WeWork’s European real estate head: SoftBank deal will lead to ‘very sustainable growth’

At the recent CREFC conference, Patrick Nelson discussed the office space firm’s business model following its refinancing, its use of SPVs in leasing deals, and its relationships with landlords and lenders.

flexible office co-working

Public appearances by senior executives from flexible workspace provider WeWork have been limited since the company ditched plans for a stock market flotation in September.

However, despite the torrent of negative press WeWork has endured in recent weeks, its head of real estate for Europe, the Middle East and Africa took to the stage in London on November 21 to speak to real estate finance professionals about the company’s business model and what lies ahead for the co-working concept.

Speaking at the Commercial Real Estate Finance Council Europe’s Autumn Conference, Patrick Nelson argued that the $9.5 billion recapitalization of the company by Japan’s SoftBank in the wake of its pulled initial public offering would enable WeWork to see through a “sustainable” growth plan.

Nelson said the SoftBank deal “allows us to execute on the plan of very sustainable growth and maximization of the large global portfolio we have.”

The debt and equity package from SoftBank, announced on October 22, followed a restructuring of the WeWork management team, which saw controversial co-founder Adam Neumann step down as chief executive. Despite the turbulence experienced by the company in recent months, Nelson argued WeWork’s future strategy would be based around three factors that remain core to the business.

First, he argued that the firm’s global platform made it a market leader in terms of attracting, as occupiers, companies with 500 employees or more. Second, he said the company’s application of technology remained crucial to its model and addressed the question of whether WeWork should be viewed as a tech or a property enterprise.

“We are a real estate company that employs more tech than I think any other real estate business that exists,” said Nelson. “And this tech is applied throughout the entirety of WeWork’s operations, so we are able to provide a great member experience in a cost-efficient manner.”

Third, Nelson explained that “space efficiencies” would allow for greater earnings from individual buildings occupied by WeWork. “We have a higher EBITDA margin on a unit level than almost any competitor in the world and that gives us comfort that there is a buffer against any potential downturn,” he said.

Nelson was questioned about the company’s use of special-purpose vehicles to lease buildings, with guarantees from its parent company only being provided for a portion of the lease duration – a factor that some market observers have said gives landlords and lenders limited recourse. Nelson argued that such lease structures are not out of kilter with the wider property rental market.

“We are a real estate company that employs more tech than I think any other real estate business that exists”

Patrick Nelson

“It’s conventional to have that SPV structure and to back it up with a corporate guarantee from the parent company,” he said. “Most of our deals have significantly longer than a year’s corporate guarantee. Ultimately, what provides comfort for landlords is the actual performance of a location and the quality of the asset. We have a very strong performing UK portfolio. If the landlord feels confident that they can lease out a building, they’ll take a lot of comfort that WeWork will be able to successfully operate that building.”

He added: “Real estate is a relationship business, and people basically hire a company that stands by its commitments.”

Asked whether WeWork might agree to hotel-style management contracts in future, rather than the long leases it currently takes, Nelson argued it is most important to demonstrate to landlords and lenders the operational performance of assets that offer co-working space.

“The sector is relatively young, and it is still evolving,” he said. “Lenders understandably lend based on historical data and WeWork is not even 10 years old. In our London portfolio, for example, we have a lot of buildings that are three or four years old, and we know lenders like to see at least a five-year track record. So, whatever the operating model, ultimately it comes down to what is the actual operational performance of the asset. We are challenging the approach of looking backwards – we want to inform and demonstrate that an operation is very strong.”

Nelson also played down the likelihood of WeWork adopting an ownership model across its portfolio: “Buying buildings takes a lot of time and it also takes a huge amount of capital. Leases are less capital-intensive and they allow us to be faster and more dynamic. We have a global platform and a member in London, for example, has access to 45 buildings, and that’s beneficial to us. If we were to buy all our buildings, the scale of the operational platform would be much smaller.”

On getting valuers comfortable with the WeWork model, Nelson said: “It takes going through a downturn and showing viability in that downturn, and once we come out of that I’d hope valuers start to distinguish between operators in the flex space.”

He added: “The fact we take leases is because we are operating in a pretty conservative market. But we are very happy to share our figures with landlords and with valuers – we are a private business, so we do this under NDA.”

Real estate lenders’ reaction to SoftBank’s rescue of WeWork will be the subject of a deep-dive analysis by sister publication Real Estate Capital, to be published online in December and in its Winter print edition