WeWork, IWG Stock Drops Outpace Market With Investors Wary Of Risk

Tumult on the markets has been extra unkind to the world’s two largest coworking companies — even as industry experts project that the flexible workspaces they provide will grow in adoption in the future. 

Shares in WeWork, which debuted on the New York Stock Exchange last October, are down 68.2% year-to-date as of Thursday afternoon. London-listed IWG plc, the parent company of Regus and the world’s biggest flexible office company, is down 57.4%, per MarketWatch. During the same time, the Dow Jones U.S. Industrial and Office REIT Index slumped 37.5%, while the broader S&P 500 is down 24.3% on the year as of Thursday.

Investors in the current climate, analysts and market watchers told Bisnow, are gun-shy of risk, lack of profitability, cash-intensive businesses — and in the case of WeWork, a history of volatility.

“Coworking has a checkered past, and not a good one either. Coworking has had numerous ups and downs, probably more downs than ups,” said Alexander Goldfarb, a senior REIT analyst at Piper Sandler who covers WeWork. "So the market is skeptical [of] the business model to begin with."

He notes the pandemic-fueled scattering of the population and the widespread adoption of hybrid working models is what makes him and his firm bullish on flexible working models in general.

Piper Sandler is forecasting WeWork will reach positive cash flow by early 2024 and EBITDA profitability in the middle of next year. WeWork scored a three-year, $350M loan from Brookfield Asset Management in May, and Goldfarb said the lender “knows what it's getting into” and would likely extend when it comes due in 2025.

But many investors see quarterly losses in the hundreds of millions and don't want to stomach the short-term risk for possible long-term benefit.

“You take a market like the current one where risk is rising, people are very nervous about the economy and you take a business that's currently unprofitable — that's going to have some negative consequences to the stock price," Goldfarb said.

“[But] when you look at the revenue that they're achieving, when you look at the expense reduction, all of that remains on track, and that's the critical component," he said. "So the bears right now are focused on the unprofitability and have a view that [WeWork CEO] Sandeep [Mathrani] will not be able to rightsize the business — our model indicates otherwise.”

WeWork missed analysts' earnings predictions in the second quarter, but reported its occupancy at 72% overall — much higher than what traditional landlords are seeing in major cities like New York. Still, it reported a total revenue of $815M for the second quarter, with a net loss of $635M. 

IWG, which is listed on the London Stock Exchange, doesn't have the same analyst or disclosure requirements as WeWork, but stock tracking site Seeking Alpha shows it has more than $9B in outstanding debt and roughly $250M in cash on hand.

“IWG has some systemic differences relative to WeWork … But they're still going to suffer from a lot of the same macro headwinds,” Goldfarb said.

WeWork merged with BowX Acquisition Corp. and went public Oct. 21 at an opening price of $10.38. The debut was 19 months after Mathrani took the helm of the company and embarked on a revamp, slashing more than 8,000 jobs in the past nine months to reduce its headcount by 60% and running an intensive portfolio review.

“The company just keeps taking body blows, and just keeps on chugging,” CenterSquare Investment Management Portfolio Manager Alex Snyder said. “I do think they'll get through it … Somebody will recap them in some form. I think they will get there. I just don't know what that means for the share price between now and then.” 

Mathrani said on the firm’s quarterly earnings call last month that it expects to make profit by the second half of next year.  

“It's been doing well, but the real issue is: Can Sandeep make an ongoing profitable business? And so far, our model supports that, and that's where they're tracking but obviously it's something for him to prove,” Goldfarb said. “The company is still bleeding cash, and we’re going into an economic downturn.” 

Globally, fears about the state of the economy have spiked in recent days. Last week, the Federal Reserve raised rates by 75 basis points for the third time in a row — and signaled more hikes are coming. In the United Kingdom, an ongoing energy crisis and the government's release of a set of new tax reduction measures have roiled the markets and pushed the pound down to its lowest level since 1985. 

“The goal of the Fed right now is to pretty much make fewer people employed,” Snyder said. “It's not good for companies that cater to labor.”

Putting aside the fact that WeWork is not yet cash-flow positive, the market is taking a dim view of coworking right now purely because of macro issues, Snyder said. With so much economic uncertainty, investors return to their age-old prediction that in tough times, companies could shed office space and entrepreneurs will opt for coffee shops and their couch over paying for a coworking membership.

Charlie Robinson is the co-founder of coworking firm The Malin and former senior vice president at Servcorp, a flexible office provider that has traded on the Australian Stock Exchange since 1999. He agreed investor reticence to WeWork is tied to its unflattering history.

“I just think they inherited a complete mess, and it's going to take a while to turn that ship around,” he said. “They're definitely moving bits of it in the right direction, but it's a big business and it's just going to take a while.” 

In the case of IWG, which like Servcorp has a history of profitability, Robinson said, its underperformance could be a matter of shifting office tastes. Its stock's descent hasn't blunted its growth ambitions: IWG CEO Mark Dixon said earlier this year it could open up to 500 new U.S. locations.

“IWG potentially runs into some of the same issues that a lot of the Class-B, Class-C buildings in Midtown are going to face over the next few years, which is that a lot of their portfolio is either a little bit worn out or very cookie-cutter,” Robinson said. “There's a shift to quality and you're seeing that across commercial real estate …  And I think the flex space as well. People have a choice of where they want to go.”