May 16, 2019 / 12:12 AM / 8 days ago

WeWork gets complex, but its problem is simple

FILE PHOTO: The WeWork logo is displayed outside a co-working space in New York City, New York U.S., January 8, 2019. REUTERS/Brendan McDermid/File Photo

NEW YORK (Reuters Breakingviews) - WeWork is getting more complex as it readies for an initial public offering, but its central problem remains simple. The shared-office firm has set up a unit to buy buildings it can then let out to its customers. It’s a way to hedge against rising lease costs and cash in on WeWork’s supposed halo effect. If tenants prove fickle or demand subsidies, though, the benefit of owning property only goes so far.

Right now WeWork is in a state of high growth, and high cash-burn. Its revenue rose 106% last year to $1.8 billion, as its net loss more than doubled to $1.9 billion. The idea is that while it’s costly to renovate space and find tenants to start with, buildings then generate substantial operating profit – with a margin of perhaps up to 30%.

Its new unit, called ARK, will roll up existing investments in real estate, including those by private-equity firm Rhone and WeWork co-founder Adam Neumann, and add an injection of $1 billion from a unit of Canadian investment firm Caisse de depot et placement du Quebec. The structure is intricate, with separate funds and special purpose vehicles, according to a person familiar with the situation. There’s obvious room for conflict: If real estate rates fall in a city, WeWork will want to reduce leases, but ARK may have other ideas.

There are advantages too. WeWork can buy buildings it likes rather than offering only spaces that were available for long-term leases. If its hip offices lure other tenants into the building then it can reap the benefit of higher rents paid by occupiers who aren’t direct customers. And the ability to sell a building may be useful if WeWork needs money.

Would-be investors also have a new form of spin to watch out for in the IPO. Previously the company’s “total addressable market” was office rental. Now it includes owning and managing buildings. The risk of being distracted by unhelpfully large numbers just increased.

The main challenge for WeWork hasn’t changed, though. Many of its expenses are locked in for the long term, but much of its revenue isn’t. And tenants benefit from goodies like rent discounts, which could get used more liberally if the market becomes more competitive. If renters demand better terms, decamp or go broke, then WeWork will face problems, whether it part-owns its properties or not.

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