Don’t worry, WeWork has only committed $47B to landlords

WeWork’s future as a public company collided headlong this week with investors’ biggest concern: What happens in a downturn?

Nine hours after the co-working company filed its IPO prospectus, the Dow plunged 800 points on Wednesday. With a possible recession looming, WeWork’s parent, the We Company, disclosed that over the next 15 years, it has $47 billion in lease commitments. That’s the same amount as its latest valuation, and that figure is in addition to $6 billion debt.

Currently, the company says it has $4 billion in committed revenue from its customers and $2.5 billion in cash, half of which is unrestricted, according to its S-1 filing.

“The stakes are very high,” said John Arenas, CEO of Serendipity Labs, a co-working company with a franchise model. He said that WeWork would need to rake in $94 billion in revenue to get a 30 percent profit.

“They’re showing they have $4 billion,” he said. “We all know a recession is going to happen, it’s just a matter of, will they be prepared for that?”

Though WeWork isn’t the first flexible-office-space provider, it has disrupted the office leasing market since its launch nine years ago. In 2018, it became the largest tenant in its homebase of New York. Globally, it has has 527,000 members across 528 locations in 111 cities. With its rise, it has repeatedly defended itself against the question of whether its business model can weather a recession, when tenants retract their office sizes.

Landlords were generally tight-lipped about any concern over WeWork’s ability to fulfill its lease obligations. But one landlord said, “When you dissect $40 billion over 15 years, into millions of square feet spread over several hundred locations, it’s not as alarming as it may seem.”

More concerning, according to the source, is WeWork’s lease structure, in which most locations are signed by a single purpose entity and only a minimal percentage of the rent is fully guaranteed. “That aspect of it is bad for landlords,” the landlord said on the condition of anonymity.

This week’s IPO filing offered a stark look at the We Company’s finances, including revenue and losses that have grown hand over fist. During the first six months of this year, the company generated $1.5 billion in revenue — but lost $905 million. (Between 2016 and 2018, WeWork’s revenue quadrupled to $1.82 billion while losses reached $1.61 billion.) The filing also raised questions about the company’s corporate governance, which include massive loans to its CEO Adam Neumann and other executives, and its creation of new metrics to measure profits.

Citing the company’s uncertain path toward profitability, Fitch Ratings downgraded WeWork’s bonds three levels to a B- on Wednesday.

“At the time of our rating back in April 2018, we thought that the company would be able to attain normalized profitability within a couple-of-year horizon,” analyst Kevin McNeil said. “Subsequent to the bond offering and the capital raises that were done privately, and ultimately leading to this public capital raise, the company shifted its strategy.”

While McNeil said Fitch’s belief in the viability of the business was unchanged, he acknowledged that its model was “untested through a major downturn.”

WeWork declined to comment.

On its path to an IPO, the company has received a vote of confidence from half a dozen of the world’s largest banks, who committed to a $6 billion debt deal to the startup.

S&P Global kept WeWork at a B rating with a stable outlook, based on the company’s ability to maintain cash as it grows.

“Obviously there is uncertainty about their performance in the downturn but one of the cushions to that is their occupancy levels, which provide at least a 20 percent headroom,” said Tatiana Kleiman, a ratings analyst at S&P.

Some of New York City’s largest landlords, like Columbia Property Trust and SL Green Realty, have started to require stronger guarantees from the co-working company, the Wall Street Journal reported in June.

Other landlords are more comfortable with the risk of a WeWork tenancy. In New York, WeWork occupies the entire rentable space in five office buildings, and it occupies more than 50 percent of at least a dozen more, according to a recent analysis by The Real Deal. Still, impact on the value of a building remains untested. This spring, Rudin Management listed 110 Wall Street — where the company also operates WeLive — but ultimately decided not to sell.

WeWork is not the first space-as-a-service company to face an uphill battle heading into a recession. Regus, the U.K.-based office space company that WeWork surpassed last month in workstations, filed for bankruptcy in 2003 after the dot-com bubble popped, leaving the company with empty offices. The company renegotiated leases with landlords and minimized expenses, which allowed it to emerge from the 2008 financial crisis profitable, said Arenas, who was Regus’ president of Americas franchising at the time.

By comparison, only 30 percent of WeWork’s locations are mature (have been occupied for more than 24 months) and have been signed during the height of the market cycle.

“If you’re out over your skis when [a recession] hits, you got a lot of work to do to get small, and get profitable,” said Arenas.

But that’s not what WeWork is selling in this IPO, he said. “They are selling: ‘We are going to get big and raise your consciousness.’”