WeWork’s unsuccessful IPO attempt has generated a lot of media attention over the last two months. In Forbes, we ran a comparison of the disclosed related party transactions versus recent high profile IPOs. Our Head of Research was interviewed extensively at IPO Edge regarding the governance, valuation and business model considerations surrounding the offering. The same outlet also wrote about the disappearing references to cash flow in the amended S-1 filings with the SEC.
While the dust has not settled yet (the company is going through a radical overhaul, with the founder/CEO stepping down, the staff members closest to him on their way out, and a curtailment of new leasing activity), we decided to take a look at what has been said about WeWork on conference calls by publicly traded players in the real estate industry.
We went through 300 (yes, 300) transcripts of global real estate companies going back two years, with our Sentieo-powered document search including mentions of WeWork, co-working, or coworking. The industry comments overall are mixed: while all acknowledge the rapid growth of co-working, some seem happy to partner with WeWork and many of the other providers, others are rolling out their own versions of the product, and some players have been expressly skeptical on the model, both in terms of its durability through the cycle, and regarding coworking as a defacto direct competitor. We will highlight several of these comments chronologically, emphases ours.
Empire State Realty Trust (NYSE: ESRT), a Manhattan-focused entity, has been perhaps the most consistent skeptic. In November 2017, the company said this about WeWork (and its tenants): “On WeWork, and I’ll just — maybe, John will join me here as well. But look, we’ve commented before that — we said in the past, we will not lease space to WeWork. Not only do we prefer the direct relationships with the end users of our space but in our view, WeWork’s model makes it difficult, if not impossible, to have a secure building, and their transient users tend to beat up on the buildings. We don’t think we should underwrite the risk of their variety of short-term rental income streams when we have great tenants to whom we can lease directly.”
Workspace Group PLC out of London in June 2018 were also skeptical: “I think some of the co-working, to use your expression, some of these kind of quick startup reactionary businesses, it will be interesting to see how long they last.”
ESRT again in September 2018: “I think, from our perspective, we don’t have WeWork as a tenant in our portfolio. Our view, as Tony has articulated, is we don’t like the proposition of providing a long-term lease to someone who’s, in turn, entering into short-term agreements. And then, we generally not, very often, not creditworthy entities, not that the enterprise business is different. But we don’t see it as a good credit.”
Paramount Group (NYSE: PGRE) operates in NYC, SF and Washington, DC (top WeWork markets). They have also been consistently skeptical. This quote is from the Merrill Lynch Real Estate Conference in September 2018: “We have been focusing on the leasing side on long-term, financially-stable companies. That — we haven’t been focusing on co-working activities. We have not taken the easy way or the easy route of filling up our space while it was vacant. With co-working space, which would have been very easy to do. We wanted long-term stable with growth for the next couple of years future tenancy for our portfolio. And I’ve seen it before, after the bubble burst in the last tech crisis. The predecessor had a 98% leased portfolio and in the 2 years after, where the whole market was screaming about how bad it was, our portfolio was stable. The cash flow was coming in and that’s a very comforting situation when the market gets difficult. Today, nobody thinks about it and we might be filling the gap between 98% leased and 99% or so with some of the co-working opportunities, as an amenity to our tenants or for our tenants, but we want to build a very stable platform. And we are confident that if the market gets a little rougher that investors realize that some companies are different than others.”
Ichigo Inc. from Tokyo, in October 2018, invokes the famous “bubble” saying: you can look stupid now, missing out on the hot thing, or, you can look stupid later, having a big loss: “The one thing to be very clear that we are not doing and will not do, and to that extent, we are not WeWork. We care about cash earnings. Every single corner — quarter making money. You will not ever get Ichigo to bet the ranch, we’re going to lose $5 billion, but potentially we’re going to be worth 50 billion. And so that is our fundamental problem with the business model is that we’re not willing to do massive upfront spend with a — with what we think of potential unknown payout. And that possibly makes us a less interesting investment, and I fully recognize, because our basic position, as everyone else is smart and we’re stupid. And so we are very involved and we study these other business models, but that has been the main reason why we’re not participants because none of these are breakeven businesses. They are significant loss creators since, potentially, the fact loss they did when they turn into significant revenue generators over time, but that’s the reason we have chosen not to enter this space, in this sort of gateway.”
ESRT again in November 2018 openly criticized what they saw as giveaways: “I think that focusing in on WeWork perhaps understates the — what’s going on when you’ve got WeWork, Industrious, Serendipity, Knotel, Convene. The New York City market, the shared office environment is without question, and has for some time been the single largest tenant. And we just don’t understand why landlords don’t pay attention to what is motivating people to go to these different user of space, who then turn around and relet it to others. We think that it’s important for landlords to recognize that in New York City alone landlords have probably invested over 3/4 of $1 billion in shared office space providers in the form of tenant installation free rent commissions. And I think it’s just a very easy things for people to do, and we don’t see a reason to do it.”
Alstria Office REIT, out of Hamburg, in November 2018 was point plank: target is zero exposure: “So to your first question, our target exposure to co-working space, et cetera, is actually 0.”
ESRT was critical again in February 2019, shining the spotlight on the competitive aspect of the coworking model and issued a warning to the industry: ”Three, we have no exposure to the new wave of coworking enterprise office providers. I have been very clear for years and the world now recognizes that these companies seek to disrupt the relationships amongst tenants, landlords and brokers with outsized risk from weak equity-dependent business models. I maintain that landlords, investors and lenders will regret the day, they decreased the probability of their future cash flows with the leases they have made with these tenants.”
Originally Posted on October 2, 2019 – WeWork Skepticism From 300 Real Estate Conference Calls
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