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Seems to be in line with Aswath Damodaran's valuation estimate. "From my perspective, this seems like an optimistic story, where WeWork generates pre-tax opera

by bhupy 7y ago

Seems to be in line with Aswath Damodaran's valuation estimate. "From my perspective, this seems like an optimistic story, where WeWork generates pre-tax operating income of 10.07 billion on revenues of $80.5 billion in 2029, generating a 26.61% return on capital on intermediate capital investments. Allowing for a starting cost of capital of about 8%, the resulting value for the operating assets is about $29.5 billion, but before you decide to put all your money in WeWork, there are two barriers to overcome: Possibility of failure: The debt load that WeWork carries makes its susceptible to economic downturns and shocks in the real estate market, and the cost of capital, a going concern measure of risk, is incapable of capturing the risk of failure embedded in the business model. I will assume a 20% chance of failure in my valuation, and if it does occur, that the firm will have to sell its holdings for 60% of fair value. Debt load: As I noted in the last section, the company has accumulated a debt load, including lease commitments, of $23.8 billion. Adjusting for these, the resulting value of equity is $13.75 billion, and with my preliminary assessment of shares outstanding, translates into a value per share of about $26/share." Highly recommended read for those that haven't already: http://aswathdamodaran.blogspot.com/2019/09/runaway-story-or-meltdown-in-motion.html http://aswathdamodaran.blogspot.com/2019/09/runaway-story-or...

duxup 7y ago
>will have to sell its holdings for 60% of fair value. That makes sense, possibly in some cases if they sold now. WeWork is big so maybe it isn't relevant but I know folks in real estate in my area and they were a bit surprised at the prices paid for what became WeWork buildings. Not every purchase in the area, but there was buzz in that community about "Who else was bidding it up that high?" and they came to find out, nobody. WeWork just paid a lot more than anyone thought it was worth. Granted maybe WeWork can afford to do that here or there.
- sgt101 7y ago
  There's a liquidity issue as well. The shareholders could get zeroed out because the debt could call in before the leases and freeholds can be sold. There is good reason to think this is what will happen : - transaction times for large property transactions are on the scale of months for prime property in good times - wework has distorted the market with private capital potentially misallocated given the value reduction since softbank invested - in many places that wework has invested there is significant growth in commercial property inventory; for example London. This is because the property boom in China has changed the cost of building large office buildings (builders have worked out how to throw up a 50 floor tower fast and cheap) and consequently many old 10 floor plots are now becoming 50 floor plots If wework comes under pressure their assets may not only be over valued, they may find that it takes too long to find any buyers at all. In which case the assets belong to the banks. (edited formatting)
  - duxup 7y ago
    There seems to be a lot of indication that WeWork, if there are any problems, could be in the worst position of their competitors. That seems like a recipe for disaster, and if their competitors survive any downturn, an opportunity for them.
- r_singh 7y ago
  I’ve heard similar stories about WeWork over paying for property here in India (because the parent company offered a buy out at time of partnership). WeWork BKC’s (in Mumbai) annual rent amounts to ~$11M (for an 18 story building, but the price is higher than market by 10-15% at least).
Androider 7y ago
Note that Aswath is detailing a best-case scenario for WeWork here, where they're somehow making $80.5B revenue in 2029. That's... a bit of a stretch, seeing as they'd have to 26x their current 2019 revenue. Are they going to buy out every building in Manhattan? So we can say the fair pricing is somewhere between $0 and Aswath's $13B. Personally, I feel that no matter what price WeWork IPOs at, it's going to pancake pretty hard. There's a good business in there somewhere (AWS for real-estate), but it's saddled under so much crap, debt, and hot air.
- Twirrim 7y ago
  > There's a good business in there somewhere (AWS for real-estate) Is there? I keep looking at the WeWork thing as a complete outside, someone who's never had to deal with that sector, and it's just not clear to me what is actually different/innovative about what they do.
  - Androider 7y ago
    Leasing office space in a place like NY traditionally required at least a one year lease, often longer. WeWork has at least popularized the notion of extremely flexible month-to-month contracts for fully managed facilities in historically expensive markets, which is very attractive to virtually all companies (now is that a sustainable business remains to be seen, but at least the demand is there). Not just small companies and startups, but companies of all sizes like the flexible opex that can be scaled on short notice. WeWork's S1 shows that a big chunk of the customer base and growing is in fact large companies. E.g. Microsoft in New York has their entire sales organization scattered across WeWork properties. That kind of thing is where WeWork appears to be doubling down on according to their S1, not really the freelancer hot-desk market. Companies also generally don't like to deal with anything that is not core to their business. Already previously most functions were outsourced (cleaning, maintenance, stocking the fridge etc.) but increasingly companies don't even want to deal with the hassle of sourcing a supplier. Or getting Internet. Or insurance. WeWork makes all of that a non-issue. So does Regus Spaces product, but it has to be at least acknowledged that it's a direct reaction to WeWork. I think the future will look something like this, and why it can be likened to AWS for physical space (WeWork doesn't go this far yet, today requiring e.g. physically visiting the space before leasing which is honestly a pain-in-the-ass speaking as someone looking to place multiple people all over the US, just let me input my credit card already): - Startup company in the Bay Area logs in online and clicks to reserve a 1x Private Office in NYC, for the two new hires starting there next week. No tour, no calls, no interaction with anyone at WeWork. WeWork is already a "known quantity" (kind of like McDonald's), no need for any of that process. - Microsoft manager in Redmond does absolutely nothing workplace related as his new hire just shows up at WeWork Houston, as the company already has a direct expensing agreement. His cost center is just billed X for the month automatically.

by bhupy 7y ago

duxup 7y ago

>will have to sell its holdings for 60% of fair value. That makes sense, possibly in some cases if they sold now. WeWork is big so maybe it isn't relevant but I know folks in real estate in my area and they were a bit surprised at the prices paid for what became WeWork buildings. Not every purchase in the area, but there was buzz in that community about "Who else was bidding it up that high?" and they came to find out, nobody. WeWork just paid a lot more than anyone thought it was worth. Granted maybe WeWork can afford to do that here or there.

sgt101 7y ago
There's a liquidity issue as well. The shareholders could get zeroed out because the debt could call in before the leases and freeholds can be sold. There is good reason to think this is what will happen : - transaction times for large property transactions are on the scale of months for prime property in good times - wework has distorted the market with private capital potentially misallocated given the value reduction since softbank invested - in many places that wework has invested there is significant growth in commercial property inventory; for example London. This is because the property boom in China has changed the cost of building large office buildings (builders have worked out how to throw up a 50 floor tower fast and cheap) and consequently many old 10 floor plots are now becoming 50 floor plots If wework comes under pressure their assets may not only be over valued, they may find that it takes too long to find any buyers at all. In which case the assets belong to the banks. (edited formatting)
- duxup 7y ago
  There seems to be a lot of indication that WeWork, if there are any problems, could be in the worst position of their competitors. That seems like a recipe for disaster, and if their competitors survive any downturn, an opportunity for them.
r_singh 7y ago
I’ve heard similar stories about WeWork over paying for property here in India (because the parent company offered a buy out at time of partnership). WeWork BKC’s (in Mumbai) annual rent amounts to ~$11M (for an 18 story building, but the price is higher than market by 10-15% at least).

Androider 7y ago

Note that Aswath is detailing a best-case scenario for WeWork here, where they're somehow making $80.5B revenue in 2029. That's... a bit of a stretch, seeing as they'd have to 26x their current 2019 revenue. Are they going to buy out every building in Manhattan? So we can say the fair pricing is somewhere between $0 and Aswath's $13B. Personally, I feel that no matter what price WeWork IPOs at, it's going to pancake pretty hard. There's a good business in there somewhere (AWS for real-estate), but it's saddled under so much crap, debt, and hot air.

Twirrim 7y ago
> There's a good business in there somewhere (AWS for real-estate) Is there? I keep looking at the WeWork thing as a complete outside, someone who's never had to deal with that sector, and it's just not clear to me what is actually different/innovative about what they do.
- Androider 7y ago
  Leasing office space in a place like NY traditionally required at least a one year lease, often longer. WeWork has at least popularized the notion of extremely flexible month-to-month contracts for fully managed facilities in historically expensive markets, which is very attractive to virtually all companies (now is that a sustainable business remains to be seen, but at least the demand is there). Not just small companies and startups, but companies of all sizes like the flexible opex that can be scaled on short notice. WeWork's S1 shows that a big chunk of the customer base and growing is in fact large companies. E.g. Microsoft in New York has their entire sales organization scattered across WeWork properties. That kind of thing is where WeWork appears to be doubling down on according to their S1, not really the freelancer hot-desk market. Companies also generally don't like to deal with anything that is not core to their business. Already previously most functions were outsourced (cleaning, maintenance, stocking the fridge etc.) but increasingly companies don't even want to deal with the hassle of sourcing a supplier. Or getting Internet. Or insurance. WeWork makes all of that a non-issue. So does Regus Spaces product, but it has to be at least acknowledged that it's a direct reaction to WeWork. I think the future will look something like this, and why it can be likened to AWS for physical space (WeWork doesn't go this far yet, today requiring e.g. physically visiting the space before leasing which is honestly a pain-in-the-ass speaking as someone looking to place multiple people all over the US, just let me input my credit card already): - Startup company in the Bay Area logs in online and clicks to reserve a 1x Private Office in NYC, for the two new hires starting there next week. No tour, no calls, no interaction with anyone at WeWork. WeWork is already a "known quantity" (kind of like McDonald's), no need for any of that process. - Microsoft manager in Redmond does absolutely nothing workplace related as his new hire just shows up at WeWork Houston, as the company already has a direct expensing agreement. His cost center is just billed X for the month automatically.