Office space-sharing company WeWork moved one step closer to the public markets on Wednesday, when it filed the paperwork for parent The We Company’s initial public offering, giving investors a more detailed look at its business.
The company WE, +0.00%, which filed confidentially for an IPO last year, said it aims to raise $1 billion in the IPO, although that number is likely a placeholder until it sets terms. In its latest investment round in January, the company had a valuation of $47 billion. It did not disclose which exchange it wishes to list on, although it did offer that it will list under the ticker symbol “WE.”
JPMorgan JPM, +0.59% and Goldman Sachs GS, +0.23% are lead underwriters on the deal. The company is planning to list three classes of stock that carry different voting rights. The Class A stock will have one vote per share, the class B and class C shares will carry 20 votes per share with co-Founder and Chief Executive Adam Neumann expected to control most of the voting power once the deal is closed.
The prospectus reveals a company with a major focus on “community” – the word appears 150 times in the document, including in the opening sentence of the summary: “We are a community company committed to maximum global impact.”
The company’s stated mission is no less than “to elevate the world’s consciousness.” The front page includes the slogan: “We dedicate this to the energy of we – greater than any one of us but inside each of us.”
WeWork started as a single space located in lower Manhattan in 2010, and has grown to 528 locations in 111 cities across 29 countries. It has more than 527,000 memberships, or individuals that rent space in its shared offices, which offer a full suite of office services, including technology, mail pickup and delivery, communal spaces, fresh brewed coffee and fruit.
The company makes money by selling memberships, offering ancillary services and extending the global platform beyond the world of work, according to the prospectus. It has branched out to fully-furnished short- and long-term stay apartments and hotel rooms; it is behind Meetup, the platform that connects people who share interests or want to organize events; it opened an independent elementary school in New York in 2018.
As of June 30, WeWork had more than 12,500 employees, 7,500 of whom were located in the U.S.
Still, the company has significant losses that are unlikely to be reversed any time soon, and has long-term lease commitments of nearly $50 billion at a time when market signals are suggesting a downturn.
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“While we believe that we have a durable business model in all economic cycles, there can be no assurance that this will be the case,” the prospectus cautions. “A significant portion of our member base consists of small- and midsize businesses and freelancers who may be disproportionately affected by adverse economic conditions.”
See: WeWork’s IPO would be a bewildering way to waste your money
Here are five things to know about WeWork ahead of its IPO:
It has stopped using one unusual accounting metric, but is keeping others
WeWork has famously included unusual metrics to supplement the financial statements it provided in bond documents and media presentations in the past, including one controversial non-standard one it called “community adjusted EBITDA.”
That metric was supposed to measure net income before not only interest, taxes, depreciation, and amortization—or EBITDA— but also “building-and community-level operating expenses,” a category that included rent and tenancy expenses, utilities, internet, the salaries of building staff, and the cost of building amenities.
See also: You can buy this WeWork rival’s shares at a fraction of the price
After apparent push back from the Securities and Exchange Commission, the company dropped that metric, which does not appear in the prospectus.
But it continues to use two other Adjusted EBITDA metrics, one that includes and one that excludes non-cash straight-line lease costs calculated according to Generally Accepted Accounting Principles, or GAAP, the accounting standards all U.S.-listed public companies must follow.
Read: WeWork says it’s ‘investing,’ not ‘losing,’ money
Both versions of the Adjusted EBITDA metric also adjust WeWork’s net loss before its tax provision for:
* stock-based compensation expense, expense related to stock-based payments for services rendered by consultants,
* income or expense relating to the changes in fair value of assets and liabilities re-measured to fair value on a recurring basis,
* expense related to costs associated with mergers, acquisitions, divestitures and capital raising activities, legal, tax and regulatory reserves or settlements,
* significant non-ordinary course asset impairment charges and, to the extent applicable, any impact of discontinued operations, restructuring charges, and other gains and losses on operating assets.
In other words, the metrics ignore anything that may make its losses from operations look even worse.
It has never made a profit and still has sizable losses
WeWork has lofty stated goals but substantial financial losses. The company said its net loss in the six months to end June came to $909.7 million, wider than the $722.9 million posted in the year-earlier period. Its operating loss was $1.4 billion, wider than the operating loss of $677.9 million posted in the year-earlier period. Revenue rose to $1.5 billion from $763.8 million, but was less than expenses that totaled $2.9 billion.
In the risk factors listed in the prospectus, the company acknowledges that it is still in investment mode as it expands the number of locations it operates:
“These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future. Although we do not currently believe our net loss will increase as a percentage of revenue in the long term, we believe that our net loss may increase as a percentage of revenue in the near term and will continue to grow on an absolute basis.”
WeWork’s CEO has already cashed out large sums
WeWork may not be profitable, but CEO Neumann, who is also the company’s biggest shareholder, has cashed out anyway, selling some of his holdings in the company in recent years, and borrowing against what’s left, according to a July report by the Wall Street Journal.
Neumann has taken more than $700 million out of the company through a mix of stock sales and debt, said the report, which cited people familiar with the matter. The heads of start ups typically shy away from such transactions, because it may be perceived as a lack of confidence in the company. But by using some of the proceeds for earlier sales and borrowing to exercise stock options early and purchase more WeWork shares, Neumann is showing he expects the stock to gain in value, while also minimizing his tax bill, the people said. Neumann declined to comment.
Neumann has no employment contract with the company, which means he could walk away, but he has signed an invention, non-disclosure, non-competition and non-solicitation agreement that protects the company’s confidential and other proprietary information.
In some ways, WeWork is like a bank
WeWork operates much like a bank that’s funding long-term, illiquid investments with overnight repos and checking account deposits. That’s because WeWork says it currently leases a significant majority of its locations under long-term leases that, with very limited exceptions, do not contain early termination provisions.
The company’s obligations to landlords under these agreements extend for periods that significantly exceed the length of its membership agreements with its members, it says, and those may be terminated by members upon as little notice as one calendar month.
If an economic downturn results in customers pulling out, WeWork will still have to pay for those leases. The liabilities will stay on its balance sheet, are not easily liquidated, use up cash and could drag on its financial metrics indefinitely.
It has some possible conflicts of interest
WeWork admits that it has engaged in several transactions with related parties that could present possible conflicts of interest that its board, in particular its audit committee, and its auditor Ernst & Young LLP, will have to keep a close eye on.
That may be challenging since WeWork leases several properties where its board chairman and CEO, Adam Neumann, has or had a significant ownership interest. WeWork has also entered into leases where other members of its board of directors have a significant ownership interest.
The Renaissance IPO ETF IPO, -0.52% has gained 29% in 2019, while the S&P 500 SPX, +0.06% has gained 14% and the Dow Jones Industrial Average DJIA, +0.16% has added 10%.
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