The Real Deal National

In run-up to IPO, the We Company could have a $34B problem

New federal accounting rules treat lease obligations as liabilities
June 18, 2019 10:00AM

We Company CEO Adam Neumann (Credit: iStock and Getty Images)

We Company CEO Adam Neumann (Credit: iStock and Getty Images)

It’s been a year of ballooning financial numbers for the We Company, which has seen both revenue and losses roughly double year-over-year. Another figure has reportedly nearly doubled as well – the co-working company’s lease obligations.

In a development that may concern investors in the run up to an initial public offering, the company formerly known as WeWork had about $34 billion in lease obligations at the end of last year, up from $18.2 billion a year before, the Wall Street Journal reported, citing sources.

According to new federal accounting rules that went into effect this year, the current value of these obligations will now have to be counted as liabilities on the We Company’s balance sheet. While a filing from the end of 2017 stated that the firm had $2.4 billion in liabilities, the accounting change and a $700 million bond sale in 2018 are set to make that number much higher now.

The We Company filed the initial paperwork for an IPO in April, after previously filing a confidential notice to the SEC. The co-working model’s reliance on long-term obligations has raised concerns about the company’s ability to withstand an economic downturn.

“The risk of entering into long-term leases (supported by short-term tenants) is one of the biggest issues investors have with the WeWork concept,” Sanford C. Bernstein & Co. analysts wrote in a note to clients in January.

WeWork’s parent company guarantees only 11 percent of its lease obligations, a source told the Journal, limiting some of its liabilities.

A common point of reference for the We Company’s business model has been Regus PLC, now known as IWG PLC, which filed for bankruptcy after the dot-com crash in 2003. The Real Deal looked at the WeWork/Regus comparison in an April analysis of the company’s financial resilience.

Landlords such as Columbia Property Trust and SL Green Realty have started demanding stronger guarantees from the company as a safeguard against these concerns.

At the same time, some observers say the accounting change may actually benefit WeWork, by encouraging tenants to take on more short-term leases themselves. [WSJ] — Kevin Sun