matt tillotson

WeWould run very far away from this IPO

Forget the talk of inverted yield curves as the harbinger of recession. We have a clearer signal.

The story of WeWork shows we have reached the apex of hubris in this growth cycle, and, as in the late stages of every growth cycle, we have also lost our minds.

WeWork:

  • Manages more than 10,000,000 square feet of real estate, mostly office space.
  • Has aspirations far beyond being a landlord. It fancies itself as a cultural steward for its tenants, offers health insurance, even speaks of interceding in war.
  • Wants to “elevate the world’s consciousness.”

Mess with the unicorn, get the horn: Although its based in New York City, WeWork is what Silicon Valley calls a “unicorn” — a rare and magical company achieving scale and hype, allowing its founders and early investors to become rich(er) via an IPO.

All bark and no byte: Although it positions itself as such, WeWork isn’t a tech company. At all. It’s a commercial real estate ownership and management firm.

The “S” stands for shenanigans:As part of its IPO preparation, the company filed its S1 disclosures, and some of those disclosures are spectacular.

  • Last year, WeWork earned $1.8 billion in revenue and spent $3.4 billionoverall—and it isn’t closing the expense gapas it grows.
  • Per the Morning Brew’s perusal of the S1, WeWork has $47.2 billion in future liabilities in the form of long-term leases. Committed revenues from tenants sits at $4 billion.

Yikes. Yet the company has a $47 billion valuation?

But wait, there’s more.

There’s so. Much. More.

Booze Clues: WeWork used to have an unlimited alcohol policy, which, following a sexual harassment lawsuit, was amended as follows:

Members, who previously had unlimited access to beer and wine on tap, are now limited to “four 12-ounce pours per beer in a single day,” and can only access the taps between noon and 8 pm, Monday through Friday.

OK, now that we’ve sobered up, here is WeWork’s planned post-IPO corporate structure.

Ready?

These indecipherable hieroglyphics exist, of course, to maximize wealth (grift?) for executive staff, founders, and early investors. Oh, and tax avoidance, probably.

Just take it from the till: Adam Neumann, founder and CEO, seems to find plenty of ways to cash in:

This should be enough to send any half-witted investor running for the hills, right?

Yes, there is:

Adam Neumann bought buildings that he then leased to WeWork, The Wall Street Journal reported in January. Adam made millions on the deals. In May, he said he would sell the properties that WeWork leases to a real estate investment unit run by WeWork and funded by outside investors, The Wall Street Journal reported.

The investment vehicle, called ARK, will manage Adam’s holdings in 10 commercial properties, the IPO form says. Four of those properties are leased by WeWork.

Just take it from the till, Part II: Then there is Neumann’s stock option package—exercised by borrowing money from WeWork to buy the shares:

Before 2019, Adam had not received any equity awards, the documents say. But as The We Company got larger, the board of directors decided to give Adam reason to do an IPO, so Adam received options to purchase more than 42 million shares.

[…]

This led to the $362.1 million loan Adam got in April from The We Company to exercise his stock options. Adam repaid the loan this month by giving the shares back.

[…]

“Neumann swapped out a portion of those options the company valued at more than $360 million in a complicated transaction with the company that gave him a financial instrument tied to future WeWork profits.”

Are we done yet?

No. No we are not:

Adam spread the financial love to his wider family, too. From The Verge:

One of Adam’s immediate family members hosted eight events relating to our Creator Awards ceremonies in 2018, for which she was paid an aggregate of less than $200,000. Another one of Adam’s immediate family members has been employed as head of the Company’s wellness offering since 2017, and he receives less than $200,000 per year for acting in this capacity.

Will the SEC even allow the IPO to go forward? Remains to be seen.

In the meantime, sit back, drink no more than four adult beverages on a weekday between the hours of 12-8PM, and see what happens.