Blackstone-Backed The Office Group’s Accounts Show You Can Make Money While Expanding In Coworking

There are a lot of different models of how to run a coworking and flexible office business at the moment, and there is no one right answer as to how to make money in a sector which is expanding and evolving rapidly.

WeWork is growing at a frantic pace, increasing revenue and market share, but costs are growing faster and it is suffering big losses. The biggest flexible office company in the world, IWG, makes a profit, but is selling assets to try and improve its stock market valuation after seeing a number of takeover bidders walk away. Its own expansion efforts have seen it cut profit forecasts.

The Office Group is the next tier down in terms of size, and might just be a model for how to expand profitably, if accounts for its holding company are anything to go by. And with the founders having sold the business to Blackstone, the accounts show just how profitable getting coworking right can be.

The most recent accounts available for The Office Group are for 2017, and give an insight into the business during the period in which Blackstone acquired a majority stake. Revenue in 2017 grew by £20M, or 29%, to £90M. The accounts said the increase broke down into three parts: £17M came from five buildings which opened during the previous year, £2M came from rental growth in its mature portfolio and £1M came from income on new buildings that opened in 2017.

The Office Group had 36 sites at the end of 2017 totalling 1.2M SF, mainly in London, 30 of which were up and running. Those open sites had an average occupancy of 92%, the results show. Today it has 40 sites, 33 of which are open, with seven more opening this year.

Profit also rose in 2017, even accounting for the cost of opening new sites. The headline number is that pre-tax operating profit rose from £10.8M to £44.9M, but that needs some clarification. The Office Group owns nine of the buildings from which it operates, and the value of those buildings rose by £34.6M during the year to £208M, and that increase is included in its headline profit figure because of accounting regulations. The company has £188M of bank debt.

The company said that revaluation is partly the result of a better understanding of the nature of flexible office businesses by the property market. But it is important to remove this figure when looking at The Office Group’s profitability: When the property market inevitably turns, the value of those owned assets will go down.

The more telling figure is that earnings before interest, tax, depreciation and amortisation rose by 25% to £17.2M. When the one-off cost of fees relating to the acquisition by Blackstone are stripped out, operating profit increased by around £6M, even though it cost the firm £3.5M to open five new sites in 2017. So expansion is producing an increase in costs, but earnings are rising more than enough to compensate.

In terms of the leases on the buildings it does not own, The Office Group said that it had an average lease length of 17 years, and will pay a total of £120M on the leases it has taken out.

In 2018, following the acquisition by Blackstone, The Office Group started to look abroad for the first time, the accounts show, and media reports indicate it was one of the unsuccessful bidders to lease the Flatiron Building in New York.

How much does running a successful flexible office business net you when you sell? Accounts for another company in the overall corporate structure of The Office Group show that Blackstone paid founders Charlie Green and Olly Olsen and investor Lloyd Dorfman £319M for a majority stake in the business, split between £249M in cash and £70M in shares. Running a flexible office business well for more than a decade and expanding patiently can be a very profitable business indeed.