Here’s Everything You Need To Know From WeWork’s Landmark IPO Prospectus

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 canceling 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.  

“Economic downturns in these markets or other markets in which we are growing our number of locations may have a disproportionate effect on our revenue and our ability to retain members, in particular among members that are small- and mid-sized businesses, and thereby require us to expend time and resources on sales and marketing activities that may not be successful and could impair our results of operations,” WeWork said in the filing.  

WeWork also cited some of its larger deals as possible risks. It has some large leases, particularly in Manhattan, where just one company occupies thousands of desks. Most of its enterprise members occupy larger footprints in their locations, and if those companies default on their leases or vacate their spaces, they would cost even more to replace, WeWork said.

WeWork cited several other potential risk factors, including litigation, natural disasters, political instability and unfavorable publicity that damages its brand reputation.

One example of political instability it cited was the Brexit process. It said the United Kingdom’s exit from the European Union could impact its UK operations through volatility in the British pound, but the ultimate impact will depend on the outcome of future trade negotiations.  

New Details On Real Estate Footprint, Membership Growth  

WeWork detailed the recent growth of its real estate footprint and its membership base. It added 12.7M SF to its real estate footprint last year after growing by 5.6M SF and 3.3M SF in 2017 and 2016, respectively.  

The company had 528 locations across 111 cities as of Q2. With average lease terms around 15 years, WeWork had lease payment obligations of $47.2B as of June 30, a figure nearly identical to its most recent, $47B valuation by lead investor SoftBank.  

The coworking company had 527,000 members as of June 30, nearly double its 268,000 member total at the same time last year. WeWork’s capacity as of June 30 was 604,000 workstations.

It is unclear what the official occupancy of those desks are, because WeWork’s membership is divided among members who might have offices with unmet capacity — think three people paying for comfort in a space that could fit five — and “on-demand” members who don’t have dedicated space.  

Enterprise users, companies with over 500 employees, are WeWork’s fastest-growing member type. These companies accounted for 40% of its total membership as of June 30, up from 30% one year before — WeWork said 38% of the Global Fortune 500 companies are members.  

WeWork also has $4B in future revenue commitments, up from $500M in 2017, an indicator that, while its lease obligations vastly outweigh promised money coming in, more and more of its tenants have commitments that go beyond the end of the month.  

The prospectus did not break down WeWork’s footprint or revenue by market, but it said its highest-grossing U.S. markets are New York City, San Francisco, Los Angeles, Seattle, Boston and D.C.

The company has also quickly expanded internationally, with over 50% of its members located outside the U.S. as of June, despite the fact that the U.S. and UK combined make up for a majority of WeWork's revenue.

Neumann Controls The Company, For Better Or Worse

The face of WeWork, founder and CEO Adam Neumann, will control a majority of the company’s voting stock upon completion of the IPO, but his relationship with the company has some complications.  

While WeWork said Neumann is critical to its operations, it said it has no employment agreement in place with the founder and there can be no assurance he will continue to work for the company. He earned no salary last year and would not be entitled to severance if he no longer served as CEO.  

Neumann has also taken on a significant amount of debt. He has a $500M line of credit with UBS AG, Samford Branch, JPMorgan Chase Bank N.A. and Credit Suisse AG New York Branch, of which $380M was outstanding as of July 31. An undefined portion of his WeWork shares is serving as collateral for that debt.  

Two of Neumann’s family members also have WeWork ties that the company disclosed in the filing. One family member has been employed as WeWork’s wellness head since 2017, receiving less than $200K/year in salary. Another family member hosted eight events as part of WeWork’s Creator Awards initiative in 2018 and was paid less than $200K in total, according to the filing.  

WeWork also said it leases spaces in several buildings Neumann owns or owns an interest in. If Neumann were to die or be incapacitated in the 10 years after the IPO, according to the prospectus, his wife, Rebekah, an executive at the company, would be on the panel that would appoint a replacement.

Potential Market Opportunity: More Than $1.5 Trillion  

WeWork outlined its prospects for future growth, estimating a potential market opportunity in the trillions of dollars.  

In addition to the 111 cities WeWork currently operates in, it has targeted another 169 cities for expansion. In the combined 280 cities, it estimates a potential member population of 255 million. Using the average revenue per member it has brought in this year, WeWork estimates a 255 million-person member base would give it a market opportunity of $1.6 trillion.  

Only 33% of WeWork’s “workstation pipeline” is open, and only 30% of those 604,000 workstations are in locations that have been open for two or more years, what the company defines as "mature."

When July began, WeWork was building 194,000 desks, had signed leases for 327,000 more and was in negotiations for 724,000 workstations that have not been finalized. The company pegs its total pipeline at 1.9 million desks, more than triple what it is currently operating. 

“We expect to expand aggressively in our existing cities as well as launch in up to 169 additional cities,” the filing said. “We evaluate expansion in new cities based on multiple criteria, primarily our assessment of the potential member demand as well as the strategic value of having that city as part of our location portfolio.”