WeWork Looks Weak as Potential IPO
Downturn in Global Real Estate Market Could Damage Company Prospects
By Lior Ronen
Founder, Finro Financial Consulting
WeWork’s Path to IPO
The IPO market is running hot and cold.
The Chewy IPO (NYSE:CHWY) on Friday is another example of a hot offering, on the heels of several others. Chewy shares were up 59% on the first day of trading. Fiverr (NYSE:FVRR) went public a day before Chewy and saw a 90% jump in share price. Other recent IPOs, including Beyond Meat (NASDAQ:BYND), Zoom (OTC:ZOOM), PagerDuty (NYSE:PD) and CrowdStrike (NASDAQ:CRWD) also had double or triple digit returns since their offerings.
Other IPOs have not done so well, particularly Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). Although you may read that the IPO market is “hot,” it’s an extremely volatile market, and every company should be scrutinized individually.
WeWork (also known as ‘The We Company’), the co-working giant, recently announced that it had filed confidentially with the SEC to go public. Under the JOBS Act, emerging growth companies with revenues of $1 billion or less in the latest completed fiscal year, can file a “draft” of their S1 confidentially to the SEC and release their formal version 15 days before they start the pre-IPO roadshow.
WeWork states that it hasn’t decided to go public, but the choice to file confidently in December 2018 gives a strong indication that it intends to do so this year. WeWork submitted its draft at the latest possible time to still be eligible for an ‘emerging growth company’ status based on the 2017 figures and to allow the company to benefit from the confidential status throughout 2019. This shows the company is planning the IPO carefully and looking to minimize outside noise. Amending the draft in April strengthens the estimation that WeWork is aiming for a 2019 IPO.
Embedded Financial Risk in WeWork’s Business Model
The business model of WeWork is straightforward and quite different from the techy image of the company. WeWork leases office space in long term leases and rents these spaces out in short term contracts. Beyond flexible and affordable office space, the company also offers services to its tenants as well as residential and education offerings under different business units. With 679 locations across 119 cities, the main business of WeWork is still co-working spaces. The business model of WeWork allows landlords to significantly reduce their risk of fluctuations in commercial real estate while transferring that risk to WeWork.
Since WeWork is a significant player in the real estate market, its involvement and impact on real estate markets worldwide is substantial. WeWork occupies 5.3 million square feet in New York City, which makes it the largest office space tenant in the city. The inherent risk in WeWork’s business model that result from the duration gap between the long-term leases and short term tenants’ rent, forces WeWork to diversify its clients mix to include companies from different industries, sizes, markets, and locations. This explains why WeWork clients include giants like Microsoft, Facebook, Blackrock, Salesforce, Adidas, etc. on one hand and small 0 – 5 employees’ startups, on the other.
This business model works well in an uptrend market, as we witness in the commercial real-estate market for the last nine years in the chart below. If commercial real estate prices turn down, WeWork will suffer and mitigate negative impact to landlords due to long-term leases that guarantee the landlords' cash flow from their assets.
Due to the significant financial risk embedded in WeWork’s business, and its size and its substantial role in the global commercial real estate market, investors should be aware of potential conflicts of company executives. WeWork CEO Adam Neumann and other company executives hold partial ownership in building’s that WeWork leases from, according to the Wall Street Journal. The company may address these issues before going public otherwise it raises questions about the company’s management ethics and corporate governance.
Lagging behind unicorns, other co-working companies and traditional commercial real estate companies
WeWork’s potential IPO is often compared to different unicorns such as Lyft, Uber, Spotify, and Slack; however, there’s a significant difference between them. At its essence, the company is a commercial real estate play. Investors should compare it not only to other unicorns but also to other co-working companies and traditional commercial real estate companies to examine a full competitive landscape.
Comparing WeWork to five other high profile unicorns that went public recently shows that the company is approximately on par with others as far as the ratio between the latest private market valuation and the total funding raised in the private market.
The significant financial risk embedded in WeWork’s business model could increase to a massive problem if the commercial real estate market drops, after nine years of rising prices. Markets drop faster than they rise. As we’ve seen in the past a hit to the real estate market could have a devastating impact in short order. These are alarming red flags that investors should look at when thinking about investing in WeWork.