14/2019

WeWork, now known as The We Company, is moving forward with its plans on its initial public offering (IPO). Many unicorns are cashing in on the IPO wave before a future market crash in world equities. WeWork has grown dramatically since its origins in 2010, up-ending the shared office space scene. WeWork’s trajectory in revenue has not come without controversy. Born in the QE world, WeWork has not experienced a global economic downturn since founding its business. To be fair, WeWork, the company the constructs stylish millennial aesthetics that are turned into workplaces, faces a lot of issues that companies deal with in terms of leasing office space. With 528 locations in 111 cities, co-working space giant WeWork has received valuations that are not of a property company, but that of a technology company. WeWork plans to be traded under the ticker symbol “WE”.

WeWork – Consolidated Financials in USD

Period Revenue Memberships Total Expenses Net Loss
Dec 2018 1,821,751,000 401,000 3,512,750,000 -1,927,419,000
Dec 2017 886,004,000 186,000 1,817,838,000 -933,494,000
Dec 2016 436,099,000 87,000 832,373,000 -429,690,000

Source: Company S-1 Filing.

Here are the top 10 observed risks by SWFI research.

10. No Employment Agreement with Charismatic Founder

Is this a one-man show? WeWork does not have an employment agreement in place with its founder, Adam Neumann. The company views Neumann as critical to its operations, which is heavily laden with debt. Most startups and growth companies typically require employment contracts, especially with charismatic founders.

9. Counterparty Risk with Bigger Contracts

All traditional landlords face this type of risk. WeWork has enterprise members, which are bigger accounts that sign longer terms. At June 30, 2019, enterprise memberships accounted for 38% of total membership versus 32% at December 31, 2018. A default by an enterprise member under its agreement with WeWork could cause a significant reduction in the operating cash flow generated by the location where that enterprise member is situated.

8. Low Ownership of Real Estate

WeWork leases the majority of real estate at its location. WeWork, like other tenants, are typically tied to upward-only rent reviews, whereby rent for any given lease renewal term is typically equal to the greater of the rent in effect for the period immediately prior to the rent review date and the then-prevailing net effective rent in the open market.

7. Access to Capital

With SoftBank Group and a cadre of Wall Street banks, this is not a risk now for WeWork.

6. Copycats

WeWork is not immune to copycat companies that can operate at a lower margin.

5. Major Economic Slowdown

Office real estate is not immune to economic downturns. A decline in market rents could affect member termination numbers, thus impacting cash flow. The majority of WeWork’s revenue from locations in the United States was generated from its locations in the greater New York City, San Francisco, Los Angeles, Seattle, Washington, D.C., and Boston markets. A majority of WeWork’s locations in the United Kingdom are in London.

4. Membership Revenue Model

There is not one mention of “community-adjusted EBITDA,” in its S-1 filing. WeWork provides memberships to individuals and companies that affords these individuals and companies access to office space, use of a shared internet connection, access to certain facilities (kitchen, common areas, etc.), a monthly allowance of conference room hours and prints/copies, and access to the WeWork mobile application. The price of each membership is variable, based on the particular characteristics of the office space occupied by the member, the geographic location of the workspace, and the amount of desk space per office. Membership revenue consists primarily of fees from members, net of discounts, and is recognized monthly, on a ratable basis, over the life of the agreement, as access to office space is provided.

3. Lots of Debt and Lease

The real estate industry is known to use leverage – it is expected. However, analysts may want to watch the growth of WeWork’s sea of red ink and excessive debt. Concurrent with the IPO, WeWork plans to enter into a new senior secured credit facility providing for senior secured financing of up to $6 billion, consisting of a three-year letter of credit reimbursement in the aggregate amount of $2 billion and a delayed draw term loan facility in the aggregate principal amount of up to $4 billion. At June 30, 2019, WeWork had 39,378,908,000 worth of contractual obligations going out to 2024 and beyond. US$ 24,736,366,000 are contractual obligations beyond the 2024 date, while total non-cancelable operating lease commitments totaled US$ 33,953,402,000

2. Other Ventures May Flounder

WeWork has attempted to dip its hands in ancillary businesses. WeLive, WeGrow, Flatiron School and Meetup, and additional We Company offerings that WeWork may launch or acquire in the future, may not generate meaningful revenue or cash flow.

1. Profits

WeWork has a history of losses. Is the business model sustainable? WeWork had an accumulated deficit as of December 31, 2017 and 2018 and as of June 30, 2018 and 2019 and had net losses of $0.4 billion, $0.9 billion and $1.9 billion for the years ended December 31, 2016, 2017 and 2018, respectively, and $0.7 billion and $0.9 billion for the six months ended June 30, 2018 and 2019.