WeWork Stabilization Model + Economic Occupancy

Aside from the number of members, company workspace creation and design (i.e. created workspace for Morningstar, Microsoft, Expedia etc.), revenue and expenses that can be easily derived with a quick G search. Below are some interesting models and metrics that might be relevant for us from the cashflow, budget and general planning purposes if and when we do sizable capex project i.e. Thanksgiving Tower and the likes.

The following is derived from their most recent public debt offerings, which, by the way, is currently trading at 86 cents to the dollar right now on the public market, even though it was almost 30-40% oversubscribed in the pre-investor side of the story (looking to raise something like $500M+ but ended up raising $700M) Pro of raising company via public vehicle for a private company essentially means you have to expose more bones than you need in the private capital market.

1. 6-month of lead and source time
2. 6-month of capital expenditure i.e. furnishing, furniture placement, exterior and interior design etc.
3. 4-month average worth of free rent, similar to our X Miami deal
4. 6-month to get the 60%+ occupancy
5. 12-month post launch to get to 88% occupancy. Bear in mind they probably have less seasonality variable impact.
6. 18-month post-launch to get to full stabilization, which is defined as close to 100% MoM occupancy

Community Adjusted EBITDA [visual below]

Below are the variables and line items that was being adjusted out of. From the numerical perspective, 2017 net loss was -$977M (yep operating at close to $1.0B loss in 2017) to it being adjusted to positive $233M! The gap between [-$977M, $233M] is ~ $1.20B so basically $1.20B was just created out of thin air. I do think it’s important to look at general financials in a more logical manner, which is defined as calling out one-time costs (i.e. legal fee) and furniture expenditure…definitely not for adjusting $1.20B of money out of thin air though in WeWork’s situation.

Since this is more of real estate and a little bit of brand play than anything, it’s worth looking at their balance sheet per the public filings. @Roberto Rondero De Mosier you will likely this given our countless talks about our subsidiaries and financial + legal risks mgmt.

• Debt: $1.702BN outstanding
• Pipeline: 309k desks, $1.7bn to build
• Lease obligations: $18BN, however they claim only directly liable for $1.9BN (Ex. for 15yr lease, WeWork signs limited Corp guarantees – typically 6-12mo). Signed by SPE, “special purpose entity”, not parent company WeWork US Inc.

• They noted this in several of their filings that they have planned way ahead in order to weather any macro shocks, both on the unemployment spike, US business capex, and plateau small business formation perspective.
• Location selection is pretty easy to understand…
• INTERESTINGLY…they underwrite new buildings to just a 60% breakeven occupancy, which essentially means they can withstand a 30% drop in current revenue and still operate in the green.
• Aligned incentive on leases being signed by SPE or basically independent subsidiaries….therefore bankruptcy of those subsidiaries should come at relative ease.

• They are often being comped against Regus, a publicly traded flex office mgmt company
• WeWork probably realize high dependent on any single revenue stream or single type of business account (in WeWork’s case, small businesses and in Regus 2000’s case, all tech companies) is not ideal hence them signing collaborative deal with Microsoft Seattle, Facebook Seattle etc. to help with their office development.
• Below is the visual for Regus. Two things we know for sure is high dependence on a single source of revenue creates structural risks in the business and publicly traded companies aren’t easy to run.
• P.S. mathematically speaking,a -99.2% decline means you need 12,500% gain on the flip side just to get back to where you started. We all the probability of the 2nd part of that equation.