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What to invest in now the WeWork IPO has failed

By Connor Freitas

WeWork is licking its wounds after its IPO collapsed, its CEO resigned and thousands were laid off. We look at what to invest in now in commercial real estate.

Just a few short months ago, WeWork seemed unstoppable. It was a dominant force in commercial real estate – a pioneer for a new approach to office working and tipped for a blockbuster IPO. Now, the reality is very different. The company’s enigmatic CEO Adam Neumann has been forced to resign amid increasing investor concern over his leadership style, and plans for the flotation have been blown to smithereens. Japanese company Softbank, an early investor in WeWork, has urgently injected billions of dollars to keep the company afloat. In this article we look at why WeWork is struggling – and explore what to invest in now.

Why the WeWork IPO failed

Despite the boardroom drama and the financial disarray, WeWork is still standing. However, it’s undeniable that the turbulence of 2019 will continue to haunt the company into the 2020s. Smaller competitors are beginning to cash in, learning from WeWork’s mistakes and offering a similar product without the excesses that led to its fall from grace.

We’re going to take a look at the best companies in this sector in a minute, but first, let’s just refresh ourselves on the events of the past few months. WeWork had managed to achieve its supposed $47bn (£36bn, €42 billion) valuation following a Series H round in January 2019, which raised $1bn and took its total funding level to $12.8bn. On Wall Street, the excitement surrounding a potential IPO was reaching fever pitch – and many analysts were proclaiming it would be one of the year’s biggest.

In mid August, The We Company – WeWork’s parent – submitted its S-1 filing to the US Securities and Exchange Commission (SEC). This document is a crucial step towards an IPO, enabling investors to learn about a firm’s current business model in greater detail and how it would use the funds raised. In WeWork’s case, though, the filing caused alarm. It revealed that the company sustained net losses of $1.9bn in 2018. Despite revenues doubling in the first half of 2019, net losses over this period had also ballooned to $904m. One rather candid section of the S-1 read: “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level … for the foreseeable future.”

Aside from the cash burn, eyebrows were also being raised over WeWork’s corporate governance. The S-1 showed that the company had lent at least $30m to Neumann during his time as CEO, often with preferential interest rates that were well below the market average. Scrutiny over Neumann’s practices intensified further when it emerged that he was paid $5.9m in stock to obtain the trademark “We” – and that he dominated boardroom votes through special types of shares that gave him 20 times more of a say than ordinary investors. Then there were reports he gave employees shots of tequila immediately after discussing layoffs, spoke of ambitions to become the world’s first trillionaire, and expressed hope that he would live forever.

WeWork’s valuation subsequently dropped in September, but by then, the writing was on the wall. A corporate governance U-turn diluted Neumann’s voting power, the IPO was delayed indefinitely and he stepped down as CEO. It subsequently emerged that his exit package was worth a whopping $1.7bn, prompting a lawsuit, and November saw the embattled company lay off 2,400 workers.

What to invest in now

So: what are the best companies to invest in following WeWork’s fall from grace? Well, it could be worth looking at more established competitors in the space. Other shared office providers such as Regus have been in the business since the late 1980s. Although the company did collapse in 2003 in the aftermath of the dot-com bubble bursting, it has recovered and matured in recent years. Operating profit stood at $195m in 2018 – slightly below the $220m recorded in 2017 and $232m in 2016. With thousands of premises around the world, Regus (now known as the International Workplace Group) generates far healthier profit margins than WeWork by offering a no-frills approach to its premises.

Others in a related space include DropDesk, which enables office workers who are constantly on the move to find shared spaces wherever they travel. The company also allows tenants in retail spaces to let out their premises to pop-ups – a trend that’s becoming increasingly common. Whereas WeWork has amassed high levels of debt by entering into long-term leases, DropDesk has kept its balance sheet clean by avoiding expensive property purchases.

Some co-working businesses are pressing ahead with an IPO despite the drama. Ucommune – dubbed by some as China’s answer to WeWork – is planning a flotation in the US as early as January. The business model is very similar to its American counterpart, and it is running at a loss (although as a share of revenue, Ucommune isn’t in the red as much as WeWork has been). Citigroup and Credit Suisse had been underwriting the offering but stepped aside following disagreements over how the IPO should be run, with two Hong Kong banks taking their place. Despite the levels of cash burn in the business, some are optimistic for Ucommune’s future because of how it has other revenue streams and an experienced property developer at the helm. It could be one to watch.

Do remember that the answer of where to invest might not just lie in co-working spaces specifically, but in the commercial real estate sector as a whole. It is true that the retail sector is struggling (especially some shopping centres) because of the continued rise of e-commerce, but forecasts for 2020 are healthy. Deloitte’s forecast says that the industry, especially in the US, “is on solid footing to attract capital” in the coming year – with 76 per cent of industry leaders very optimistic or somewhat optimistic about how they will perform in the coming 18 months. Most of those polled also said that delivering a strong tenant experience is a top priority for the coming year – potentially a nod to the revolution that WeWork started.

Of course, it remains entirely possible that WeWork will shake off its woes and return for an IPO in the future. But given the eye-watering funds contributed by Softbank, and the fact that Goldman Sachs has lost at least $80m through its investment in the company so far, it’s fair to say that WeWork doesn’t have anywhere near as many friends on Wall Street as it used to.

FURTHER READING: What happened to the WeWork IPO?

FURTHER READING: SoftBank's WeWork bailout stalls

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