Thread by @ThomasDigan

1/ What is your take on WeWork? Risky real-estate arbitrage play w/ lofty tech valuation? Or do you subscribe to CEO Adam Neumann’s belief that it’s “valuation and size today are much more on our energy and spirituality than it is on a multiple of Revenue”? 🏙📈🤷🏻‍♂️

2/ first an overview of CoWorking industry (which is not new): - represents <5% of U.S. office stock - JLL estimates will be 30% by 2030
- “flexible” space growing 23%, vs. 1.2% growth in total U.S. office stock

3/ reasons for growth in flex space:
- avoiding capital expenses - navigating business uncertainty - serving mobile workforce - swing space

4/ WeWork history - founded in 2010 by Adam Neuman and Miguel McKelvey, both of whom grew up in cooperatives, hence why they believe collaborative environment is key. First location was in SoHo.

5/ since 2010 WeWork’s growth has exploded:

6/ and it’s tenant roster is more diverse than you would think:

7/ not just startups anymore...

8/ but let’s talk real estate for a second... - 6mo to open new space, +1-2mo to reach 60% Occ - 10mo free rent, at which point ~72% Occ, 18mo to reach maturity, i.e. 92% Occ

9/ Scale Economies: from 2016 to 2017 WeWork increased total desks by 60% while total net capex increased only 27%. They claim avg SAVINGS per employee of 30% vs standard lease.

10/ Financials (2017): the company wants us to focus on “Community Adj EBITDA” as their “Gross profit” proxy but “Overhead” is clearly not all related to dev pipeline and “Growth Inv” is not as easy to eliminate in a downturn as they claim...

11/ with Softbank in your corner growth is a certainty but at what cost? +113% YoY Revs in Q2’18 but 1H loss of -$722MM

12/ Financing_
Aug-17: $4.4BN Softbank equity financing
Apr-18: $500mm unsecured debt upsized to 702mm (7yr Bond, Caa1u/B+/BB-), put value of company at $20BN
Aug-18: $1BN convertible debt w/ Softbank (42bn cap if non-Softbank lead on next equity financing)

13/ Liabilities_
Debt: $1.702BN outstanding
Pipeline: 309k desks, $1.7bn to build
Lease obligations: $18BN, however they claim only directly liable for $1.9BN (Ex. for 15yr lease, WeWork signs limited Corp guarantees - typically 6-12mo). Signed by SPE, not parent.

14/ Reasons WeWork generally gives as to why it’s equipped to handle downturn:

15/ WeWork’s aggressive pipeline...in AUGUST alone they have executed four new NYC leases totally nearly 500k sf:

16/ Aggressive plans calls for aggressive tactics...WeWork reportedly now paying brokers 5x the standard commission rate bloomberg.com/news/articles/…

17/ This time is different?
Regus (IWG), in many ways the predecessor to WeWork, founded in ‘89. Regus was significantly levered to tech, when Dot-com bubble burst Rev fell off a cliff (-41%, ‘02-‘03). U.S. arm filed Chapter 11. Rev held in better during Great Recession.

18/ The Other Guys...

19/ WeWork’s CMBS Exposure:

20/ CMBS “Protections”:

21/ Alright, let’s talk VALUATION before Twitter cuts me off...

Regus (IWG) the biggest (54mm sf vs 14mm for WeWork) and longest standing player in the space has the following numbers:

£2.1B Mkt Cap, on 2017 Rev of £2.4B, & £377B EBITDA

22/ to be fair, since WeWork I’m told is a “tech” company (that just happens to be in the same business as IWG) and tech companies in growth mode don’t have earnings let’s simply look at Rev Multiple:

Regus (IWG): <1x Revenue

WeWork: ~12x Revenue ($20B / (Q2’18: $422M x4)

23/ to a CRE investor the valuation will seem ridiculous in the context of SL Green, which owns 32.9mm sf of primarily Manhattan office space, yet has a market cap of only $9.2bn (and to reiterate, it actually owns the real estate)

24/ Softbank brings deepest pockets & longest time horizon. They must believe in network effects + scale economies of the global innovation community WeWork is creating. Gain market share as fast as possible & try to monetize it later, likely by selling tenants other services.