What Do The Key Insights Of WeWork’s IPO Prospectus Tell Investors?
WeWork, the provider of hip co-working office spaces around the world, has seen a stellar ascent to becoming arguably the highest profile ‘property’ company in the world. Like many of the big IPOs of 2019, The We Company was founded in the aftermath of the last big financial crisis – established in New York in 2010. Over the less-than-a-decade since, WeWork had by early this year amassed 10,000,000 square feet of office space and is still growing quickly. The company is the single biggest occupier of office space in central London.
The company’s IPO now approaches and is expected to come second only to Uber’s in size over the course of 2019. And similarly to Uber, WeWork’s IPO valuation is aggressively splitting investor opinion. There are many who believe that WeWork is little more than a flexible and serviced office space manager, like Regus, with better interior designers and PR. Yet the company is valued in much the same way as the high growth tech start-ups that often start life in co-working environments like those WeWork offers.
On Wednesday of this week, WeWork released its IPO prospectus, shedding light onto several facets of the business that will no doubt be of interest to anyone considering an investment. One of the most controversial revelations of the prospectus are somewhat messy financial and business arrangements between WeWork and its co-founder Adam Neumann.
Mr Neumann has a significant ownership interest in 4 office buildings that WeWork is a tenant of. Wary of the scepticism investors may have for anything that could be considered a conflict of interest, Mr Neumann’s interest in these properties will be sold to a newly founded company named ARK that has its own independent management. Mr Neumann has also been loaned $30 million by the company, since repaid in a mixture of stock and cash, at extremely favourable rates significantly below what is commercially available.
Another larger loan of $362 million was also issued to Mr Neumann in April this year. The prospectus details this was “in connection with the early exercise of a stock option” and has since been repaid. Mr Neumann has also made use of a $382 million credit line, capped at $500 million. That is secured against his equity stake in the company.
The prospectus also reveals the extent of WeWork’s debt obligations – a key argument of analysts who believe the company should be valued more like a REIT or serviced offices manager. WeWork has long lease obligations on the buildings it is a tenant of but offers its own tenants flexible arrangements. In the USA alone WeWork has lease obligations of $47.2 billion against committed revenue of just $4 billion.
There are some concerns around an accounting metric devised and used by WeWork named “community adjusted earnings before interest, taxes, depreciation and amortisation”. It excludes the cost of WeWork’s costs when fitting out a newly leased office space as well as the company’s general and administrative expenses. It’s not a generally accepted accounting principle. However, while it was used in confidential filings to the SEC ahead of the IPO, the metric does not appear in the prospectus, leading to a degree of uncertainty. The company has also reduced the number of employees a tenant counted as an ‘enterprise member’ has to have from 1000 to 500. WeWork has also extended the amount of time on of its office locations must have been operational before it is considered a ‘mature’ location – presumably to improve the figures for mature locations.
Mr Neumann will also continue to control the majority of the company’s voting rights through his class B and C shares despite holding only 2.4 million class A shares compared to 114 million held by Softbank’s Vision Fund – WeWork’s biggest investor. A separate vehicle co-owned by Neumann and his co-founder Miguel McKelvey controls 112 million B class shares and 1 million C class shares. The voting rights of those shares were doubled ahead of the ICO, allowing the two co-founders to keep a firm grip on the company. Options for another 42.5 million will also be vested to Mr Neumann over the next 10 years, further consolidating his position.
WeWork also bluntly states that it is unlikely to achieve profitability in the foreseeable future if it maintains its current rate of growth. Net losses hit $1.9 billion in 2018 from $900 million the year before. Net losses over the first 6 months of this year have also grown to $904 million from $723 million despite revenues approximately doubling to $1.54 billion from $764 million. The prospectus further warns that losses could increase as a percentage of revenue in the near term as the company continues to aggressively expand the number of locations it operates in and square feet of office space under management.
WeWork’s corporate structure has been changed ahead of its IPO to what is referred to as an ‘up-C’, or umbrella partnership corporation. This means that investors buy A class shares in the holding company which holds an additional stake in the We Company Partnership vehicle which holds the controlling stake of the company’s co-founders. The co-founders keeping the majority of their shares in We Company Partnership protects them from the same double taxation on corporate profits public shareholders face – ie. the company is taxed and then shareholders are also taxed on any returns resulting from the stock they hold.
Some potential investors and observers may grimace at some of the more ‘floral’ language the prospectus makes use of to describe roles, company philosophies and ambitions. WeWork’s mission statement is the bold “elevating the world’s consciousness” and Neumann described as “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.”
His wife and another co-founder Rebekah Neumann is his “strategic thought partner” and the prospectus goes on to conclude:
“We dedicate this to the energy of we — greater than any one of us but inside each of us.”
Another unorthodox element to the IPO prospectus’s pitch is a commitment from Adam and Rebekah Neumann to spend $1 billion on philanthropy over the next 10 years, starting with significant funds being donated to the conservation of over 20 million acres of tropical rainforest. If that commitment is not met, the shares held by the couple that carry ‘supervoting’ rights will see the votes they carry drop to 10 each from 20.
The way WeWork is structured, talks and operates is certainly unique and some would argue takes ‘SiliconValleyism’ to an extreme. It claims to have ‘disrupted’ the world’s biggest asset class in the shape of real estate. Or at least the commercial real estate branch of the asset class. The next few weeks will show if financial markets agree and if they like the way that WeWork is going about it as a business.
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