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WeWork to Sell $500M of Bonds in Debut Sale (bloomberg.com)
78 points by dsgerard 9 months ago | hide | past | web | favorite | 79 comments

I spend about 50% of my time thinking about and working at intersection of tech & real estate at considerable scale.

WeWork is in a bizarrely weird spot.

Building cap rates eg trading multiples are at all time, insane highs.

This inflation has been driven by institutional investors desperate for yield, with a lack of viable options.

And huge tech cos that are learning that amortizing property is a better use for their hoards of cash than seeing it rot in the basement.

So for WeWork buying into this hugely competitive market doesn't really make sense.

But conversely WeWork needs real estate to grow, and they like to grow in premium markets.

In these premium markets they are competing with dozens of other fast growing enterprises in the current economy.

Which means they are having to sign INSANELY big / long leases - they have $5B in LEASE CONTRACTS aka debt on the books through 2022.

So they are signing leases that are in the record price per square foot range to deliver their core product.

And meanwhile, as best I can find 85% of their business is still driven by "Small businesses, fast-growing startups and sole proprietors". (1)

And these segments, as known to anybody who plays in the "flex space" world, are the first tenants off the boat in a recession.

It is easy to critique and hard to create, as they say, but I don't follow WeWork's valuations or strategy.

(1) https://www.recode.net/2018/3/22/17119012/wework-massive-gro...

It may be also of interest to note that WeWork's leases with their landlords are not signed with WeWork Inc, but instead with limited-liability subsidiaries that WeWork owns.

This means that when the cyclical tenants leave, WeWork is not left with the whole bag; instead, its landlords are.

When the tenants of a building stop paying, WeWork would default on that subsidiary, but WeWork corporate would not default.

This was hugely surprising to me when I first heard it.

Why would a landlord accept these terms? Isn't the landlord increasing their exposure to financial default? And if the parent is true and they are operating in premium markets, there should be a lot of other willing tenants right?

You may have answered your own question. If you can relet the space more easily when WeWork Subsidiary LLC breaks the lease, then the landlord's default risk is reduced.

Plus, maybe there's a large deposit.

A lot of other potential tenants are small anyway and have the same problems as WeWork Subsidiary LLC -- they can default and go under.

This isn’t that uncommon especially in high risk industries it can increase your overall tax liability depending on the exact structure but reduces the risk considerably.

Does anyone have the bull case counter to this? Similar to aresant I don't mean to belittle WeWork's achievement but these facts, alongside the headlines from CEO claiming that: "Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue."[0] it's easy to be skeptical. Again - would be great to hear the optimist's take on this, if anyone has it.

0: https://www.axios.com/wework-ceo-valuation-based-on-energy-a...

There's a strong argument to make that executives are strongly incentivized to make their companies riskier and more prone to bankruptcy in the long run.

The bulk of executive compensation is in either outright equity ownership, or increasing bonuses based on equity price increases. Equity can be viewed as a call option on the enterprise value of the firm [1].

If you own a call option, you can increase its value by either making it 1) more in the money (by directly increasing the enterprise value, i.e. by generating value 'the honest way') or 2) increasing volatility directly, either by taking real economic risks (investing in more assets) or utilizing leverage (debt). Here we see both.

Note that financial investors in a company can be perfectly OK with results that boost the bottom line today, but lead to disaster down the road, so long as they're convinced there will be a short-term boost in the share price (at which point they exit and sell to the next sucker).

[1] https://www.fields.utoronto.ca/programs/scientific/09-10/fin...

In terms of "tech" start-ups fads, the current fad is crypto-currency, it was "social" before that, and I'm optimistic that there will be a fad after the blockchain. The optimist isn't worrying about "the first tenants off the boat" in a recession, the optimist looks forwards to the next bull run, and whatever the next fad actually ends up being, those companies are going to need office space, and WeWorks is betting on selling shovels in the form of office space.

Just like companies have moved their computing to the cloud, the bet by WeWorks is that office space itself can be thought of in the same way. Sure, companies having their own office space will never go away just like on-prem will never go away, but for a specific type of company, WeWorks is betting that it's a niche that's still big enough to justify their $20 billion valuation.

They do add some value; basically, having an office manager, and for a sole proprietorship who may be big on plans but short on time, it may be better to exchange money for WeWork amenities, rather than spending time dealing with office stuff, eg going to supermarket to stock the office with snacks.

WeWorks isn't selling office space by the sq foot, but similarly, Apple doesn't sell computers by the gigabyte of RAM either. They sell being a part of a sexy glamorous office full of other people seizing life by the horns and living life to the fullest, including meetups, and happy hours, and an app. Gotta have an app. People don't do the boring office job that your parent's did, at a WeWorks space. (Whether or not people are doing the same boring office job is besides the point, that's what they're selling.) By building their brand, and offering convenience and consistency, the goal is to just be where sole proprietorships and tiny companies work, during this fad, and the next.

There's a gambler's case to be made for almost any new debt issue.

It's really just a matter of sorting out where the notes one is considering are in the pecking order and estimating the probability of the issuer going bankrupt to put reasonable bounds on expected return of principle if they fail. A similar estimate can then be made on the probability of default or restructuring for the notes under consideration.

Given that information and a big enough coupon, a quarter-Kelly or half-Kelly bet may not be unreasonable.

At this point there are too many unknowns to make that case however. We'll have to see what coupon they decide on and enumerate the things that could knock them out or severely limit their free cash flow.

To your quote from the CEO, it's not a great way to market debt issues tbh. WeWork really isn't any different from any other REIT and one does not lend a REIT money because they are great people.

WeWork might do exceptionally well in a recession. As businesses can't afford to keep their offices, they may downsize, and become WeWork customers.

I’m not sure about that WeWork is considerably more expensive than running your own lease or even renting old school managed offices.

I did succeed because it had a lot of customers with a lot of money to burn (startups) and it offered very good networking opportunities, later on it offered top of the line real estate and services but they were never the economic option.

In a recession when there won’t be VC money to burn and an infinite amount of rounds to raise it I don’t think they’ll do very well.

Traditional businesses won’t get much value from most of their offerings and if they would be cutting back then cheap lease in industrial parks and sub prime locations would be what they’ll be after.

During a recession, businesses--large and small--are going to cut out all the frivolous VC-style perks: snacks, booze, trendy furniture, etc.

WeWork isn't cost effective vs renting your own office space, it just removes the friction (and yes, some of the related costs) involved with getting a "trendy" SV-style office.

During a crunch, I think we'll see alot of these businesses retreat to sparser accomodations in run of the mill office buildings removed from downtown. WeWork will be constrained in this environment, since the record leases they are signing will place a pretty high floor on how much they can lower prices to compete...

If the market rages for another 5 years, WeWork is gonna hit it out of the park. If we recession before that, it'll implode spectacularly.

As someone short TSLA 5.3% debt, at least at high 7-8% on these bonds you are getting paid to take some risk

WeWork (or any flexible space provider like Regus etc) provides a way for companies to avoid large ($) and long fixed lease commitments by taking shorter term flexible commitments, and they pay a premium for that.

Why would a company do that? Well, the same reason companies pay by the minute for cloud servers - to more accurately match their demand for office space/server resources.

When the economy tanks or other uncertainties face a company, the first thing to get the chop are big long leases for new office space with upfront capital investment on fitouts. So, a prudent CFO is LESS likely to sign a traditional lease and instead go to wework for a year-to-year commitment while they ride out the economic turmoil.

In addition, if the CFO or management see potential layoffs coming, they are even more likely to take up flexible space so when layoffs happen, they can also shed the office space.

I think during a downturn in the economy is when flexible office shines as a prudent option for businesses.

The press seems to focus on the free coffee/beer to position flexible office as a premium or luxury product and use the flawed logic that when the economy falters, a “luxury” coworking space will be the first thing that gets cut from a company’s budget.

I am also interested in that space and would like to pick your brain on: what do you read to keep up in this space? Personally, I follow Crain's, and CREtech.

And speaking of cap rates vs. multiples (valuation per sq foot), wsj had a great article on the Wework business model on how artifical it's valuation seems versus traditional office-leasing: https://www.wsj.com/articles/wework-a-20-billion-startup-fue...

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$20 billion for a co-working business with 234 locations (works out to about $85 million per location)... I know they own some real estate and stuff, but man, that's a serious valuation (for something that can be copied in a heartbeat, no?)...

It's also a substantial premium relative to their competitors. WeWork offices are admittedly a bit more fancy, but in hard times fancy temporary offices are the natural thing to cut.

They don’t actually own any of the properties, the rent them, and sublease to wework members.

WeWork buys Lord & Taylor’s flagship store for $850M


How high can they stack the cards before they may tumble down..

I wonder who actually rents from WeWork. I checked their prices for Berlin, Barcelona, London and found cheaper alternatives with the same or better features after just one google search.

I spent six months in a NYC building very recently, and had the opportunity to listen to the sales team give their pitch to leads every day as I hung out in a common area. My observations:

1. Lots of the people looking at WeWork space are aspirational, to the extent that they hope being at WeWork will boost the prospects of their small business (via networking etc)

2. The tenants in more than one office on our floor were involved in one form or another of cyber-currency promotion.

3. Turnover is wicked fast.

4. Marketing to WeWork tenants is a lucrative revenue stream, both online and in WeWork buildings. All these kids have money burning a hole in their pocket and service providers are paying WeWork a lot to reach them.

5. WeWork competition is very strong at the high-end (Knotel etc). Everyone else is hanging on for dear life.

We paid less for WeWork in Chicago than we did for a private office in a relatively bad location, even before counting Internet and utilities, and got a month-to-month renewable lease to boot. WeWork is a lot of annoying things, but I don't think "terrible deal" is one of them. You can do better if you look (we're not there anymore), but it's a good satisficing default.

Really depends on your location. WeWork Berlin has absurd prices for the local market. The city already had plenty of great coworking spaces at half the price long before WeWork showed up.

Yes. I am digital nomading and the coworking in major cities in developing countries usually cost usd 100/mo, including free water, coffee and events. The WeWork places I checked were 2x-3x the costs and I can't imagine them to be that much better.

Having said that, 80% utilization is great and maybe catching all the premium market will work.

Wework are overcapacity for all locations here in Toronto while the off brand nearby coworking spaces still have lots of space. I have been hearing similar news from friends living in other cities as well. All agree about vibe and good-feel of wework compared to blandness of knock offs.

This. Exactly this. It's the intangibles. Comparing price / sq ft is like comparing the performance of Mac and Pc.

I have a single private office at WeWrok in downtown LA for $650. Is that a good deal or bad deal?

Do you feel like you need to ask me what size my office is to answer? If you do then you fundamentally misunderstand what WeWork is selling.

Yes WeWork buys square footage, but that is not what they are selling. Google does not sell search (eyeballs), Amazon does not sell products (logistics), Github does not sell code storage (collaboration), and Apple does not sell computers.

This holds true for every successful company in the world until the innovators dilemma[0] overtakes them.

It's meaningless to compare sats.

[0]: https://en.wikipedia.org/wiki/The_Innovator%27s_Dilemma

Another thing to keep in mind is that all tenants are not created equally. Coworking spaces like WeWork will give preferential rates to anchor tenants (already profitable/hugely funded/well known) to help attract tenants that pay the sticker price but with higher turnover.

Executive suites have been around for a long time. Perhaps WeWork has some cool perks, but what prevents their dozen competitors from copying their style?

I recently looked around and there are 10 executive suites firms within 2 miles from me (a WeWork is 12 miles away). I tried two of them and they were very nice.

I wish WeWork well, I just don't get their business model.

At least in nyc, it seems to be a mix -- small non-profits/start ups who need a professional looking space but can't or don't want to deal with office management as well as some big companies who need a lot of extra space and will just rent whole floors for fairly lengthy timeframes.

From my understanding, WeWork is great for short-term rentals. Once you go beyond a few months the economics don't work out at all, but if you want some space to bootstrap (and, crucially, to up/down size that space at will) WeWork is useful.

I know a team of 10 in London that just moved from their own office to a hosted WeWork space and they will be saving nearly 40% per year on office space.

"Better" than WeWork does not mean WeWork isn't also better than existing patterns. I put "better" in quotes because cheaper is not always better.

My company does in two locations: Denver & London. We're an ad agency with a handful of employees in both locations that relocated for business.

We have other locations in Europe, LA, NY but for a single employee or two it makes sense.

The main benefit to WeWork is you get generally great locations / nice buildings with no long-term commitment. So yes you pay a premium (which might not be worth it) but you get flexibility.

There may be a difference in quality of the features. I've been to a few off-brand coworking spaces that had terrible wifi

It's pretty amazing that some coworking spaces manage to have bad WiFi. Like, there are three requirements for a functioning coworking space: desks, meeting rooms, and internet access. Focus on those before building the cereal bar.

I can't see it in the article so hopefully someone else can give an opinion.

Why are these companies now using the bond market instead of hitting up VC's or listing? Considering interest rates are now creeping up it seems the least efficient time to do it.

To tack on to this, why would investors want to own WeWork bonds vs equity in the company?

In the case where bond holders do well, wouldn't shareholders do better? And in the bad scenario, with as many long term liabilities as WeWork has, are the bond holders going to be substantially more secured than the shareholders?

Does WeWork own anything real to secure the debt?

> To tack on to this, why would investors want to own WeWork bonds vs equity in the company?

Because if the company goes bankrupt, bond-holders get paid before shareholders.

As such, bond-holders are always in a less-risky position. You'll always recoup some of your money during bankruptcy. (Don't estimate the value of the shelves and furniture!) While shareholders only get some $$ if the bonds are fully paid off.

> In the case where bond holders do well, wouldn't shareholders do better?

Not always. Bond holders will do well if the share-price stays steady or even negative. The company may stagnate over the next 7 years, at which point holding bonds would have been a better investment. The company is legally obligated to pay bondholders at its highest priority, until bankruptcy.

The Bonds aren't sold yet, but will likely be in the range of 4.5% to 5% (depending on market conditions during the sell-date). Over 7 years, the company needs to grow its share price by 36% for equity to beat a 4.5% bonds, or 40% to beat the 5% bond. Doable for sure, but its not too hard imagining a situation where they fail this benchmark and the bonds end up the superior choice.

For example: GNC's stock price doesn't help its shareholders, but the bond-holders would be doing fine.

I think OP is asking because he thinks that WeWork is closer to a startup where it will either grow quickly or fail. And that bonds don't look particularly appealing to a investors for a company like that unless they have significant real assets that are worth money in the event of the company failing.

It's not mentioned in the article, but the bonds could be convertible, which would allow the bondholders to exchange them for stock in the future. Bondholders are almost guaranteed to be more secure than shareholders by law (getting their money back isn't guaranteed if WeWork went bankrupt but they'll 100% get paid before shareholders. Finally, WeWork owns real property so they have plenty of collateral.

> but the bonds could be convertible

Such bonds are called "convertible bonds". The bonds listed in this article are:

> WeWork is issuing seven-year, senior unsecured bonds

Which is pretty specific. I don't know the meaning of every word, but it sounds as if this is a conventional 7-year junk bond.

So I'm not 100% a financial professional. But I'm pretty sure the lingo is super-specific about these details.

Senior and unsecured don't mean that they aren't also convertible.

Well, there are certain keywords that are typically left off (ie: "Callable") because they're so far in the weeds that they don't really make a big difference.

But "convertible debt" is a big deal. If Bloomberg (a financial newspaper) didn't use the word "convertible" to describe the debt, its probably not convertible.

My understanding is that they own some properties and rent others on long term contracts. Therefore, WeWork lives off the arbitrage between long term and short term obligations so it's basically a REIT. Most REITs are highly leveraged and almost entirely debt funded. I think it's actually weird that they have VC and try to act like a tech startup.

There is no new technology in WeWork and there are no legal ways to create or corner markets in real estate; people have been trying for millennia. Unless they have a highly scalable revenue stream hidden somewhere, we can expect that their valuation will, at best, grow on a similar curve to other REITs.

If I owned their equity, it would be because I got it super cheap and expected them to start paying a dividend sometime soon.

I would not own their debt except through a broad based ETF. It's really hard to make long term profits on junk bonds except by playing the law of averages.

> Does WeWork own anything real to secure the debt?

From the article: WeWork is issuing seven-year, senior unsecured bonds

Yield, an equity stake in WeWork doesn't pay anything. If WeWork stops paying its bonds you can assume shareholders aren't going to be doing any better.

WeWork bought their corporate HQ building.

Bonds are cheaper than equity. The real question is why are people hitting up expensive VCs who want control and a huge piece of the pie. The answer of course is bond investors are more risk adverse (they have to be).

Off the top of my head. They either couldn't find a VC that would pay OR they would rather take on debt than give another VC another stake in the company?

Presumably VC money involves the dilution of existing shares, whereas bond sales do not.

If bond market is accessible to the company it is much cheaper way to raise capital.

I wonder what their customer base is like to protect themselves from downturns. Their customers can go month to month easily, but they're locked into long term leases.

I hope they don't become a junk stock chasing their ambition.

Those who refuse to study history are doomed to repeat it. The only difference will be the Milkens of today probably will never face jail time while their "investors" lose everything.

Got some Bitcoins or Pets.com to invest in instead?

What's a good alternative to WeWork in SF?


So, Junk Bonds are a specific thing in finance. Sharing a link[1] for those as financially ignorant as myself, before others think this title is brazen well-poisoning.

1. https://en.wikipedia.org/wiki/High-yield_debt

I learned about junk bonds from Adam Curtis' series "The Mayfair Set"[1].

[1] https://www.imdb.com/title/tt0283201/

From the article:

>WeWork is issuing seven-year, senior unsecured bonds

This means that in case of bankruptcy the holders of these bonds will probably be the last ones to get paid back, if they ever do. This increased risk is usually compensated by a higher yield than regular bonds.

EDIT: As commenters point out, they wouldn't be the _last_: "In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment."


Why would they be the last? In the case of bankruptcy these will be paid back before any money goes to junior unsecured bonds (if any) and before shareholders.

I'd imagine they have a lot of secured debt in the form of commercial mortgages. AFAIK they own some of their property rather than leasing it.

Probably. But the bond holders wouldn't be _last_ as the OP suggested.

The polite term nowadays (at least according to a FA internship I had many moons ago) is High Yield Bond

I think it has always been a matter of who's talking and what do they think want you to think about the issuance. If it's your investment advisor and they want you to buy it's High Yield. If it's a reporter who thinks the company is acting irresponsibly it's junk.

Interesting concept. I wonder if in the aftermarket these bonds will trade more like stocks due to the risk aspect changing over time (with the upper bound being the present value of the face value of the bond).

Yep, they do. Unsecured corporate debt is colloquially referred to as Credit in finance. Equity and low-grade credit tend to correlate quite well.

In fact, this is one way that companies die in a recession: credit spreads blow up (i.e. risky debt is much more expensive than good debt). That makes it difficult for struggling companies to refinance maturing debt, and they go under.

There's even a class of debt called CoCo bonds (contingent convertibles) that turn into equity if the company is struggling. The idea is to avoid the maturing debt scenario I described above. In practice, they're a horrible product for investors. Equity-like risk with bond-like returns.

nobody involved in buy/selling High-Yield debt uses the term 'Junk'. It's a term from the 80s before every major investment bank serviced that market. Even the journalists at bloomberg are spinning clickbait language, sheesh ...

The ticker for one of the largest High Yield ETFs (SPDR Bloomberg Barclays High Yield Bond ETF) is JNK.

The term is often used in the financial press: http://lexicon.ft.com/Term?term=junk-bond


Maybe that ETF is for Jank bonds that stall and jump around a lot?

That's funny, because of the two terms, "junk bond" seems to me to be the more accurate and descriptive one, while "high-yield bond" seems like a deliberately deceptive euphemism.


when major banks/investors refused to deal with BBB or lower they called it 'Junk'. When they realized 1) the credit risk can be safely managed with modern financial theory and instruments 2) there was money to be made ... they quickly adopted it and had to figure something out to drop the 'Junk' pejorative.

junk implies zero value, which is very far from accurate

you should talk to more normal people and fewer high yield bond traders

I've only recently learned more about the bond space including high-yield vs. investment grade, bids wanted in competition, zero-coupon analysis.

Do you know any good resources, books included, but especially sites that go beyond the theory and into the day to day lingo at a bond desk ?

This is correct. We use the term cryptocurrency today

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