Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
Is WeWork Ditching Its Expansion Plan to Become a Property Owner?
WeWork has had quite a year. From reaching a $16 billion valuation, to opening new locations in new markets, like Asia and Latin America, to having tiffs with ex-employees, to cutting its earnings forecast, to raising an extra $690 million on investment.
The coworking brand is a great example that success doesn’t come without its struggles and challenges.
Yet, if the business is so successful–which is what we gather from WeWork’s new openings, their claims of high membership rates, and the investment that they continue to procure–why is the company looking for ways in which to drastically adjust its business model?
According to a recent article by The Real Deal, “WeWork is preparing to launch an investment vehicle to buy its own real estate properties.”
Michael Gross, Vice Chair of WeWork, told the Real Estate Magazine that “The company (WeWork) is right now in the process of working on a vehicle that would acquire buildings for WeWork and WeLive.”
This would mean a major shift for the company. They would stop being a lifestyle brand and instead become property owners.
But that’s not all, according to The Real Deal, WeWork is also looking into sale-leasebacks–which means that they would sell the building to a third party and rent it from them to set up their WeWork and WeLive locations.
Just for you to get an idea, this would be like saying that Uber is buying and reselling cars. Or, AirBnB is buying houses to rent!
For those unfamiliar with sale-leasebacks, here’s a simple explanation of what they are and why property owners opt for them.
“In a sale-leaseback, sellers can convert illiquid assets into cash while still retaining use of the properties. Essentially, the user sells the property to an unrelated third party and then enters into a lease for the property for a mutually agreeable term or time period.” – CCIM Institute
On a LinkedIn article, Anthony Naticchioni, Managing Director at Brown Gibbons Lang, says the following about sale-leasebacks:
“A sale-leaseback enables a company to reduce its investment in non-core business assets (the land & building) and liberate that equity in exchange for executing a lease and paying rent.”
“A sale-leaseback can be used to free up cash to grow a business through acquisition or acquire additional facilities, technology, and equipment.”
“Businesses that are struggling for liquidity to pay creditors or are considering bankruptcy might look to a sale-leaseback for capital.”
Now, you’d think that a company that recently capped off $690 million in an investment round isn’t looking for liquidity or struggling to pay back its investors or creditors.
But, as we all know from the WeWork documents leaked to Bloomberg, the coworking company isn’t living up to its own earnings and profit expectations. Just a few months ago WeWork cut its earning predictions from $65 million to $14 million. The leaked documents also showed that the coworking company reported a 63% surge in negative cash flow.
All of this begs the question: is WeWork changing the core of its business model in an effort to try and balance out their balance sheets?
Having long-term leases implies a long-term liability–a liability that would be eliminated by doing sale-leasebacks. WeWork needs cash on hand to balance out its balance sheet; if they’re still dealing with negative cash flow, then it makes perfect sense for them to create their own investment vehicle.
By buying property, they’re able to better balance out their accountings sheet.
On the downside, however, doing this slows down their growth and expansion opportunities. It also limits the markets where they would be able to afford to operate in this way. Are they planning on building or buying buildings in NYC or Beijing? Or are they going to also continue with their current expansion model?
WeWork declined to give a statement.
What do you think are WeWork’s reasons behind this ‘strategic’ move? Have they found a new sweet revenue spot no one else in the industry had thought of? Or are they simply proposing scenarios to attract more investor attention?
But more importantly, how do you think this will change the flexible workspace panorama?
*Feature image: screenshot of Friends, Netflix, season 5 episode 16. Text added.
