WeWork, a startup that leases office space to other startups, is now worth $10 billion, but an investor presentation obtained by The Information suggests the long-term financial situation of the company may be perilous.
In the presentation, WeWork projects a 2018 operating profit of $942 million on $2.9 billion in revenue, a far cry from the $4.2 million in operating profit on $75 million in revenue it expected in 2014.
This rosy picture is based on the assumption that WeWork will drastically increase its membership and revenue per member, but the report exposes several financial details that could cause alarm for investors.
WeWork’s near-term costs appear artificially low because of large initial concessions from landlords, The Information reports. WeWork, which opened its first South Florida site in Miami Beach this summer, is locking itself into longer lease deals than is usual in the industry, and getting benefits from doing so such as initial free rent.
An example The Information gives is that of a 20-year lease signed in New York’s financial district, on which WeWork got over a year of free rent. This free rent, however, was not spread out over the length of the lease, as is usually standard accounting practice. Instead, it was plugged straight into the current numbers, increasing near-term profits.
This suggests that WeWork’s rental costs will spike in the next few years, as it begins to absorb the true costs of its long leases.
The long leases invite another question as well. WeWork seems to be betting that its long-term leases will shelter it from rent increases, but if the market is at its peak right now, this will actually make it harder for WeWork to rent their office space in the future.
WeWork estimates its rent expense per available desk will go from $1,009 to $2,244 between 2014 and 2018, but it expects to improve its profit margins to compensate, according to the presentation.
The company projects growth in both membership and its revenue from each member.
WeWork predicts in the presentation that the amount of people who sign up for workspace will rise to 260,000 in 2018, up drastically from the 16,000 that signed up last year. WeWork also forecasts a drop in corporate and marketing costs, down from 34% of revenues year to 14% next year.
Business Insider has reached out to WeWork for comment.