Finance

WeWork Asking Investors To Help It Buy Real Estate That It Forgot To Buy And Already Made More Expensive By Paying Premium Rents

The more WeWork talks, the more we want WeWork to please stop talking.

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(photo by David Lat).

Over at Dealbreaker, we’ve been somewhat critical of the company formerly known as WeWork. Aside from the fact that it isn’t totally clear about what it actually is, loses an incredible amount of money, it  is wildly overvalued and appears almost psychologically incapable of seeing its own flaws. But while we can be a little cruel, WeWork just makes it so easy…

In an interview with CNBC to discuss the company’s first-quarter financials, CFO Artie Minson urged investors to view losses as “investments.”

“We really want to emphasize the difference between losing money and investing money,” Minson said on Wednesday. “You can lose money or you can invest money. At the end of this quarter, we have these cash flow-generating assets.”

Well, that’s just total bullsh!t. And it’s not even the good kind of total bullsh!t like when WeWork created the utterly ludicrous concept of  “Community-adjusted EBITDA.” It can be almost annoyingly cute when WeWork uses Millennial new-age thought crimes to pretend that finance is a mutable concept, but simply asking potential investors to see net losses as unrealized profit is just boring and lazy.

Especially considering that everyone knows why WeWork seems so suddenly panic to explain its red balance sheet:

When asked if he was trying to differentiate WeWork’s losses from the capital the ride-hailing companies [Lyft and Uber] spend on subsidies and discounts, Minson said, “that’s a fair differentiator.” Renting out work space is “a proven business model,” he said. Memberships climbed to 466,000 from 220,000 a year earlier.

Renting out workspace is a proven business model…for commercial real estate companies that own the space being leased. Which, by the way, is another thing that the company had something to say about yesterday:

Sponsored

Now, after more than a year of planning, WeWork is creating an investment fund that aims to raise billions of dollars to buy stakes in buildings where it will be a major tenant. If all goes according to plan, the fund, called ARK, will start with $2.8 billion, including $1 billion from Canadian real estate investor Ivanhoé Cambridge Inc. WeWork has long said it mostly stuck to leasing space because it believed in being “asset-light.” Now it’s wagering that buildings become more valuable with WeWorks in them, in which case ARK will put more of that added value back in the company’s own pocket.

Now we’re just snarky financial bloggers but this pitch seems very dumb. Is WeWork really pitching investors on the premise of “We leased this space, burned capital to make it look cool, sold short-term secondary leases, drove up the price of the real estate and now want you to help us buy it a premium so we don’t get killed on our next rent increase period?” Because that is certainly a “recipe” for…something.

Somehow the optics around ARK get even more muddled and less realistic the more you delve into it. One example is how ARK will incorporate the holdings of WeWork co-founder, CEO and sometime landlord, Adam Neumann:

WeWork has been dogged by criticism from some investors this year for renting space in buildings partly owned by Neumann. That’s legal, but outside of the real estate world, the boss negotiating how much to pay his own investments from the company’s coffers carries more than a whiff of unseemliness. Partly for that reason, Neumann is transferring some of his own real estate holdings into ARK. The fund will be run independently from WeWork’s main office-leasing business but will remain under the executive team’s control as part of an umbrella company, so for all intents and purposes, WeWork will still be sitting on both sides of the table when it leases ARK-owned spaces.

Have you guys met Neumann yet by the way? Because he’s a real hoot:

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“Everyone wants to know what ARK is. I think it’s going to be amazing,” Neumann says one morning last month at WeWork’s headquarters in Manhattan’s Chelsea neighborhood. Throughout our conversation, he’s at ease making grand statements, as if the dreary details will fall in line later as long as the vision is bold enough. He’s also hungry. It’s just past 11:30 a.m. when a male assistant in a black baseball cap delivers a shallow gray ceramic bowl with brown grains and a spoon. “I haven’t broken my fast yet,” the 40-year-old CEO says apologetically, instead of using the word “breakfast.”

Even the bowl should be embarrassed by what happens in this paragraph.

But most of these modern-day tech founders can be made to look like next-level douchenozzles by…their own behavior. What really matters is Neumann’s vision for what future shareholders can expect from their investment in “The We Company”…

Neumann frames his idiosyncrasies in terms of spiritual enlightenment, which he says was especially heightened after SoftBank took the extra $14 billion off the table in January. “Let’s not build a company just for the sake of revenue,” he says. “Part of creating value is not maximizing.” 

Oh jfc.

Let’s be clear. WeWork’s real business model has been selling an urbane elite Millennial lifestyle brand to wildly thirsty private investors like SoftBank who are more than happy to drive startup valuations into the financial Avant-garde. For that crowd, the practice of what we like to call “barista accounting” is fun and novel, but it’s also already stopped being viable. For WeWork to survive going forward, it needs to radically change its messaging in order to be perceived as a real company by public market investors who are still licking their wounds from Snap, Blue Apron, Lyft, Uber, et al.

That shift in perception will be very hard to achieve if the people running the show keep making it clear that WeWork might not be a real company.

WeWork urges investors to see losses as ‘investments’ as it reports first-quarter loss of $264 million [CNBC]

WeWork Wants to Be Its Own Landlord (It Also Wants $2.8 Billion) [Bloomberg]

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