Anyone looking for signs that institutional money is better embracing today’s shared-working champions WeWork would have done well to attend the PERE Europe summit in London this week.
It was not so much that TH Real Estate stressed its justifications for engaging with the disruptor’s recent equity syndication in London on PERE’s stage, but that the global investment manager suggested it would be happy to repeat a similar arrangement – even if WeWork syndicated down 100 percent of the equity.
To recap: WeWork, formerly an office tenant but latterly an investor in its own properties too, exchanged contracts last November to buy the 13-building, 640,000-square-foot Devonshire Square office complex from private equity real estate giant Blackstone in a deal valued at £580 million ($758 million; €657 million) and an approximately 5 percent net initial yield. In March, WeWork syndicated 90 percent of the deal to a joint venture with THRE’s Future Cities Fund and the Danish commercial pension fund PFA. It was a milestone in the organization’s development as a property owner and manager, in addition to being the space’s trendiest serviced office operator.
That deal represented a leap forward in demonstrating how institutional equity is willing to take more of a chance on the WeWork phenomenon beyond the leasing risk associated with a tenant with such fluid turnover.
Giving a presentation on the deal on day one of the summit, Nick Deacon, THRE’s head of Europe offices, admitted his firm had taken a “deep dive” embracing such a transaction but, such was its faith, should a similar deal be tabled it “may not ask WeWork to put any money in,” thereby assuming 100 percent of the equity and all the associated risks. “These guys are the largest occupiers in London and they are going places. Fundamentally, we want to be part of that,” he said.
Scratch beneath the surface of the Devonshire Square deal, however, and you will see various risk mitigants. Firstly, while WeWork wants to occupy all 13 buildings, initially the firm will only take up 190,000 square feet across two properties. At the presentation, WeWork director Matthew Brown confirmed his employer wants to operate “the lot,” but also that “the joint venture comes first.” If the complex ultimately has a mix of tenants, then it joins the ranks of any other well-designed, prime-located office proposition – just with WeWork as a flagship tenant.
Secondly, THRE and PFA are effectively in for £260 million apiece – including debt – for an investment that doubles as a front-row seat to London’s biggest office occupier. THRE will share asset management duties, Deacon admitting that the education inherited in the tie-up was “hugely valuable.”
The arrangement also involves revenue sharing, so the “economics” are aligned beyond the equity they have put to work. And, the debt arranged for the deal is conservative. From an original ask of 60 percent loan-to-value financing, the terms agreed with lender Bank of America Merrill Lynch for a £235 million facility, plus a £40 million capital expenditure tranche, reflected gearing of 40 percent.
These measures are important considerations. But it is the alignment of equity that should be taken most seriously. WeWork might have raised over $6 billion since its inception in 2010 and today command a valuation of more than $20 billion, but no business wants to lose any part of its shirt on a deal, even if it is in for just 10 percent. Co-investment means shared risk. The fact THRE thinks it may not need to share that risk going forward shows where this $114 billion investment management gorilla stands on an occupier that splits so much opinion. More instances like that will tip the WeWork debate further in its favor.
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