The Wall Street Journal

Why WeWork's Business Model Is Risky


The We Co.'s public offering is expected to come as early as next month. But some investors are saying it might not be worth the risk. Here's why.

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- [Spencer] WeWork's IPO is coming as soon as next month.
- Investors might rightly be wondering
if it's a bridge to nowhere.
- This is, obviously, an unprofitable company.
We've seen a number of these companies
come to market this year with actually mixed results.
- A lot of numbers are swirling around,
but if you really wanna understand WeWork's business model,
look at this one, $47 billion.
That's how much the company is on the hook for
in lease obligations leading up to its public offering.
It says a lot about how the company works
and why some investors are eyeing the risks.
(pleasant piano and orchestral music)
You probably know WeWork, which recently changed its name
to The We Company, as an office space
with a specific aesthetic.
You know what we're talking about.
The glass walls, plants, cafes,
mid-century-style furniture.
WeWork's basic business model is to lease large spaces,
transform them to look like this,
and then rent them out to individuals and companies
at a higher price.
- [Spokesman] Our software finds the best buildings
in the best locations. (dramatic orchestral music)
Before we even begin construction,
we build full 3D models to make sure
we're creating environments that allow members to thrive.
- [Spencer] As of 2018, the company operated
more than 35 million square feet of space globally,
and it currently occupies 528 locations
in 29 countries around the world.
(dramatic orchestral music)
- [Spokesman] Speed is important,
because on average, we open two new locations
every single day. (dramatic orchestral music)
- To cover the costs of the renovations and leases,
WeWork charges individuals and companies
through four different membership options.
For one of the cheaper plans,
a member can bring their laptop
and sit in a common area if space is available,
and for the most expensive plan,
companies can rent out full offices,
suites, or entire floors.
WeWork also offers a service called Powered by We,
full custom build-outs for larger companies.
So why are some analysts and investors skeptical?
Well, some are concerned with those lease obligations.
When WeWork signs a lease on a building in the U.S.,
they commit to an average of 15 years,
but WeWork's members only commit to an average of 15 months.
WeWork's obligations top $47.2 billion,
but its customers have only signed leases
on $3.4 billion worth of space.
Recently, the company has started signing
more long-term clients, but still,
with 528 locations, that's a lot of time and space to fill.
It's unclear how much space WeWork needs to fill
to break even, but the company's occupancy rate
fell from 84% to about 80% in the final quarter of 2018.
The company said the drop was caused by expansion.
New offices traditionally take up to 18 months to fill,
but it's unclear what would happen
if suddenly fewer start-ups and freelancers
were looking for workspace,
which could happen in an economic downturn.
It's also unclear what would happen
if existing tenants started to default.
One place investors are looking for precedent
is International Workplace Group, formerly known as Regus,
a Swiss company with a similar business model to WeWork.
During the economic downturn in the early 2000s,
IWG's U.S. unit filed for bankruptcy
as its revenue fell but long-term leases remained in place.
WeWork has said it's flexible business model
would help keep it safe in a downturn.
The company's rapid expansion
has helped it stay out in front of competitors,
but some investors are concerned that could change.
That's because WeWork's business model is easy to replicate.
The company has filed for some industrial design
and furniture patent protections,
but anyone with enough cash can lease out
industrial office space and flip it, and they have.
A New York-based rival, Knotel,
hit an estimated $1 billion valuation
following a recent round of funding,
and in 2017, Blackstone acquired a majority share
of The Office Group,
a flexible workplace provider in the U.K.
Investors will have to decide
if WeWork's size and flexibility are enough
to protect it in a period of economic uncertainty.
(pleasant mallet percussion music)

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