WeWork filed their IPO prospectus on 14th August 2019 with the SEC, under its holding company The We Company.
Forbes quipped it the most ridiculous IPO of 2019 and there are tons of articles questioning the company valuation of US$45bn with only $1.5bn of revenue in 6M19. Read carefully, it’s revenue not earnings. WeWork lost US$689m in 6M19. Its equity is -US$2.3bn as of 30th June 2019, with additional US$4.7bn worth of preferred stocks and redeemable non-controlling interest.
According to its prospectus on page 58, WeWork has US$2.47bn of cash on hand, mostly from VC investors, but it had US$17.9bn of long-term lease obligations. According to the prospectus, WeWork explains their great business model in one simple chart.
12 months after WeWork signed on an office lease term, their co-working space will turn profitable 6 months after its opening. The chart does not show how losses in the first 12 months stake up against the future profit after the operation turns profitable. According to the prospectus, WeWork made around 20% of net property margin, rental revenue minus lease obligation. So, US$1.5bn gross revenue will give WeWork around US$300m of net property revenue after paying its landlords.
In my view, WeWork net revenue was around US$300m only in 6M19. Even assuming WeWork, in the long run, could generate 50% net profit margin, its business scale as of June-2019 would only translate into US$150m profit for 6 months period, or US$300m on an annualised basis. That still works out to 150x FY19e earnings if our super aggressive assumptions hold.
Do bear in mind that WeWork signs long-term office space and convert it to small cubicles, meeting rooms to cater to new start-ups which do not have the financial power to rent the whole space themselves. WeWork’s business model is simply rent big space long-term, and lease short-term smaller space to many lessors. It’s an even more fragmented space leasing business if you compare that to other property owners such as Sun Hung Kai from Hong Kong, CapitaLand from Singapore or Scentre Group from Australia.
These investment properties companies takes generations to build and their market value today is largely arisen from the value of the investment properties they hold. These companies normally lease out large space in long-term lease to big tenants, albeit in a discounted rate to smaller tenants. The good thing about these long-term leases is that it creates less fluctuation and their big tenants are unlikely to come and go or breach the leasing agreement.
The CEO, Adam Neumann has been widely reported by various press that he had already owned several mansions in the U.S. All up cost him hundreds of millions.
On Page 173, Rebekah and Adam Neumann had also pledged US$1bn to fund charitable causes. On Page 186 footnotes, Adam Neumann also pledged his shares as collateral for loans from financial institutions.
On page 201, there goes…………Personal Loans
“Adam currently has a line of credit of up to $500 million with UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, of which approximately $380 million principal amount was outstanding as of July 31, 2019. The line of credit is secured by a pledge of approximately ____ shares of our Class B common stock beneficially owned by Adam. In addition, JPMorgan Chase Bank, N.A. has made loans and extended credit to Adam totaling $97.5 million across a variety of lending products, including mortgages secured by personal property. None of these other lending products are secured by a pledge of any of Adam’s shares of capital stock in the Company.“
and yes, JP Morgan is one of the underwriters of the We Company IPO. JP Morgan’s subsidiary extended US$97.5m loan to Adam Neumann.
I would agree with Forbes and some other skeptics that the We Company IPO is kind of shady given so many shenanigans one can easily discover by reading their prospectus. So, i will not waste more of my time to point out many other worries i have on The We Company structure. There are simply too many articles out there explaining things in more details.
Anyway, i would definitely pass this IPO for one very simple reason, why should i pay US$45bn valuation for a loss-making company?