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If the tech bubble and real estate bubble had a baby, it's name would be WeWork. How is a company that had a net loss of $933 million and that owes $18 billion in rent even remotely worth $35 billion. I'd consider the lemonade stand on the corner to be more of a business than WeWork in the true sense of the word. What's inherently hard about what WeWork is doing? With enough money, anyone can rent out buildings, chop it up, and make it appealing to hipsters with some interior work, then over charge companies and individuals to rent out tiny spaces.





I find this whole “owe $18b in rent” thing that’s come up recently interesting.

They only "owe" $18b in rent the same way any company leasing office space "owes" their landlord money. The word "owe" is thrown around here in relation (almost exclusively to WeWork) to imply they're in arrears to the landlords to the sum of sum of $18b.

It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.

Over the length of their leases they have an $18b obligation, but that isn't the same as the way "they owe 18b" is used colloquially to mean currently in arrears/default.

It is the same as entering into any agreement - over the agreements length you have an obligation, which if you can't service you're insolvent.

I guess I find the narrative that they "owe" $18b to imply a far greater extent of distress than the reality of their leasing obligations actually entail.


>It isn't anything like that - they have leases over the next 10-15 years with a contract value of $18b.

Precisely. They have liabilities of $18b with no profits. In the event of revenue drying up, they are still on the hook for those leases. There is no real difference financially between a lease and a loan in that sense. If I lose my job and can't pay the rent, I don't get to just say to my landlord "Sorry, lease is up!", and move out. I can be sued for that entire value.


You can't frame it as a loan because it's nothing like that. In fact they can only get $18B because landlords know if WeWork goes under they aren't getting paid the rest of the lease (lucky to get much at all). The point is, they don't mind. It's not lost money it's lost contractual revenue on a building that can be turned around immediately. The risk profile is not even close to the same.

If I was an investor in WeWork I'd care 0 about the total amount and almost entirely on what their trajectories look like, and the terms of those leases, etc. The $18B number is a red herring.


If they operate like most real estate companies, each lease is entered into by a different corporate entity. Any one of them could be sued for breaking a lease without touching WeWork.

But nobody sues when they can just rent to another party.


As a WeWork member, I can confirm that the lease of my local WeWork (and the fee I pay) go to a subsidiary specific to the location.

>It's not lost money it's lost contractual revenue on a building that can be turned around immediately.

That's the whole point though.It is lost revenue because in an economic downturn, when no one is trying to rent office space, the landlords will be left with no recourse but sue if the leases aren't paid. There are underlying construction and mortgage loans on the buildings being leased that must be paid regardless of whether the lessees bail out. At a certain point someone is left holding the bag.


Its still a short/long term liability on their balance sheet... until they have substantial enough assets (eg 5-18B worth of future revenue) they are working out of a massive negative equity hole.

Leases haven't been on the balance sheet historically, although a 2016 change (which comes into effect next year) will see them move onto the balance sheet, however offset by a corresponding right to use asset.

The right to use asset is depreciated over the course of the lease whilst the liability is decreased as payments are made.

So it isn't a huge negative equity hole (particularly at present since lease obligations are off balance sheet), but with these changes gross debt will increase substantially, which may trigger covenants with regards to debt ratios (equity will be offset by right to use asset however, so no bit equity hole even with new accounting rules).


There is a huge difference - the duty to mitigate losses.

A landlord can re-let the space to another tenant, and start earning revenue again.

The money loaned however is gone until it is repaid. The total loss of a loan is the principal remaining unpaid at time of default, since you have permanently parted ways with the money once you transfer the funds to the borrower.

A lease on the other-hand hasn't deprived you of anything. You've still got the asset that can be released.

The losses in this instance are limited to the period of time the premised was vacant and unpaid for, as well as associated other costs such as an amount of any incentives provided as a proportionate to the length of the lease term remaining, legal costs, reletting costs, advertising and renovation costs etc.

You can't simply sue them for the entire value of the lease - especially if someone else moves into it and starts paying rent, you'd be double dipping.


You can be sued for the entire value, but in all likelihood the lessor would expect you to pay until you or they find another lessee.

But it does impact your appraisal of their net present value, since you know their future income streams have to exceed at least that obligation plus other operating costs.

I think it’s fair for their rent obligation to contribute to the concern about their business in this sense.

Yes, it’s not like an immediate obligation of $18 billion. But the effect on a net present value calculation of a company already operating on big losses is still very important.


Agreed - just haven't seen future cashflow obligations referred to as "owe" in the same way, except for when discussing WeWork, so (to me) comes across disingenuous given the lack of consistency in application.


Again they're loans not lease obligations - different.

You can sublease or assign your obligations in a lease, typically you can't assign a loan in the same way.

Edit:

To clarify, when the average household talks about their family debt, they don't include the future lease payments that they're liable to pay over the remaining term of their family home's lease in their calculation - that is (rightfully) an expense, not a liability.

They do think about their mortgage though in terms of net worth and debt position.


Actually I was replying to your previous claim that "owe" "is used colloquially to mean currently in arrears/default". Colloquially "owe" means "in debt". According to the dictionary "to be under obligation to pay or repay". To what extent other liabilities (leases, pension fund obligations, whatever) can be assimilated to loans is a different question.

You're right that only WeWork appears in the news in these terms, but WeWork is an unusual case. I would be interested to know if there are other companies in a similar situation.


Gotcha, sorry - I guess you're right, doesn't mean immediately due, or past due, I just don't think of leases as owing, just a commitment to pay, which might be splitting hairs.

In the linked article of this thread though, and a few others I've read specifically about WeWork, it feels like it is used to imply a currently due debt that they can't pay, mostly for dramatic effect I imagine.

Someone else had some comments in another part of this thread about other companies with large plant/equipment leases receiving similar commentary, such as expensive data centers.


You only hear it on businesses that have substantial future cashflow obligations, which most startups don't. That's levied against anything with capital. I've heard it used against scooter and bike rental companies, I've heard it used any time a company has its own datacenter instead of AWS, etc.

Of course Uber and Basecamp and Reddit and Dropbox and other unicorns don't have this kind of criticism, because they don't have the same amount of heavy plant capital that WeWork has.

Look at any thread about a company building/buying a datacenter and you'll see the same argument. It's a bad idea because if they shrink in the future they're stuck with capital they can't pay for and now they go out of business. Only in this case, they can't shrink any more because they're already massively unprofitable, PLUS they have ungodly amounts of debt obligations.


Fair call, and good distinction to draw.

Having 18b in obligations is the EXACT same thing as owing 18b. Litteraly the exact same thing. Here in Denmark the name of a bond is “obligation” againg litteraly the same thing.

I get what you’re saying, but real estate is all about cash flow. Losing a billion a year is a problem for a capital intensive business.

When you consider that much of WeWork’s revenue is likey just VC dollars paying the expenses of their tenants then the whole thing looks even crazier. VC money paying revenue of a startup that uses that revenue to justify raising more money from VCs. I have some bridges to sell.

While this is true, there's plenty of non VC backed companies, consultancies, and startups at WeWork. I never liked the place myself, but it does provide value. A lot of money out there is dumb money, and a lot of it is smart money, and there's nothing wrong with having some percentage of your revenue be dumb money. AWS certainly does but nobody would question the sound fundamentals of AWS as a business. WeWork has a better balance in that regard than many others.

That's how mainstream internet got started - dotcom-era Yahoo was getting paid the ad dollars from startups spending money to buy growth, that very money they have raised on the promise of being the next Yahoo which is making a killing! (on the ad dollars...)

>When you consider that much of WeWork’s revenue is likey just VC dollars paying the expenses of their tenants then the whole thing looks even crazier. VC money paying revenue of a startup that uses that revenue to justify raising more money from VCs. I have some bridges to sell.

A definition of a pyramid scheme


"When you consider that much of WeWork’s revenue is likey just VC dollars paying the expenses of their tenants"

Is that a known fact or just a guess? The prices are low enough that it seems like it could easily appeal to bootstrapped companies or small businesses.


Anecdotally,we're a bootstrapped business and a happy wework tenant.

You're missing what WeWork actually does. They're in the data business. So is SoftBank, their primary investor.

WeWork tracks everything that goes on in its buildings. They're in the business of understanding the quantifiable nuances of human interactions within a workspace. WeWork itself uses that data to "optimize" the coworking experience, but from what I understand, SoftBank has much grander schemes.

http://www.businessinsider.com/weworks-secret-weapon-will-be...

Oh wow look what else SoftBank owns: https://en.wikipedia.org/wiki/Boston_Dynamics

Soon there will be robots walking around the WeWork offices delivering coffee and monitoring peoples breathing patterns.


The actual data business is pretty thin margins.

So unless WeWork can use that data to be a better real estate company, it doesn't much matter.

And I have a hard time believing that WeWork needs all that data to create their coworking spaces these days, especially since lots of competitors come real close without the data.


They would have a ton of data points on how all the "free beer" runs out constantly, as well as the "free cold brew coffee".

They'd get data on how they don't have enough bathrooms for their capacity, there are often broken items in these bathrooms, and more.

They'd have data on how there's never enough mugs and how they're at <60% capacity in one building, yet opening up 2 more in a city :).


Hah!

I think there's a bigger picture here. I'm not suggesting that selling the data is lucrative. From what I've heard, WeWork and SoftBank have plans for the data that goes far beyond coworking spaces or data brokerage.

I'm thinking of it as a lab for quantitatively studying human behavior in a candid setting. When you go into a WeWork space, you're a specimen.


Like Westworld. Heh.

IMHO, the real innovation here is 3 fold:

  - A fresh presentation on small suite / desk rental + some trendy common area space (vs legacy players like Regus which had gotten very tired) 
  - Having space that's largely built out. Companies can spend $50 - $100+/ft getting space ready for their use
  - Bridging the mismatched term expectation between landlords (desiring 5-10 year terms) and smaller tenants (desiring 0-3 year terms).

It’s very hard to read code formatted blocks on mobile.

It's hard to read on desktop too. The UI requires me to horizontally scroll in order to read the comment. Feels broken.

It's very hard on a desktop too.

These all seem like extremely low-hanging fruit for a building management company to do itself.

What frictions do you think gives WeWork essentially what you describe as a lease arbitrage opportunity?


Short term, direct leases scare thee crap out of institutional landlords. It impacts the surety of the building's income stream, which is reflected in the assets' "cap rate" and therefore valuation.

Also, due to protracted lease negotiations and brokerage model (both tenant and landlord brokers get paid based on the total lease payments), there isn't motivation for shorter term leases. Just ask anyone who has a small lease requirement that is in a stable, non-VC backed company -- no tenant rep broker wants to take this work on because there is no money in that transaction, there's not that much less work than required vs a larger lease requirement, and no promise of a bigger deal with that company down the road in case they become the next Dropbox....

So 3 out of the 4 involved parties are not motivated to shorten lease term. The only one who wants shorter leases are the tenant.


So what's to stop a local real-estate investor, or twenty investors, from leasing ten office buildings in downtown Seattle long term and then subletting them short term?

Where is the WeWork moat? Buildout? Reception clerk? Meeting room reservation software? Demand forecast?

At some point the VCs will stop pouring money into it, WeWork will have to charge the full price, and then any old group of people with money can build a local WeWork clone. And unlike WeWork they won't be saddled with expectations of paying a return on the multi-billion investment spent on subsidies.


One useful thing about WeWork is I can drop into any location in the world several times a month and I'm already set up, I just point and click, and I'm ready to go.

Croissant is an interesting aggregator that does this across smaller coworking spaces, but does require you spend some time getting set up each time you use a new space.


I can do the same at Starbucks :-)

Then why bother getting a coworking space at all? Yet many do... The experience is night-and-day different... sure WeWork is more expensive than Starbucks (it costs about 5 Starbucks drinks a day), but the productivity difference is worth it.

I could see some defenses of WeWork, but surely not productivity!

Having worked in a company fully based in a WeWork location in Boston, I can tell you WeWork basically is a complete stereotype of precisely all of the miserable, distraction-focused problems with open plan offices in general.

For fun meetups and goofing around, they are nice spaces.

For getting work done, it’s horrible, universally. People on my team would actively leave the WeWork office and walk to Starbucks to get work done, or more often just constantly work from home.

Whatever VC <-> founder winking social signaling and sort of cookie cutter “look at how start-uppy and innovative we are” status signaling must be the driver of locating in WeWork and coworking spaces generally.

It is clearly not related to productivity, quiet or private conditions conducive to engineering work, or basic workplace ergonomy or cognitive health.


Or a library.

That aside, percentage of WeWork tenants that ha e to travel is what? 2%?


If it's so easy, why did no one do it before? Other than Regus, who didn't do it so well.

One thing that is getting lost in the noise they have like a 40% profit margin and many new properties are profit share with the developer/owner of the property. They are spending very aggressively on expansion but unlike Uber they actually have decent margins.

40% margin on real estate seems so high. Would you mind sharing your source?

https://www.youtube.com/watch?v=-EKOV71m-PY (after reading through the comments decided to learn a bit more and found this interview).

It is a very, very generic coworking arrangement. Get A grade space, add services, sublet, rinse, repeat.

The coworking industry, a novelty in US, was alive and kicking everywhere else before becoming a hipster trend in US.

I'd say, WeWork, with all its colossality, is still only managed to secure single digits of the market share. In the future, it has no chances to approach even, say, 10% as competition is cut throat.


I think that may be one attraction. With relative ease to raise funds in US, they can gobble up other global competitors , especially if the competition is cut throat (so very slim profit margins). They can easily become the dominant player if they can keep raising funds and acquire competitors in few more rounds.

One moment here. What if you competitor will not sell itself? The "grand scheme" fails

Wait, how do they have a positive margin at all if they are losing all this money?

The profit margin quoted is likely just based on what they pay vs what they charge (per sq foot). Doesn’t include staff, marketing, etc.

? you can have 99% margin and still loose money :)

> How is a company that had a net loss of $933 million and that owes $18 billion in rent even remotely worth $35 billion.

Theranos had a valuation of $9 billion not too long ago. Did we forget about Pets.com and all the "valuable" properties during the dotcom boom that became worthless in a manner of months? Or the shacks worth hundreds of thousands during the 2000 housing bubble?

> I'd consider the lemonade stand on the corner to be more of a business than WeWork in the true sense of the word.

You should. There is so much money out there looking for assets that you could start a lemonade franchise business and you are sure to get investors bidding up your property even if it makes no money.

The current economic environment is dotcom bubble + housing bubble combined on steroids. There is lots of money to be made if you are willing to suppress your morals and just take the money.


The net loss is meaningless currently. You're quoting the $933 million as though it matters: it does not.

That's a sub 3% dilution on their valuation. Laughable with the capital that is freely flowing right now.

It only matters if the music stops at a time when their finances are in very bad shape. If you had polled HN about that, you would have gotten four years ago as the popular answer to when the music was going to stop.

Amazon took the exact same risk, bleeding vast red ink to expand aggressively, financing itself with free flowing capital during a bubble. So is this comparable to 1996, 1998, 2000, 2005, 2007, none of those? Who knows, especially given the behavior of central banks is aggressively interventionalist post 2007.


So many people like referring to Amazon and Facebook, although they forget that both companies capitalized on the rapidly raising demand for better shopping and better casual networking triggered by the rise of web. There were actual people willing to pay for a solution and there was nobody else providing a good enough solution because the technology was relatively new.

What recent technological advance made WeWork possible in a way that was not viable 10 years ago? Cash burning VCs' pockets that lets them underbid the competition?




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