Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
- The We Company is creating an investment fund to buy stakes in buildings where WeWork will be a major tenant.
- The fund, called ARK, will start with $2.9 billion and could help the We Company offset some of its balance sheet issues.
- ARK is a long term play that will only work if WeWork becomes profitable and is able to pay its leases.
Last week, the We Company announced it is creating an investment fund that aims to raise billions in order for it to buy stakes in buildings where WeWork will be a major tenant. The fund, called ARK, will reportedly start with $2.9 billion and it could potentially help the We Company offset some of its balance sheet issues.
Suggested Reading: “The We Company Files for IPO”
But, what does this move actually mean and how will it potentially affect WeWork’s operation?
The simple answer is that, through ARK, the We Company will establish itself as a landlord. It’s worth noting that Adam Neumann, co-founder of the We Company, has recently faced criticism for renting WeWork space in buildings partly owned by him. ARK will help partially remove this conflict of interest as Neumann has stated he will transfer some of his own real estate holdings into ARK.
Though ARK will be run independently, it will nonetheless be under the We Company umbrella, like WeWork, WeLive, and WeGrow. So, “WeWork will still be sitting on both sides of the table when it leases ARK-owned spaces.” It’s a potentially tricky situation, especially if WeWork decides not to lease space from the building but rather to set up a joint-venture agreement, which would allow WeWork to only pay a part of the lease.
You can’t be your own partner and escape liability. This will be tested when ARK’s interests differ from those of WeWork.
Which brings us to another key point. ARK’s building values will be tied to WeWork’s performance. Neumann argues that WeWork locations make buildings become more valuable. Coworking spaces, overall, can increase the value of a building when coworking takes up less than 20% of the building’s space… and when the coworking operation is profitable.
Suggested Reading: “Do Coworking Spaces Positively Impact Property Value?”
WeWork is yet to be a profitable company and it is burning cash at an astounding rate; just last year it lost almost $2 billion. So, even though coworking spaces can, in theory, increase a building’s value, if WeWork’s credit continues to fall and it continues to report more losses and no profits, the value of its buildings will most likely depreciate, thus having a doubly negative impact on the We Company value.
Should WeWork turn its balance sheet to the positive side, ARK and WeWork would both benefit tremendously.
Either way, the creation of ARK is an interesting move structurally.
But, why is Neumann — the We Company — doing this now?
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The We Company is looking to go public and it will have to justify its $47 billion valuation. Creating ARK, which could offset some of the company’s lease liabilities could be a move to charm analysts and investors, allowing the We Company to maintain its lofty valuation. This is especially important considering some recent unicorn IPOs haven’t performed as many expected (we’re looking at you, Uber).
But, and there’s a but here, ARK could spell trouble for the We Company and its valuation. Experts have for a long time argued that WeWork is overvalued, and they typically use International Workplace Group (IWG) as a point of comparison.
IWG trades at a multiple of 1.08x revenue while WeWork’s projected revenues command a price to revenue multiple of 8.5x. Why? Well, because IWG is valued as a real estate company while WeWork is valued as technology company (subscription model).
Since it was founded back in 2010, WeWork has defended this by arguing that it is an “asset-light” operation, comparing itself to Uber and Airbnb. However, Uber doesn’t buy or rent cars and Airbnb doesn’t buy or rent property. On the other hand, although WeWork hasn’t purchased any buildings (except for the Lord and Taylor NYC flagship building), it did rent out space, so Uber and Airbnb do not seem like a fitting point of comparison for valuation.
Now, by creating ARK, WeWork should no longer be a technology company. It is, in fact, a real estate company. WeWork could find itself trapped as being a business process outsourcing company, much like IWG. This, by no means, is a bad thing. However, it could spell trouble for WeWork as being a property company would change its valuation model.
REIT company valuation is based on their yield, not projected revenue, so the We Company’s valuation would be set quite low: again, the We Company hasn’t reported profits since it was founded; it is an operationally bankrupt company.
Now that the We Company is going public, it can’t ignore the debt and lease liabilities it has in its balance sheets. ARK can help obfuscate some of these liabilities. As a side note, ARK will start with $2.9 billion. WeWork currently operates over 400 locations across 36 countries; so, how far will the $2.9 billion go? Not far, and Neumann will be tasked with raising more capital for WeWork and ARK.
Still, creating ARK is a smart move. However it will only work if WeWork becomes profitable and is able to pay its leases. It’s a long term play.
As of now, WeWork is not profitable and ARK will be signing a participation deal with a tenant that is a non performance potential tenant. As it currently stands, the value of the buildings would be cut, not advanced. This could later change if WeWork is able to raise more capital and turn its balance sheet around.
CRE’s Growing Role in the Coworking Industry
ARK could represent a new type of ownership within the coworking and flexible workspace industry. Over the past couple of years, commercial real estate stakeholders have shown a growing interest in the flexible workspace industry.
Many property owners have launched their own flexible workspace brands, while various others have partnered with existing operators to add coworking space to their buildings in the hopes of increasing its value.
On the other side, not many flexible workspace operators own the buildings in which they operate. Some exceptions include Novel Coworking, Premier Business Centers, The Office Group (Blackstone acquired a 75% majority stake in the company back in 2017), and franchise brands like Serendipity Labs and Office Evolution, where franchisees typically own the buildings they will develop the brand in.
International Workplace Group has also made an interesting move recently. It relaunched the franchise business for Regus. Most recently, it franchised all of its Japan Regus locations, through which it was able to raise approximately £300 million, which resulted in a 33% increase in its stock price. Franchising its business has provided the company with more cash to buy buildings.
As the industry continues to mature, more CRE stakeholders will take an active role in the industry and more operators will seek to leverage building ownership as a future-proofing strategy.
