Real Estate

WeWork:  vacant possession


WeWork’s fall from grace has been just as explosive as its rise. In the space of a few months the US office sharing company has gone from one of the world’s biggest start-ups valued at $47bn to a $8bn pariah forced to abandon plans for growth. Lex was never impressed with the company’s financials. We remain unconvinced by its future plans.

Lex reviews its investment calls at the end of each year. We scored more big hits — mostly of an iconoclastic kind — than big misses in 2019. One less-than-flattering explanation is that we are at the top of an investment cycle. Idiocies multiply at such times, providing material for debunking.

In summer 2018, Lex tried to put a price on self-proclaimed tech prodigy WeWork. Ignoring the company’s claim to be a new sort of business and its consciousness-raising “space-as-a-service” description, we looked at the core business of office rentals. 

Lex did not quibble with the central concept. Off-the-peg workspaces are useful for companies. So is the chance to scale up and down at will and operate in multiple cities around the world. Plus taking on long-term leases for office space and offering shorter-term subleases is a proven business model.

What we could not accept was the skyscraper valuation, driven largely by SoftBank’s $4.4bn investment in 2017. Why, we wondered, should the company have five times the valuation of IWG (formerly Regus) — a company that does the same thing, is bigger and makes a profit. WeWork’s kombucha on tap and stylish furnishings were not valuable enough to account for the difference.

Generously we assumed WeWork could one day turn a profit and then priced it on the same trailing sales multiple as IWG to arrive at the figure of $3bn. We were not far off. SoftBank’s $9.5bn rescue package valued it at less than $8bn.

Now that plans for an initial public offering have been cancelled, SoftBank will continue to determine the company’s valuation. It is still too high. Even if new offices are not opened, WeWork remains on the hook for over $47bn in lease payments. There is no clear path to profitability and losses more than doubled to $1.3bn in the third quarter of 2019. We were right that WeWork’s high valuation was based on thin air. In retrospect, we may even have been too generous.

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