WeWork reveals an astonishing $2.4 billion annual loss as it pushes to an IPO

• US-based office space startup WeWork released its prospectus publicly overnight.
• The IPO documents reveal the company is a long way from profitability and does not predict when it will be in the black. It lost AU$2.4 billion in 2018.
• The 10-year-old venture has 20 sites in Australia, half of them in Sydney.
• It is expanding globally at a rapid rate, doubling revenue in 2019, but the losses are still outstripping that growth

The company behind global co-working space startup WeWork has publicly released the financials behind the rapidly scaling venture as it seeks to list on the US stock market, revealed that its annual losses nearly match its revenue.

The numbers reveal the staggering size and ambition of the business co-founded in New York in 2010 by Israeli businessman Adam Neumann, 40.

The 383-page document for The We Company, which includes 129 pages of financial statements, revealed that while revenue quadrupled between 2016 and 2018 as the business expanded globally, the annual loss in 2018 was $US1.6 billion (AU$ 2.38bn) on revenue of US$1.82 billion (AU$2.68 billion).

The first half of 2019 nearly doubled the revenue again, generating $US1.535 billion, but the losses also grew to $US690 million and would have been worse if not for a one-off $486 million gain.

The IPO filing also reveals the complex financial relationship the startup has with its co-founder and leader.

WeCo’s IPO documents go to considerable effort to try and mitigate Neumann’s potential conflict of interest in owning four buildings the company leases space in. The leases are worth more than US$250 million over their lifetime. The CEO is selling his stake in those sites to a new investment vehicle called ARK, which WeCo has a stake in.

It promises no more involvement with buildings Neumann owns.

The other aspect of Neumann’s financial dealings with WeCo raising eyebrows is his staggering US$700 million in company loans or borrowing against stock over the last six years.

WeWork lent its boss more than US$30 million in three-year loans at a fraction of market rates at the time (one loan at 0.2% interest, another at 0.64%), which he repaid in stock or cash. In April 2019 the business loaned Neumann US$362 million “in connection with the early exercise of a stock option”. The money has been repaid.

He’s also borrowed US$380 million in a $500m line of credit using WeCo shares as security.

Neumann will hold onto his stock for a year following the float, expected in September, and won’t sell down in the IPO. The IPO is expected to value his stake in the startup at more than US$4 billion

WeWork’s Australian arm

WeWork first opened in Australia in Sydney’s Martin Place in 2016 and launched in Brisbane in March this year. It now operates in 20 sites in Sydney (10 sites), Melbourne (5), Perth (2) and Brisbane (3).

Prices start at AU$450 a month for a hot desk, rising to AU$2100 a month for a private office at 114 William St, Melbourne.

A dedicated desk costs between AU$900 and $1000 monthly.

WeWork co-working spaces now operate in 528 places in 111 cities globally with 527,000 members. The business says those tenants include 38% of the Global Fortune 500, including Salesforce.

The startup sees plenty of untapped potential in its current locations saying there are “149 million potential members” worth US$1.7 trillion.

The prospectus outlines WeWork’s ambition saying: “among the approximately 255 million potential members across our 280 target cities globally, we estimate a total opportunity of $3.0 trillion.”

The startup takes long leases on the sites. The IPO documents reveal it has $US47 billion in lease payments due over the next 15 years. In contrast, because it offers short-term leases to its tenants, WeWork’s revenue commitments are just $4bn. That disparity, amid concerns of an economic downturn, are among the reasons investors could be wary.

The prospectus notes that: “average revenue per WeWork membership has declined, and we expect it to continue to decline, as we expand internationally into lower-priced markets”.

Appetite for investment

The revelations in the initial public offering documents will be a test of whether investors are keen to back another large startup losing billions as it scales rapidly. Other large recent US startup listings such as Uber and Lyft, which all lose money, have seen their shares plummet below their issue prices. Uber is now US$33.30, having listed at $45.

Only Slack has succeeded in defying the odds, currently sitting at US$30.76 on a $26 issue price.

WeCo’s biggest backer is the Japanese investment giant SoftBank, which has 114 million shares.

SoftBank bought new shares again in January at a valuation of US$47 billion. But investors in the bank’s Vision Fund baulked at doubling down on WeCo at that point and SoftBank’s future commitment, which tops US$10 billion so far, was revised downwards.

The prospectus says the IPO is seeking to raise US$1 billion, but observers believe the figure is more likely to be between $3bn to $4bn. The number of shares to be offered and the price range for the proposed offering have not yet been determined.

Several US banks, led by JPMorgan Chase, Goldman Sachs and Bank of America will provide WeCo with up to US$6 billion in a secured credit facility. A pledge to hold $2.5 billion in cash reserves means the IPO needs to raise more than $3bn to satisfy the debt facility.

Julia Lee, portfolio manager at Sydney-based Burman Invest told Startup Daily that the biggest challenge 2019’s second largest unicorn float faces is market sentiment.

“The big question comes on how you value these companies given that they haven’t made a profit. Generally some of the factors to look at are revenue multiples and expected growth. WeCo appear to be following Amazon’s model, where they’re not as concerned about losses as they are about being first movers and capturing growth,” she said.

“Their biggest problem is the timing of the IPO. Sentiment has turned against tech stocks with worries about recession dominating investors’ minds. This in particular has a large impact on high growth areas.”

It the prospectus, WeCo addresses its rapid expansion and opening new locations thus: “these expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future.”

The startup says it is “reinventing the way people work and transforming the way individuals and organizations relate to the workplace”.

Whether its disruption model is reinventing the way companies make money from commercial real estate remains to be seen.