WeWork: The Bull(ish) Case

CuriousCharacter's picture
Rank: King Kong | 1,849

I'm working on a mammoth multi-part Google post and WeWork ties in nicely with the overall theme.

(To be clear, I have no opinion on WeWork as an investment - and I have zero knowledge of real estate - but I saw this thread and thought I could add value)

My partner Bruce Dunlevie once asked "what could go right?" This is the defining attitude needed in VC investing. When they work .... Wow. - Bill Gurley

WeWork certainly seems bubbly (or even fraudulent):

The CEO is making millions renting property to his own company, the primary backer has the dubious distinction of losing the most money in history - in the last tech bubble no less - and we're overdue for a recession that would hit CRE particularly hard.

Indeed, to assess WeWork by conventional metrics is to miss the point, according to [Chief Executive Officer Adam] Neumann. WeWork isn't really a real estate company. It's a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs.

@Addinator pointed out WeWork's use of "community adjusted EBITDA," which made me chuckle - what's a good multiple on "consciousness adjusted EBITDA?"- and it is cause for concern...*

But it's not all bad.

Revenue growth is up and to the right, WW has successfully embraced the enterprise, bringing on blue chip clients including Microsoft, IBM, and Amazon, and Adam Neumann's access to capital appears limitless.

Let's also not forget that EBITDA is not a Generally Accepted Accounting Principle - the term was popularized by a genius (John Malone) who wanted to maximize leverage and minimize net income to fund acquisitions in the fast growing cable industry using pre tax cash flow.

What if we're at an inflection point in real estate?

The shit's chess it ain't checkers! - Denzel Washington, Training Day

WeWork is well positioned to exploit a (literal) land grab situation, using their rent arbitrage model as a trojan horse, analogous to what Amazon did with books to takeover e-commerce.

Interestingly, many lenders are already overexposed to WeWork - apparently WW is the largest corporate office occupier in NYC? - what if, through savvy financial maneuvering - and Neumann has access to some extremely sophisticated financiers through Softbank - WW manages to become the only game in town?

Leases are currently structured individually through special purpose vehicles, preventing any one bad loan from bringing down the house, and who knows what goes on behind the scenes.

Expansion to adjacent sectors is already underway, with co-living, a gym, and even a school appearing under the newly rebranded "The We Company" (awful, awful name) umbrella.

For people who don't like WeWork as a product, they now offer WeWaaS (WeWork-as-a-Service :) ), providing commercial remodeling services (a $1tt industry? Huh?) and "space management" software to the enterprise.

Still, none of this is "innovation" per se, so why would anyone be excited?

Situational Awareness

Invention is a lot like surfing; you have to catch the wave at the right time - Ray Kurzweil

The Internet of Things (IoT) revolution never really took hold, did it?

I don't know about you, but I'm still waiting for my smart-salt-shaker to ping Amazon when it's running low, and for the autonomous delivery drone to show up jusssssst before I notice it needs a refill.

A version of this is on the way I'm told, it's just that the "cost per computation" has been prohibitively high, and early investors had the timing all wrong.

WeWork seems to think the time is now.

"Basically, every object will have the potential to be a computer," adds David Fano, WeWork's chief growth officer, who is overseeing development of this new technology. "We are looking at, what does that world look like when the office is this highly connected, intelligent thing?"

And, IMHO anyways, WeWork is taking the right approach, giving users a platform to behave how they want, and letting the system learn with each interaction.

Acquisitions like Euclid - I know people in this space - underscore their commitment to this strategy.

Taken in the context of an information services play, a bet on WeWork is a bet that they can:

1. Get to x scale without going bankrupt, where x provides the necessary data (the timing)
2. They can capture that data (the technology)
3. Monetize that data (the economics)

Assuming they can pull it off, maybe they prove that people in WeWork offices are x% more productive, and therefore charge y% more per square foot.

Maybe they become the ultimate AI-powered interior designer, optimizing space across the enterprise globally.

Still, a LOT that has to go right, what about downside protection?

SoftBanking on the Future

WeWork's shenanigans might not play in the public markets, but Masa Son and Co. appear ready, willing, and able to extend private market runway indefinitely.

Softbank has become something of a "Berkshire for startups," providing access to liquidity while still allowing founders to operate (mostly) independently.

So if you don't like WeWork on its own, what are your thoughts on it as one piece of a larger real estate puzzle:
Source

Perhaps knowledge gained from WeWork helps inform better building design at Katerra...

Which makes WeWork spaces more attractive...

Which makes property more valuable on OpenDoor...

Which makes it easier to get mortgage loans through SOFI...

Which makes property easier to sell through Compass...

Which drives demand for Katerra's construction software...

and round and round we go...

What Else?

How about an AirBnB + WeWork merger?

AirBnB on its own will never have access to spatial intelligence, and Benchmark is a significant stakeholder in both...

Or is there no hope whatsoever?

Is The We Company (shudder) just a giant ponzi scheme?

Is Adam Neumann a huckster?

Is Masa Son just another false prophet?

What do you guys/gals think?

Cheers,

CC

Comments (61)

Apr 14, 2019

is that peter thiel in the first picture?

Apr 14, 2019

Yes, I believe he is a chess master.

Funniest
Apr 14, 2019

prob not going to read your post cause I dont care but awesome picture of peter thiel, thanks for including that

    • 5
Apr 14, 2019

Would definitely be interesting if SoftBank did turn into a PE firm that basically used the VC side it has equity in to generate deal flow and then put together supergiants.

I still think a lot of these companies are overvalued though...

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Apr 14, 2019

Yeah no clue how to go about valuing any of them...

Apr 16, 2019

Right down some numbers on separate pieces of paper. Crumble those pieces of paper and throw them into a hat. Close your eyes and pick a piece of paper!

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

    • 1
Apr 15, 2019

Everything was going well before I read the below. It just screams shady af:

It's a state of consciousness, he argues, a generation of interconnected emotionally intelligent entrepreneurs.

    • 1
Apr 15, 2019

Nothing like throwing around popular buzzwords and bs business jargon to distract everyone from the real issues at hand.

    • 2
Apr 16, 2019

Yeah bro this has Fyre Festival written all over it.

Apr 15, 2019

I think it's just another example of how much money is out there chasing the next best thing. There's no reason WeWork needed to get to this size before actually becoming a sustainable business model. Unfortunately, since there's so much private money it just delays companies going public and actually having to report to real shareholders / face scrutiny. Will be an interesting 2-3 years for WeWork...

    • 1
Apr 15, 2019
  1. WeWork has expanded rapidly in part due to favorable lease terms including years of free rent. Much of this free rent is set to burn-off over the next few years, substantially increasing total lease payments.
  2. What is WeWork's economic moat? Are there any barriers to entry in the space? How is their offering unique?
  3. How will WeWork obtain credit going into the future with a non-existent tangible asset base? They are supposedly trying to form an acquisition vehicle, but timing of this is terrible considering current valuations and the credit cycle...
    • 3
Apr 15, 2019

+1 and to piggy back on number 1, they are getting these favorable lease terms because they are (generally) winding up in crappy older buildings which are desperate to fill space.

Can't imagine there is any public information on it, but I'd be more curious how many of these leases are guaranteed by the parent entity vs. the local SPE.

Interesting concept regarding potential synergies in softbanks portfolio companies, but I just don't see it:

  • Katerra is pre-fabbing buildings, and while an interesting concept, I don't believe they are in the specialty TI buildout space. Much more valuable in low-margin commodity products (such as industrial, or low rise multifamily)
  • Opendoor is basically providing liquidity to homeowners by essentially making a market. Not sure why it's valuable in this market, where liquidity exists, and I could see it being a disaster in a market where demand dries up. Also aren't in the commercial space, as far as I know. The residential brokerage model and its 6% commissions isn't a winning one and won't be around forever, but I don't see opendoor being the answer.
  • Compass - I see no differentiation from every other residential brokerage aside from the higher cost structure.

Am a firm believer that anything can be a good investment for a price, but I just don't see what synergies there are to justify the prices softbank is paying for these business. That being said, I am eager to hear counter arguments

    • 4
Apr 16, 2019

Good point on the SPE question. I can't imagine the institutional property owners would be stupid enough not to get the parent guarantee, but nothing is surprising anymore...

I think there are geopolitical influences going on with SoftBank concerning US/Japan relations and their inability to protect themselves against an increasingly expansionist China.

Most Helpful
Apr 16, 2019

other users in CRE are more astute than I am on the shortcomings with wework as a real estate investment, I worry about the CEO's behavior. he's treating softbank's money as a way for him to acquire toys. he's a surf bro (as am I), but he also has a fiduciary duty to shareholders. buying a wavepool, maybe that's a CRE play. buying a turmeric coffee company just so you can look at Laird's wife...what? buying a $60mm brand new jet and taking it to hawaii on a personal surf trip? dude, you'd get proxy raped if wework was public.

regardless of the business model shortcomings, this is not the kind of person I'd want running a company. as much as I talk shit about elon musk, the man slept in the factory and put in 80-100 hour weeks. this bro just uses the company coffers as his personal slush fund, despicable

    • 18
Apr 16, 2019

+1. Someone needed to say this, not surprised you were the one to drop the facts.

Apr 24, 2019

Many of the big players in the space are extremely averse to investments with WW as a large tenant. I've mentioned this in other threads, but I'm definitely in this camp.

Apr 26, 2019

We need more surf bros calling out other surf bros. Thank you for the lesson in facts, thebrofessor. LOL.

    • 1
Apr 26, 2019

I will call out surf bros all day long, since I'm not good it's one of the most fun parts about competitive surfing

hey kelly slater - shut the fuck up and just do cutbacks

hey dane - you're not too cool for the tour, you just suck at variable conditions and are out of shape (don't hate me, I love your videos)

hey mick - I love you

hey brazilians - chill tf out, you ask us to respect your culture, tone it down a bit

hey hawaiians - we get it, you invented surfing, stop preaching aloha spirit when you get into fistfights because someone almost dropped in on you at 3 ft windswell

....more on hawaiians - don't complain about people coming to the island 24/7 and then plead for help when shit hits the fan. you can't be a NIMBY and then want help when it's convenient, balance is key.

hey girls on tour - don't complain about being sexualized in a sport where you choose to wear a thong when the water's warm, they make girl boardshorts

hey WSL judges - stop smoking crack

    • 6
Apr 16, 2019

I'm somewhat skeptical.

Commercial office space-- or residential space-- doesn't benefit from the same economies of scale as a Lyft or AirBNB. Yes, WeWork is a brand name, but when someone switches office spaces or even starts a business, they typically have the time and energy to invest in switching and investigation costs that they don't have for a cab ride or place to stay.

I can see WeWork becoming the Chipotle of commercial real estate, but I don't see them becoming the Lyft or Ebay. Maybe I'm missing something about subleasing from a WeWork vs a Regus-- maybe there is some sort of curation and networking effect among startups that I don't see coming from a big firm. But I don't see WeWork's advantages being so huge that they bring the industry beyond monopolistic competition.

They're a well-run firm with a lot of natural competitors and they don't benefit from network effects. That might change if they turn into a sort of weird tech incubator/ curator of tech startups.

I could see a model where WeWork begins hosting tech startups and they up the pay for facilities managers by about $30K/year to try and get some guys and girls with a thoughtful eye for VC rather than just an eye for hiring electrical contractors. You start curating which startups sit next to each other and try to get some positive interaction between the two. Eventually, you turn WeWork into this validating brand name, you make getting into WeWork a little bit more like getting into an NYC co-op than buying a condo, and you go from being a commercial space subleasing firm to something that looks a bit more like a startup incubator.

So the question here sort of is, how do you turn Chipotle into an exclusive social club with a dining room? If you can pull that off, you can charge 50-100% more than the competition and still be turning away business.

    • 3
Apr 16, 2019

If I were to start a fund today, I'd be making my decision on the building, not the coworking space. Fortunately, rent here in Chicago is fairly cheap.

I'd take a long hard look at the Chicago Board of Trade Building. The exchange floor is basically gone and a lot of the prop shops have moved to the West Loop, Wacker Drive, or north of downtown and 131 W Jackson has a 75% occupancy rate-- even on the high floors. But the CBOT building is 3 blocks from the train station. It's a classic 1930s Art Deco building that bookends LaSalle Street, and the south views above the ~20th floor are pretty incredible. And for dumb Midwesterners like me, the building is instant credibility. Now, in statarb a lot of the credibility comes down to recruiting rather than capital. If we're running a Sharpe of 2, we run out of trading ideas and capacity, rather than capital. Maybe the best place for a statarb firm is Logan Square or Lincoln Park. But if I were running a purely traditional AM firm or an investment bank and trying to impress clients, I'd take a long, hard look at the Chicago Board of Trade Building.

Best off, me being IlliniProgrammer, the rent is CHEAP for downtown. As in, they charge the same rate for a gross lease as a lot of class B downtown buildings charge for a net lease.

Today, in finance, the building is the validation. How does WeWork turn that into the sublessor for tech startups and other small firms?

    • 2
Apr 16, 2019
IlliniProgrammer:

I could see a model where WeWork begins hosting tech startups and they up the pay for facilities managers by about $30K/year to try and get some guys and girls with a thoughtful eye for VC rather than just an eye for hiring electrical contractors. You start curating which startups sit next to each other and try to get some positive interaction between the two. Eventually, you turn WeWork into this validating brand name, you make getting into WeWork a little bit more like getting into an NYC co-op than buying a condo, and you go from being a commercial space subleasing firm to something that looks a bit more like a startup incubator.

So the question here sort of is, how do you turn Chipotle into an exclusive social club with a dining room? If you can pull that off, you can charge 50-100% more than the competition and still be turning away business.

That is extremely interesting, and not something I had considered.

Apr 16, 2019
CuriousCharacter:
IlliniProgrammer:

I could see a model where WeWork begins hosting tech startups and they up the pay for facilities managers by about $30K/year to try and get some guys and girls with a thoughtful eye for VC rather than just an eye for hiring electrical contractors. You start curating which startups sit next to each other and try to get some positive interaction between the two. Eventually, you turn WeWork into this validating brand name, you make getting into WeWork a little bit more like getting into an NYC co-op than buying a condo, and you go from being a commercial space subleasing firm to something that looks a bit more like a startup incubator.

So the question here sort of is, how do you turn Chipotle into an exclusive social club with a dining room? If you can pull that off, you can charge 50-100% more than the competition and still be turning away business.

That is extremely interesting, and not something I had considered.

So Y Combinator?

This is a 'cool' idea, but as a guy who is a self-identified technology junkie in a CRE job, this will never happen. I'm too lazy to write all the counterarguments about this, but it's a ridiculous idea to suggest WeWork is going to become the Tinder of technology firms.

Apr 17, 2019

Agree with this on wework. But Lyfts a bad idea. To date they haven't shown any ability to improve margins as they scale. Non of the ride hailing companies have. I've seen numbers where they aren't beating the fixed/variable costs of the taxi business. Same cars. Same gas prices etc. driver still needs paid. I've seen arguments that taxi companies had better operations for maintainence/taxes etc since the companies had some scale.

Now it's way more convenient than booking a taxi. But Uber's aren't getting a pricing premium.

I have seen evidence the corporate overhead is coming down. Uber/lyft expanded the ability (outside urban core) to get a third party ride but they haven't done anything to get pricing premiums or cut the core costs of providing a ride.

Array
Apr 17, 2019

Since the SoftBank idiot wasn't allowed to put gigantic amounts of more money into WeWork he is going to put it into the Uber ipo.

Apr 24, 2019

Only glanced at this (too long), but make sure you studied Regus' bankruptcy coming out of the 2001 recession.

Apr 24, 2019

I love WeWork the concept and the actual product. My best friend has an office set up at a WeWork location and it's f*cking fantastic.

I detest WeWork the company for basically being a glorified venture capital firm, investing in every non-related idea before actually perfecting the economic model of shared office space. From a business perspective, it annoys the hell out of me.

Apr 29, 2019

update: WeWork just filed. while the S-1 isn't out there...it doesn't look great

https://www.cnbc.com/2019/04/29/the-we-company-for...
highlights
- 1.9bn loss, 1.8bn revenue in 2018
- at the latest funding round, it was valued at $20bn, meaning we're in for another 10x revenue IPO

I've made my opinions about the company known, we'll have to see how this shakes out

    • 1
Apr 29, 2019

Another pass for me. I am waiting for Airbnb. I am much more bullish on them.

Apr 29, 2019

https://www.wsj.com/articles/marriott-to-take-on-a...
does this worry you at all? not trying to be snarky, RE is just outside my wheelhouse so I wonder if this is a death knell or just an interesting also-ran

Apr 29, 2019

WeWork parent files confidentially for IPO

https://www.ft.com/content/92e6f5bc-6ab0-11e9-a9a5... [sorry FT has a bonkers paywall]

The We Company, parent of the heavily lossmaking shared office space provider WeWork, revealed on Monday that it has filed documents with US securities regulators to publicly list its shares, adding to the backlog of highly-valued, privately held companies pursuing a stock market listing.

The company said in a statement it had confidentially submitted plans for a listing in December and recently had made amendments to its filing with the Securities and Exchange Commission.

    • 1
Apr 29, 2019
Comment

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.