What Landlords Should Make of WeWork Postponing its IPO
The WeWork initial public offering (IPO) is one of 2019's most highly anticipated events, at least for the commercial real estate community. It carries with it the potential to test WeWork's assumptions on its enterprise value in the public markets while offering landlords the first real sense of how stable a tenant it will be. But now, it seems, we will all need to wait a bit longer.
The We Company, WeWork's parent, announced on September 17, 2019 that it would postpone its IPO for at least one month. Journalists and the real estate community have been fervently exploring the reasons why while shedding more light on CEO Adam Neumann's character and potential conflicts of interest. The We Company's decision to postpone the IPO coincided with its falling expectations for a post IPO valuation. WeWork was last valued at $47 billion in the private market, but as of September 19, 2019, the valuation could be closer to $10 to $15 billion (check out our post on venture capital valuations to see how start-up valuations are calculated). What, if anything, can WeWork change in a month to convince investors to boost its valuation?
WeWork's Hurdles: Losses and Corporate Governance
WeWork has two broad challenges to overcome: its substantial losses and its evidently flimsy corporate governance. Realistically, there is very little WeWork can do to curtail its accumulated deficits inside a month. The company is following a similar playbook to those that have come before: scale at all costs and worry about profitability later. In the start-up world, this has been a fundamental principal for years, though WeWork, Uber, and Lyft all appear to be testing that conventional wisdom as they have yet to convince Wall Street of their long-term value. WeWork is opening so many locations that it cannot generate enough revenue to cover its substantial financial and operating obligations, and its fragile financial condition will not likely change by October.
That means management and ownership will be addressing corporate governance in an attempt to pitch a stronger story to investors next month (or later). We often take corporate governance for granted in the U.S., especially among large companies and those looking to go public. Much like we expect the electric company to keep the lights on
, we expect that boards will hold managers accountable to be good corporate citizens and stewards of their companies. WeWork's board failed to keep its CEO in check, and that has made investors nervous. Below is a bullet point recap of the company's most serious corporate governance missteps:
To be clear, WeWork is attempting to or has already corrected the issues outlined above, but the fact that these were ever allowed in the first place suggests that oversight had been lapse and that Mr. Neumann made decisions with relative impunity. The company will likely continue working to clean up as much of these corporate governance issues as possible and then re-approach the investment community to test the IPO waters again.
What about the IPO?
WeWork's future is largely dependent upon a successful IPO. WeWork will need to generate significant proceeds from the IPO to increase its cushion due to its substantial losses while providing an exit for some of its investors. The company's S-1 noted that it has secured up to $6 billion in senior secured debt financing if it can raise $3 billion from the IPO. The debt would be secured by WeWork's performing locations, putting landlords in a weaker spot. Even so, landlords should be rooting for WeWork to succeed here. If the company does not go public, it will continue burning cash and be reliant on private markets that will almost certainly be very skeptical of committing capital to the business. If the company goes public but does not generate at least $3 billion in proceeds, it will not unlock the $6 billion in debt. Given WeWork's losses, it will need every dollar it can raise to give it runway to stabilize its business.
If WeWork does not go public, or it fails to meet the $3 billion watermark, it may be fair to speculate about the firm's future as a going concern. The company may close locations to limit losses, or it could file for Chapter 11 protection, and we have seen this move before play out with shared workspace company Regus (IWG today) back in 2003. Many landlords restructured with Regus back then, and a similar scenario could play out this time around.