WeWork S-1

This week, WeWork, that famed coworking space startup, filed its paperwork to go public. Here are my takeaways

The Positive Stuff

WeWork grew dramatically in terms of revenue, workstation capacity, memberships, run rate revenue and committed revenue backlog which as of June 30, 2019 is approximately eight times that as of December 31, 2017.

Enterprise memberships which refer to companies with more than 500 employees make up of 40% of all memberships and new locations seem to be filled up quickly

Net Capex per WorkStation added has gotten smaller

The not-so-positive stuff

While revenue grew fast, so did losses. WeWork lost money as quickly and almost at the same rate as they generated revenue. And the company continued to lose money to the tune of approximately $1.7 billion last year and $1.3 billion in the first half of 2019.

The company is projected to continue losing money from its operations and keep investing in new leases and workstation. The contractual obligations run up to $47 billions in the future. It remains to be seen whether the company will start generating profit and honor such a sizable obligation. On top of that, the majority of WeWork’s revenue comes from the US and recently, the inverted yield yesterday which caused one of the worst drops in the stock market’s history is seen as a sign of upcoming recession in two years. One of the concerns about WeWork is whether they can operate in recessions with huge fixed costs in the form of long-term leases.

Additionally, what stood out from WeWork’s S-1 for me is the influence of the CEO and his wife. Here is what the S-1 has to say about the Neumanns

We have entered into a number of transactions with related parties, including our significant stockholders, directors and executive officers and other employees. For example, we have entered into several transactions with our Co-Founder and Chief Executive Officer, Adam Neumann, including leases with landlord entities in which Adam has or had a significant ownership interest. We have similarly entered into leases with landlord entities in which other members of our board of directors have a significant ownership interest, such as through ARK (as defined in “Business—Our Organizational Structure—ARK”).

In the event that Adam is permanently disabled or deceased during the ten-year period commencing upon the completion of this offering, a committee will be formed for the sole purpose of selecting a new Chief Executive Officer. The composition of this committee will be as follows:

Bruce Dunlevie and Steven Langman, who are currently members of our board of directors and members of our compensation and nominating committee, to the extent they are then serving as our directors, will serve on this selection committee with Rebekah Neumann (with the size of the committee fixed at two or three, as applicable); and

if neither Bruce nor Steven is then serving as one of our directors, Rebekah will choose one or two board members who are serving at the time to serve on this selection committee with Rebekah.
In the event that Rebekah is not able to serve as described above, the trustee then acting on behalf of Rebekah and Adam’s estate will serve in all such capacities and make all such determinations. In addition, Adam and our board of directors have a process in place to designate an interim CEO in order to give the selection committee time to select a long-term CEO. Any selection of an individual to serve as our Chief Executive Officer must be made with the unanimous approval of the selection committee.

The company entered into leases with some buildings as soon as Adam acquired ownership of those buildings

For one of these four properties, we entered into a lease agreement with the landlord/partnership entity within one year following Adam acquiring his ownership interest, and in the other three cases we entered into a lease agreement with the landlord/partnership entity on the same day that Adam acquired his ownership interest. During the years ended December 31, 2016, 2017 and 2018, we made cash payments totaling $3.1 million, $5.6 million and $8.0 million to the landlord/partnership entities under these leases. During the year ended December 31, 2018, we received payments from the landlord/partnership entities in the form of tenant improvement reimbursements of $11.6 million related to these leases. During the six months ended June 30, 2019, we made cash payments to the landlord/partnership entities totaling $4.2 million under these leases and received no tenant improvement reimbursements related to these leases. As of June 30, 2019, future undiscounted minimum lease payments under these leases were approximately $236.6 million, which represents 0.5% of the Company’s total lease commitments as of June 30, 2019.

The company paid almost $6 million for the We trademark which was owned by WE Holdings, which is controlled by its own directors

In July 2019, WE Holdings LLC assigned residual rights related to “we” family trademarks to the Company, which we desired to obtain following our rebranding in early 2019. In consideration of this contribution and in lieu of paying cash, the Company issued to WE Holdings LLC partnership interests in the We Company Partnership with a fair market value of approximately $5.9 million, which was determined pursuant to a third-party appraisal.

Even though he will function without an employment contract, Adam will have total control over the direction and decisions of WeWork due to his ownership of B and C class shares. His influence isn’t particularly reassuring given how much has been written about the chaos at WeWork. I had one here

The grand vision which sometimes seems closer to delusion than ambition to me is reflected within the first sentence of the S-1 form.

Mission: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness”

I literally have no idea what “elevate the world’s consciousness” means and how a real estate company, not a tech one no matter how much they try to portray themselves so, can turn those words into actions and reality.

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