WeWork’s Crippling Costs Are Outpacing Its Revenue

• New documents provide detailed information on WeWork’s expenditure and revenue in 2016 and 2017.
• Revenue is growing year on year, but its costs are growing faster.
• To further fund expansion, WeWork sold $700 million in bonds, which is the first time the company has sold debt to investors.

This week has seen a worrying new development in the WeWork story.

Not for the first time, revealing insights into the company’s expenditure and revenue has raised alarms within the flexible workspace industry — and now a full picture is emerging of the extent to which WeWork is being swallowed by its debt.

So much so, that it has sold $700 million in bonds to investors in order to finance its continued aggressive global expansion.

The bond documents show that WeWork’s current global portfolio spans more than 14 million sq ft, which Bloomberg likens to “the size of the entire office and retail space in London’s Canary Wharf district” — but it comes at a price.

Here’s a roundup of the highlights (and lowlights) as revealed by Bloomberg and the Financial Times:

• In total, WeWork has committed to pay at least $18 billion in rent for its space.
• WeWork’s total revenue in 2016 was $436 million, which more than doubled in 2017 to $886 million.
• However, costs are rising faster. In 2016 its total expenditure was $832 million, and last year this rocketed 118% to $1.8 billion.
• WeWork reported a net loss of $883 million in 2017, excluding a loss of about $50 million attributable to its “noncontrolling interests”.
• The company has committed to pay at least $5 billion in rent by 2022, with a further $13.2 billion due from 2023 onwards.
• WeWork reports $43.7 million of capital-lease assets. But its operating leases make up $1.9 billion of the value of its property and equipment.
• As of March 1st, WeWork had 220,000 members (up from 7,000 four years ago) using 251,000 desks in 234 locations.

The facts are stark. WeWork is burning cash and its costs are growing faster than its revenue.

What is it doing to address these problems?

For one, it raised $700million this week by selling high-yield notes, which is the first time the company has sold debt to investors. After analysing the bond documents, Fitch Ratings (which gave the company a BB-minus) noted, “As a company in sustained growth mode, WeWork is not profitable on a combined basis, as significant growth operating expenses more than offset existing property cash flows” (Bloomberg).

WeWork is also diversifying its workspace portfolio, having recently bought Chinese coworking brand naked Hub for $400 million among a raft of other deals.

It’s well known that WeWork is keen to distance itself from the ‘coworking’ label; CEO Adam Neumann recently commented that “WeWork is not a co-working company” — partly because the shared space model is not associated with the kind of multi-billion valuation WeWork has made for itself. Indeed, $20 billion is unheard of in the flexible workspace industry. Not even IWG’s Regus, which has experienced phenomenal growth over almost 30 years and survived a global downturn, can match its valuation.

But this is nothing new. WeWork’s valuation has long been a topic of debate, with industry experts expressing concerns over the sustainability of its business model, particularly for a company just 8 years old.

However, the optimistic view is that WeWork is now successfully bringing in more big-money, blue-chip companies. The company said it needs at least 60% occupancy to cover the cost of each workspace location, and last year’s occupancy reached 80% — an increase of 5% on 2016.

Bigger clients lead to higher occupancy and in some cases, less churn, which reduces the cost of acquisition. On that note, once its early member discounts and rent-free periods begin to expire, the company will start recouping more revenue from membership fees.

Still, there’s growing concern that WeWork may be in a tailspin. Like it or not, WeWork is a coworking provider — it’s a part of the flexible workspace industry, which has been steadily growing and gaining ground for 40 years. WeWork isn’t the only operator seeking financial backing to fuel ambitious growth plans, yet it is certainly under the closest scrutiny, and investors will naturally look to WeWork when considering investment opportunities in other workspace companies. The high-flying, cash-burning company has made a huge name for itself and now it must shoulder the responsibility, not just for itself and its investors, but for the benefit of the industry in which it made its mark.