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Failed WeWork IPO is a rebirth to some, irrelevant for others

The co-working company is adjusting to new ownership under SoftBank, a decision some of its landlords support while others remain uninterested in WeWork all together.

WeWork has failed to go public but has found refuge under the control of major shareholder SoftBank, a decision some of its landlords can get behind. Others remain uninterested in working with the co-working giant.

When WeWork instigated its initial public offering process  in December, underwriters hoped it might become a $65 billion business. However, unlike private investors, which pushed its valuation to $47 billion by January 2019 via funding rounds, the public markets were unconvinced.

$65bn

Shareholders’ highest valuation hopes in 2018

Prospective investors took issue with WeWork’s governance, a valuation based on a multiple more reflective of a tech rather than a real estate company, and a business model whose exponentially growing numbers could not mask the fact it never turned a profit. After failing to garner enough interest to go public and quickly running out of cash, SoftBank struck a deal in October to acquire 80 percent of WeWork and provide the co-working giant with an additional $5 billion in new financing. SoftBank also plans to launch a tender offer of up to $3 billion for existing shareholders and accelerate its existing $1.5 billion commitment to the firm.

Media reports estimate WeWork is now valued at around $8 billion – a far cry from the $47 billion private valuation in January.

WeWork has already started implementing changes by ousting founder Adam Neumann and adopting a more conservative strategy than that widely accredited to him. “Streamlining” and “stabilizing” the business will be focal points for the newly appointed co-CEOs, Artie Minson and Sebastian Gunningham, according to a firm announcement. This compares with Neumann’s emphasis on rapid growth – WeWork nearly doubled its membership from 268,000 members to 527,000 members within a year, according to a regulatory filing. These changes have largely been viewed as favorable for the real estate industry and for the company.

“I think this is the best possible near-term outcome for the company and for all of their stakeholders,  owners, employees and landlords,” one manager says.  Neumann leaving the company is critical for a focus on the future, rather than the past, he added. SoftBank, which has plenty of access to capital, has a big incentive to put WeWork on the right path, the manager says.

$47bn

Shareholders’ valuation at last private fundraising round in February

“It is certainly good news to property owners,” says Sam Chu, Hong Kong-based managing partner of  Phoenix Property Investors. “[SoftBank’s] deep pockets might help to significantly improve the credit quality.”

Phoenix previously signed WeWork as an anchor tenant in 2016 at its Causeway Bay office property, Tower 535, in Hong Kong. The firm considered other tenants, but chose WeWork after negotiating a favorable deal, according to Chu. He explains that when reviewing tenants, the firm first looks at commercial terms then takes into consideration whether the tenant can provide any synergies to the overall building.

Though many of WeWork’s leases are not guaranteed by parent company SoftBank because of the special purpose vehicles that were created, having a solvent parent is better than the alternative, another manager points out.

“The bailout is good news for sure,” he says. “The valuation is now back on earth.”

$8bn

Valuation when Softbank agreed to a bailout package

Questions persist

Just because WeWork is no longer in danger of running out of cash does not mean landlords will want to work with the firm. WeWork still faces challenges, prompting some landlords to consider other co-working offerings with more flexible models.

Aiming to “right size” the business and put it on a path to profitability means the firm needs to cut costs, and WeWork already has plans to axe as many as 4,000 jobs, according to media reports. The firm will reduce the number of new leases it signs, another clear indication of its strategic shift.

“We have no intention of working with WeWork, regardless of SoftBank ownership, as their business model is not compelling to us as an office owner-operator,” Inna Khidekel, partner at Salt Lake City-based manager Bridge Investment Group. “However, co-working remains of interest and will continue to grow as a piece of our business.”

He said/she said

He said: “I think this is the best possible near-term outcome for the company and for all of their stakeholders, owners, employees and landlords”

She said: “We have no intention of working with WeWork, regardless of SoftBank ownership, as their business model is not compelling to us as an office owner-operator”

Bridge has co-working exposure through WeWork competitor Industrious. The firm chose to work with Industrious because it believed doing so increases the overall value of a building. For that, it is willing to pay a management fee, according to Khidekel. WeWork, on the other hand, signs long-term leases with office landlords and sub-leases the space short-term to its customers.

Ultimately, the new management and SoftBank’s deal made little difference to Khidekel, who sees WeWork’s core business model and alignment with landlords to be flawed. She believes landlords need to approach co-working through a partnership, or managed-service model that gives them greater control and the opportunity to capture upside in a different way than purely from rents. With a model like Industrious, Bridge maintains “kick-out rights” and retains any upside when exiting the investment, she explains.

For co-working rival Convene, meanwhile, the industry should stay focused on one, overarching trendline – that flexible office is here to stay. “If anything, this is the time other players in the space, like Convene, are further validating their consumption of real estate in a different way and the branding of commercial space,” Convene co-founder and chief executive Ryan Simonetti says. “A legacy industry is still being disrupted.”