One of the most highly anticipated corporate filings dropped this morning when The We Company made public its prospectus before its initial public offering.
The parent company of WeWork divulged more than 350 pages of financial information, risk analysis, business plans and disclosures about the way it operates, including with one of the most powerful men in real estate, its co-founder and CEO Adam Neumann.
The headline news was its losses, as it is for many “unicorn” companies with valuations like WeWork’s current $47B number. After $1.9B in losses last year, WeWork lost nearly $700M in the first half of 2019, and said it will likely continue to lose more money “in the foreseeable future.”
It has also shored up its revenue stream, bringing in $1.54B as of June 30, approaching the $1.8B it earned all of 2018.
But for those in the commercial real estate industry, the unprecedented look at WeWork’s current operations goes way beyond whether the company will turn a profit any time soon.
In New York, London and elsewhere, WeWork is already the top private occupier of leased office space. Its plans for growth, its anticipated market share and how the company evaluates its possible performance in a recession are all of critical importance to an industry increasingly influenced by The We Company.
“We are changing the way people work globally,” the company states in its prospectus. “And, in the process, we have disrupted the largest asset class in the world — real estate.”
Operating At A Loss And Taking On Billions In Debt
While WeWork brought in $1.54B in revenue during the first six months of 2019, it continues to operate at a net loss. The company ended the first half of the year with a net loss of about $690M, up from a $628M net loss in the first half of 2018.
WeWork attributed the net loss to the investments required to open new locations and support its existing spaces.
“These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future,” WeWork said in the filing.
WeWork had more than $1.3B in outstanding debt as of June 30, and it is preparing to raise significantly more. Along with the IPO, WeWork is securing financing of up to $6B, consisting of $2B in a 2019 credit facility and an additional $4B between 2020 and 2022.
The prospectus included the company’s level of debt as one of its risk factors. It said it could limit WeWork’s ability to obtain additional financing to fund future needs, require a substantial portion of cash flows to go toward debt payments and increase the company’s vulnerability to adverse economic conditions.
The We Company’s other ventures — WeLive, its housing platform, the Flatiron School coding academy, Meetup and private school WeGrow — “may not generate meaningful revenue or cash flow” for the company, the prospectus acknowledged.
Risks From Recession And Other Factors
Future growth is never a guarantee, and WeWork’s business model presents a series of potential risks.
Most WeWork members can cancel their memberships at any time with as little notice as one month. But the majority of WeWork’s long-term building leases do not come with early termination rights, so the company cannot reduce its footprint if its membership starts shrinking.
It typically signs 15-year leases, it says, but it is pushing more toward management agreements in which landlords share in more of a space's upside and downside.
Some of WeWork's competitors, including Industrious, have pivoted to this method as a means of assuaging pervasive concerns over coworking's long-term viability.
If the economy goes into a recession, WeWork could be susceptible to its smaller users cancelling memberships en masse. A reliable predictor of coming recessions, the yield curve between the 10-year and two-year U.S. treasury bonds inverted this week for the first time since 2007, and the Dow Jones Industrial Average dropped more than 2% as a result.
WeWork says a recession would present a risk for its business model, particularly in the cities where its footprint is largest such as New York City, San Francisco, Los Angeles, Seattle, D.C and London.