A Different Beast? Analysts Weigh In On How WeWork Will Fare When It Finally Goes Public
Real estate companies don’t usually enter the general consciousness. But WeWork’s attempt to go public in September 2019 at a $47B valuation is one of the biggest failures in recent financial history — a miss so hubristic and spectacular, it spawned books, documentaries and soul searching about the Silicon Valley business model.
It almost broke the company, to boot.
Now, a little more than two years later, it’s back. Barring any last-minute and highly unlikely disasters, the shareholders of a special acquisition company called BowX will vote Tuesday to agree a deal to merge with WeWork and turn it into a listed company. On Thursday, shares in WeWork will start to trade on the New York Stock Exchange and WeWork will finally achieve its aim of becoming a listed company, with an initial valuation of $9.2B.
It’s a big moment for WeWork and an even bigger moment for SoftBank, the Japanese tech firm that has ploughed $18.5B into the flexible office company and stands to finally get some of it back. For WeWork itself, the strategy won’t change, but the real estate sector will have a vital insight into how flexible offices, a fast-growing sector, are really performing.
Beyond that, there is the question of how this once most grandiose of real estate companies will perform on the public market. WeWork has changed hugely since 2019, but coming out of a pandemic that was a perfect storm for flex office companies, how will it fare in the public spotlight?
“It’s undoubtedly in a better position as a listed company coming to market at a $9B valuation than at a $47B valuation,” independent analyst Richard Windsor said. “Whether that $9B valuation is sustainable remains to be seen.”
WeWork is undoubtedly a very different company today. The failure of the 2019 IPO attempt came down to the disconnect between that $47B valuation and the fact WeWork was taking huge losses, with no guarantee of turning a profit, as well as the level of control over the company founder Adam Neumann would retain even as it went public.
The failure led to Neumann’s exit with a tidy $550M-plus payout and main investor SoftBank putting up $9.5B in equity and debt to stabilise the company. Former GGP executive Sandeep Mathrani was brought in as chief executive to restructure and turn the company around.
“WeWork appears better suited to be a public company on several fronts,” Green Street Office Senior Analyst Danny Ismail said. “The presence of a well-seasoned public market CEO, fewer distractions in the C-suite and a narrower focus for the company.”
Comparing WeWork’s mission statement from the 2021 IPO prospectus to that of 2019 gives an insight into the tighter focus Mathrani has brought to WeWork. Saying “Our mission is to empower tomorrow’s world at work,”, as the 2021 prospectus said, is a pretty big ambition. But it seems eminently achievable next to the 2019 assertion “Our mission is to elevate the world’s consciousness”.
But what about the numbers? WeWork is still not profitable, on track to a $1.5B loss in 2021, the company said in a third-quarter presentation earlier this month. That compares to a $1.9B loss in 2019, when the company did not have to deal with a pandemic that caused occupancy to plummet from 75% in 2019 to 45% in 2020. Occupancy is back to 60% today.
Revenue has dropped sharply, from $3.2B in 2019 and 2020 to an estimated $2.7B in 2021. But Mathrani has cut costs dramatically and pivoted away from a model of growth at all costs toward focusing on making WeWork outposts profitable.
WeWork’s annual selling, general and administrative expenses — things like staff and central overheads — have been cut by $1.1B, and its annual rent payments have been cut by $400M, as 150 leases have been exited completely and 350 have been amended. A further $400M of operating expenses related to WeWork’s locations have also been trimmed.
“The large-scale rationalization of the portfolio is now complete, but of course we’ll continue to evaluate the portfolio on a location-by-location basis,” WeWork CEO Sandeep Mathrani said in a recorded presentation alongside the Q3 results.
So while revenue has dropped, costs have dropped faster, allowing the company to post a smaller loss in 2021 than 2019, even while operating during a pandemic.
“It’s safe to say that the delta variant has had an impact, but our sales have stayed resilient,” Mathrani said in the presentation.
The new chief executive effectively shrunk the company to put it back on a path to growth. Mathrani said WeWork had dropped from 916,000 desks before the start of the coronavirus pandemic to 730,000 today. That figure is likely to start growing again as buildings where leases have been signed start to open, he added. By the end of 2022, desks would be 810,000, he said, predicting it will be just shy of 1 million desks by the end of 2024. It currently has 629 locations and 461,000 members.
Memberships dropped from 525,000 in 2019 to 395,000 at the end of 2020, with a prediction for 591,000 by the end of 2021. The company hopes this growth in members and keeping costs in check will allow it to achieve something it has never done before — make a profit.
Mathrani predicted in 2020 that by the end of 2021, WeWork would make a quarterly profit. In June this year, that prediction was pushed back as the rise of the delta variant slowed the return to the office. But WeWork predicted in its Q3 presentation that 2022 revenue would rise to $4.3B and earnings before interest, tax, depreciation and amortisation would be $243M, putting it in the black at long last. It forecast that by 2024, revenue would be $6.8B and EBITDA $2B.
How WeWork’s shares perform will depend on its ability to hit those predictions.
“The company is much better run today, but its reputation is far from mended,” Windsor said. “It will need a good couple of quarters before people start to really trust it again.”
Do those financials justify the $9.2B valuation the deal to merge with BowX puts on WeWork? As Windsor pointed out, once WeWork is listed, the market will ultimately determine the company’s value. Sales of companies that go public via merging with a SPAC have a mixed record: Some trade higher than the price at which the company listed, some lower.
In its Q3 presentation, WeWork pointed out that its enterprise value was about 7.3 times its estimated 2023 earnings, which is almost exactly the same as the ratio of enterprise value to 2023 earnings of IWG, WeWork’s largest listed competitor. In a note, when WeWork announced its most recent attempt to go public in March this year, analysts at Green Street made the same point: WeWork’s valuation multiple is about the same as IWG’s. The valuation will not be out of line if WeWork can hit those profit targets.
Mathrani and his fellow WeWork executives are already being handsomely rewarded for their turnaround efforts. Mathrani was paid $7.5M in salary, bonus and stock options in 2020, the recent IPO prospectus showed. International President and Chief Operating Officer Anthony Yazbeck was paid $3.6M and Chief People Officer Samad Jahansouz was paid $3.4M.
Currently $18.5B in the hole, SoftBank will be hoping their efforts pay off. WeWork’s existing investors, of which it is by far the largest, will own 80% of WeWork once it goes public. That $9.2B is more than the $8B of rescue money it put into WeWork at the end of 2019, so it is up on that final payment. WeWork existing investors and staff have to wait between nine months and a year before they can sell their shares in the newly listed company.
Beyond the question of how much WeWork is worth, that it is going public has benefits for the real estate sector more generally.
"As a public company, WeWork will provide another read-through for the health of the flex office market,” Green Street’s Ismail said. "There's a clear place in the future for flexible office product, arguably even more so post-Covid. The public eye on WeWork's financial and operating performance will provide another read-through on how one of the largest operators is faring in terms of meeting that demand.”
An immediate read-through is how the relationship between flexible office operators and landlords is likely to change in the coming years.
One eye-opening figure from the 2019 IPO prospectus was that WeWork was on the hook for $47B of lease payments at the buildings from which it operates. That figure has dropped to $36.6B, according to the 2021 prospectus, and WeWork expects that to continue dropping as it pursues a strategy of striking management agreements with landlords.
About 24% of its buildings are now subject to management agreements rather than leases, WeWork’s 2021 IPO prospectus said, up from 15% at the end of 2019. The public markets reward businesses that are "asset-light," meaning they don’t take on long-term liabilities like fixed leases. IWG has been pursuing a similar strategy.
“While a management agreement is not without its pitfalls, it appears to offer the most sustainable path forward to address tenants’ flexible office needs,” Green Street wrote in a note on WeWork and IWG in April.
On the whole, being a listed company won’t change WeWork’s strategy hugely. It will be able to tap public market shareholders rather than its private sector investors like SoftBank if it needs more equity to grow. But that growth plan doesn’t change on 21 October; it changed when Neumann departed and Mathrani came in.
Costs have been cut, the pandemic weathered and growth at all costs abandoned. Now WeWork has to prove it really can make a profit. If it can, it probably still won’t elevate consciousnesses, but it might have a big role to play in the future of work.
CORRECTION: OCT. 18, 7:05 A.M. ET: This story has been updated to reflect the fact that WeWork is listing on the New York Stock Exchange, not the Nasdaq stock exchange.