Real Estate

Revealed: the cash cost of WeWork's global expansion

Documents seen by FT Alphaville reveal the huge cash costs incurred by WeWork in 2018 as it became one of the largest global providers of office space.

The $47bn business, which is backed by investors including Softbank’s Vision Fund, previously reported a net loss of $1.9bn in 2018, after generating revenues of $1.8bn — more than double 2017’s top line.

However the documents reveal new information which highlight the business’s growth-at-all-costs assault on the once mundane sector of commercial real estate.

The filings specifically show WeWork’s net cash used in investing activities was $2.5bn in 2018, financed by $2.7bn of net cash provided by financing activities.

The income statement, not disclosed before, also divulges WeWork’s voracious appetite for expansion. In 2018 its “growth and new market development” expense accelerated 335 per cent year-on-year to $477m. Similarly, the company’s sales and marketing costs were $379m, up 164 per cent from 2017.

However, thanks to a 21 per cent decline in general and administration expenses, WeWork’s operating costs grew a touch slower than revenues, up 93 per cent to $3.5bn.

Despite signs of WeWork beginning to get a handle on its expenses, several of its financial metrics deteriorated according to the documents.

Its adjusted ebitda margin which, according to its bond prospectus from last year, excludes costs such as stock based compensation along with depreciation, fell to negative 43.4 per cent in the last quarter of 2018, the lowest in three years.

For those retroactivists who like traditional financial metrics, FT Alphaville calculates WeWork’s ebitda margin was negative 75.6 per cent in 2018, a loss of $1.4bn. However this was a marginal improvement from 2017, when the same figure was minus 86.8 per cent.

As previously reported, WeWork’s annual average membership and service revenue per physical member, which it cited as one of its linchpin metrics in its bond offering, also declined. It fell to its lowest point in 3 years in 2018’s last quarter, down to $6,360 per member versus $7,353 in early 2016.

Here’s the chart:

Do note, however, that the non-US mix of WeWork’s revenues increased from 34 per cent to 43 per cent from the fourth quarter of 2017. So geographies with lower pricing, such as its offices in Colombia and the Czech Republic, are likely a contributing factor to this decline.

On the bright side however, WeWork’s much joked-about “Community-Adjusted ebitda” margin, perhaps the most infamous financial metric of a generation, stood firm at 27.5 per cent for the year versus 26.9 per cent in 2017. This translated into $467m of heavily adjusted profits.

This continuity in one measure of profitability may not be so much of a surprise as WeWork calculates the figure in a rather non-traditional way. It takes its membership and service revenue, less revenues from noncore ventures, before subtracting “adjusted rent, tenancy costs, and adjusted building and community operating expenses”, according to a document shared with the FT.

However WeWork do think it’s the best measure of the returns on its office spaces. As the company stated in its bond offering, the metric is designed:

. . . as a way analysing [sic] the core operating performance of our WeWork locations, inclusive of community support functions but excluding the impact of general and administrative expenses, which are not incurred at the location level and do not relate directly to the operation of our communities.

WeWork declined to comment on the numbers on the record.

Losses are to be expected in a high growth company, particularly one involved in the capital-intensive business of shared office space. For example, WeWork only classified 161 out of its 425 offices as mature locations — buildings open for at least 18 months, according to its bond offering — at the end of 2018. So declining revenues per member, and huge GAAP losses, are not that surprising with so many of its offices still new on the block.

Yet WeWork is not a exactly an infant business either. It is now the largest corporate office tenant in London and New York. And it carries a market valuation of $47bn, 16 times rival Regus, which, according to S&P Capital IQ data, generated $3.3bn of revenues, and $493m of ebitda, in 2018. So at some point, to justify the faith of its investors, it will need to turn off the investment taps and mature.

With an IPO expected within the next few years, and January’s news that SoftBank had dialled back its planned investment in the company, this moment may need to come sooner, rather than later, for one of this bull market’s most debated businesses.

Related Links:
WeWork and the vanishing bond rating — FT Alphaville
WeWorked to solve a rent-accounting puzzle
— FT Alphaville
Splashing in the WeWork waterfall
— FT Alphaville

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