14/8/2019 WeWork IPO Shows It’s the Most Magical Unicorn - Bloomberg

Technology & Ideas

WeWork IPO Shows It’s the Most

Magical Unicorn
Everything about the company is over-the-top: its growth, losses, potential conflicts of interest and
financial gymnastics.

By Shira Ovide
14 de agosto de 2019 10:54 GMT-5

The company is a leap of faith, to put it mildly. Photographer: David 'Dee' Delgado/Bloomberg

I get paid to write words for a living, and I am nearly at a loss for words about WeWork Cos.

The company on Wednesday released the financial paperwork for its planned initial public
offering of stock. The company is in many respects what people thought it was, although I don’t
think we knew the half of it. WeWork is an office subleasing company on steroids, with a
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complicated corporate structure topped by a single person, Chief Executive Officer Adam
Neumann, who has unusual measures of control or influence over the company. 

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Yes, WeWork is growing swiftly and posting heavy losses. That was not a surprise. What
surprised me, at least, is the numbers behind those losses. Last year, WeWork’s filing shows, it
recorded $1.7 billion in revenue from rent and service fees charged to people and companies
subleasing office space from the company. That was double the revenue from tenants in 2017,
and the revenue figure is on pace to increase at about the same rate this year. 

That’s the kind of growth that gets investors justifiably excited, and they may be willing to
overlook eye-watering losses as WeWork grabs for bigger chunks of the huge but fragmented
commercial leasing market. But look at how WeWork is generating its losses.

Razor Thin
WeWork spends nearly as much on running its office spaces as it generates in revenue from
tenants

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Member & service revenue Location operating costs

$ 2.0 B

1.5

1.0

0.5

2016 2017 2018 1H 2019

Source: WeWork disclosures

Last year in buildings that WeWork had up and running, the company recorded $1.5 billion in
lease payments to landlords, plus costs for employees, utilities, real estate taxes, office cleaning,
repairs and other expenses. That means WeWork’s revenue from operational office locations is
scarcely higher than expenses for those locations — not including anything the company is
paying for fixing up new locations that aren’t open yet, or costs for employees not working on
operating office buildings. 1

It’s standard practice for WeWork and other office leasing companies to give tenants breaks on
rent for a while, and no doubt that is driving up WeWork’s costs for its workspace locations
related to the revenue it’s bringing in from the buildings. But WeWork's numbers belie the notion
that the company is simply incurring losses for funding its expansion.

The company right now is eking out a slim base profit simply from the revenue it takes in minus
the bare minimum costs to run its buildings. The revenue for each WeWork tenant also is
declining. WeWork attributes the decline to its expansion into countries with lower standard
prices for tenants and to discounts it dangles to persuade tenants to sign longer-term subleases.  
 

The financial disclosures make it clear that WeWork — which, it should be said, is a commerce
office leasing company and not truly a tech company — shares the hallmarks of Uber
Technologies Inc. and other high-profile young technolo y startups.

At this point in WeWork's life, it’s tough to assess whether the company is economically viable in
the long term. Its growth is overwhelming, but it’s not clear that it got there in a sustainable way.
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This company is a leap of faith, as are many of the young tech-ish companies hitting the stock
market. Many of them have done poorly as public market stocks. 

Unicorns Gored
Many of the highly valued young technology companies have not done well as public companies
Price change from first public stock sale

Xiaomi -47%
Uber -22
Lyft -21
Slack -21
Dropbox -15
Spotify -11
Meituan -8
Snapchat -2
Pinterest 77

Source: Bloomberg
Note: Stock price changes for Slack and Spotify are from the first stock trades in their direct listings.

The WeWork leap of faith rests, in part, on the ability of the company’s management to take
advantage of the shake-up it started in the commercial office leasing business. And there are red
flags about how WeWork is structured and operated. I am not joking when I say that the typically
rote IPO filing section about transactions involving a company’s CEO or other insiders is
astonishing for WeWork. 

A glimpse at those disclosures: Rebekah Neumann — the CEO’s wife and a company co-founder —
is one of two or three people who would pick a successor if Adam Neumann dies or is
incapacitated. 2 It has already been reported that Neumann has personally owned at least
parts of a handful of office buildings that WeWork leases 3 and that he has taken out hundreds
of millions of dollars in loans secured, in part, by his holdings of WeWork stock. And as
previously reported, WeWork recently created a complex partnership structure that pays out
profits to Neumann and others in a setup that minimizes their individual tax payments. 4

At least two members of Adam Neumann’s family, other than his wife, have done work for the
company, including promotional work for a WeWork awards events for which the company’s
biggest outside shareholder has paid tens of millions of dollars to fund. Neumann controls the
company and has more tied up in its future success that anyone on Earth, but the board this year
gave him options on tens of millions of shares of stock that were linked in part to WeWork’s stock
market value increasing as high as $90 billion, then recently canceled most of those options and
gave him an instrument tied to WeWork’s future profits. 5

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In short, everything about WeWork is utterly odd. It is a real estate company valued like a tech
company. It is a young company with questionable economics that has committed to paying tens
of billions of dollars in future years for office building leases. This is a company whose intricate
relationships with its chief executive requires 10 pages of disclosures. And this may be the first
time I’ve seen an IPO filing with a section titled “Expected Resilience in a Downturn.” 6

WeWork may be the most magical creature in the last decade of richly valued “unicorn” startups
that are attempting to bust up established industries. Its ambition is ambitious even by unicorn
standards. So are its growth, losses, potential conflicts of interest and financial ymnastics.
Succeed or fail, at least WeWork is not boring. 

1 WeWork has ditched the much-maligned "community adjusted Ebitda" metric, which
attempted to isolate the revenue and costs from only the operational WeWork
locations. The metric was in the first few draftsof WeWork's IPO paperwork to the
SEC, and it's still there in spirit if not in name. WeWork now prefers a profit
metric it calls "Contribution margin excludingnon-cashGAAP straight-line lease cost."

2 Under some circumstances, she can pick the other two people on this three-person CEO
selection committee.

3 WeWork recently created an investment vehicle, called ARK, that will buy stakes in
buildings in which WeWork is a major tenant. The IPO filing said ARK would manage
Adam Neumann's interest in 10 commercial properties he owns, including four that are
leased by WeWork.

4 Bonus disclosures: If Adam Neumann does not donate at least $1 billion in cash,
property or stock to charity in the next 10 years, his voting rights get cut in half.
The company has periodically lent money to Adam Neumann or companies he controls, and
one of his affiliated companies recently sold WeWork-related trademarks to the
company. The IPO filing says that "Adam is 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."

5 Neumann swapped out a portion of those options the company valued at more than $360
million in a complicated transaction with the company that gave him a financial
instrument tied to future WeWork profits.

6 WeWork’s ability to withstand a recession or a real estate sector collapse is an open

question, so I suppose credit the company for tackling this risk head-on.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

Shira Ovide at sovide@bloomberg.net

To contact the editor responsible for this story:

Daniel Niemi at dniemi1@bloomberg.net

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the
Wall Street Journal.

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