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Comment by braythwayt | Hacker News Reader

Refreshingly, this article opens by stating the strong case FOR WeWork’s business, before getting down to asking whether this is a sound investment given the founder’s behaviour and the structure of the company.

But when it does turn its attention to that, it is as unflinching in its criticism as it was optimistic in its appraisal of the business opportunity:

Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.

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The bull case is that it has the potential to become as valuable as Marriott which is about $43 Billion in market cap.

Marriott for the most part has transitioned mostly to an all digital company over the past two decades. The Marriott of today is primarily about hotel operations (i.e. branding, bookings/pricing/revpar/SEO, front desk, housekeeping, wifi, remodeling) and its loyalty rewards program and mobile phone app (BonVoy).

Much of its assets have been moved to a standalone REIT that trades under a different ticker. In a way similar to WeWork, Marriott effectively leases hotels from the REIT.

So in that sense, if WeWork can be considered analogous to Marriott, then in a hand wavy way the $47 Billion market cap valuation could somewhat make sense.

The bear case is that its not a well implemented corporate structure full of accounting traps and is actually a fraction of Marriott's valuation...

>The bull case is that it is as valuable as Marriott which is about $43 Billion in market cap.

Apart from the fact that Marriott has 11.5X as much annual revenue?

Thanks - very good point - Added more description to the bear case. It is unclear to me why WeWork is being valued the same as Marriott today when its business/financial model is clearly unproven.

Does the Marriott REIT actually own its properties or lease on long-time lines like WeWork?

The Marriott REIT is Host Hotels which is the owner of the physical properties. It does own all its hotels and Marriott leases them. Its a symbiotic relationship.

The analogy would be: Marriott is to Host Hotels as WeWork is to multiple office property owners

So that's a stark contrast. Host Hotels (Marriott) is sitting on an appreciable asset while WeWork has off-balance sheet operating leases.

https://www.investopedia.com/terms/o/operatinglease.asp

> The bull case is that it has the potential to become as valuable as Marriott which is about $43 Billion in market cap.

Um.. that's one bull case, but the article presents a much stronger case (namely, the one that WeWork itself is making). That is, that WeWork will do to offices what AWS did to servers - make it so the average company never buys physical servers, but rather outsources all of those operations to Amazon.

Analogously, WeWork is imagining a world in which companies never build offices - it's not their core competency, after all. Rather, most companies just get an office at a WeWork instead.

So their potential market is huge - they've only tapped a tiny tiny percentage of "all people who work at a desk".

Apply Buffet's investment thesis to WeWork, one should stay away from this company because of the bad management team.

Speaking to the business model, in my midwestern city a few coworking spaces popped up only to go broke within a few years. The only one to last is funded by VCs and mostly as their incubator. That VC one is thriving because the rents are heavily subsidized. If they ever rose prices, I doubt their membership would have any problems getting up and leaving as they don't have ties there by the nature of "coworking." It's the Uber/Lyft problem-- easy to switch between 2 competitors offering a commodity service. Good luck ever becoming more than marginally profitable. Heck, they're a real estate business, and they can't take advantage of deductions as effectively as LLCs or individuals can. As this realm matures, and they spend money and effort vetting markets, enterprising partnerships can swoop in offering localized services for cheaper.

Wouldn't recession make business real estate dirt cheap for WeWork too? Wouldn't it make flexible business spaces even more valuable when things are uncertain?

At first glance, maybe a recession can enable WeWork to acquire lot's of real estate under really favorable conditions and make it's premium when the recession is over. Don't you think so?

Also I'm under impression that the WeWork ysers are not the well funded companies but smaller companies and contractors and those people usually make money on their services, instead of relying on funding keeps flowing intil they exit.

If they have a lot of capital available, maybe. But the likely scenario (my opinion): they're stuck with big multi-year leases to property owners, most of their existing customers do not renew their short-term leases because of the economy, and WeWork's existing cash reserves can't come close to covering the short fall until the market picks up.

EDIT: Grammar.

The problem is that they are heavily leveraged at current prices.

Like if WeWork had a great business model after a massive recession, so would a competitor that didn't have an awful legacy portfolio to deal with.

A recession now will make their already signed real estate too expensive, and that will happen when people dial back in discretionary expenses.

They may be able to re-negotiate their contracts. It might be much more desirable to let your tenant get cheaper price than go bankrupt. It might be more profitable to cut a deal concerning prevoiusly lent space if your tenant is willing to expand the lending when no-one else wants to rent.

You know what they say? If you owe your landlord 1 month of rent for one room, you have a problem but if you owe your landlord 10 years of rent for 1000 buildings, your landlord has a problem.

Landlords have unusually long timelines. They might be willing to let the tenant go bankrupt, ride out a 2-year recession, and wait for a tenant who can sign a 10 year lease at higher rates.

Landlords leave spaces empty all the time. Or they'll even bulldoze a building, get a tax cut, and lease the space to a parking lot operator rather than take the easy way out and lease their space at low rates.

Man, this was covered, in-depth, in the article. Not only the recession case but the fact that WeWork will likely just default on a lot of leases in the worst case scenario as the lease is signed by a independent corporation that has no assets for the landlord to seize. In addition, of course landlords would re-negotiate with WeWork, better to have some money than none.

Yep, that's why I'm trying to dig deeper in this as the HN doesn't seem to be convinced or didn't read the article :)

Color me not convinced. They have a lot of leases. It’s top of market and they’re still subsidizing their customers. Won’t actually have leverage against a host of major real estate debtors. Nor will it be easy for them to sign newer leases again when that recession ends. And “we’ll just default” is a terrible story to tell during the road show.

Yeah, same. Companies like Uber have a massive power and information advantage negotiating with their contractors (who have taken on a lot of Uber's financial risk). But commercial landlords are a whole different deal. They have seen it all, are experienced in weathering the vagaries of the market over long time scales, and are really not interested in being a sucker.

I also suspect WeWork doing deals with larger companies is not going to help them much in a downturn, because they are likely to be savvy players as well. If WeWork is threatening to default on a space, I'm sure there will be corporate office teams from stable industries saying, "Oh, we'll take that nicely built out space, thanks."

Except, as noted above, real estate leases usually don't get renegotiated. I don't know if it's because of the long time frames or exactly why, but landlords frequently would rather leave a building empty than not get their rates.

It’s because there are huge tax incentives for “under preforming” real estate investors. It’s honestly maddening. You literally get to deduct everything short of your desired “market” rent (even if the market can’t bear it, you just need a team of appraisers on your side) and you can even include upgrades and entrepreneurial risk as a deduction.

https://www.nreionline.com/finance-investment/struggling-vac...

Not if we undergo an inflationary period. And all signs point to the Federal Reserve printing more money.

I don't feel bad about my loans either. I think banks are going to get screwed with a low value USD.

They’ve signed long term leases. Most of their customers can cancel on a months notice. So they will have shrinking revenue but fixed costs.

You’re right that it might reduce the cost of growth ...

This is addressed in the article. There are a lot of reasons to believe that in such circumstances WeWork would be able to renegotiate its leases to lower costs.

A recession would be the best time to build out capacity because they could snap up long-term leases and maybe even building equity on the cheap, but they've been building now that the market is frothy and getting into long-term leases at possibly the worst time...

Not if you're already locked into contracts at drastically higher prices. This seems like a startup that would actually be better to do in a recession instead of on the precipice of one

Yeah I was thinking the same. A recession could allow them to lock up really nice deals at cheap rates for a longer term and if they could then ride out the recession into the recovery the spread on the rates they could charge in recovery could be relatively good for them.

The other possibility I don't see discussed often is they might simply be trying to become big and entrenched enough that bailouts of some variety (probably just endless tax breaks extracted at the local level) become mandatory for the business to survive.

If you entrench yourself deeply enough and people are looking at eviction and foreclosure and cancelling construction projects they could fight for this. Call it capitalism by hostage negotiation.

This actually seems to be what some larger companies like GE are planning on, (and Foxconn has already executed successfully) but it's bizarre to see this plan launched at the IPO stage.

> they might simply be trying to become big and entrenched enough that bailouts of some variety

The implied source of such bailouts are the landlords, who may prefer to cut lease terms versus see e.g. 40% of their portfolio blow out simultaneously. (My personal view is yes, landlords will renegotiate terms. But they'll also demand an arm and a leg, likely in the form of senior debt and aggressive warrant coverage.)

> landlords, who may prefer to cut lease terms versus see e.g. 40% of their portfolio blow out simultaneously.

Landlords aren't going to renegotiate unless WeWork manages to hold back the corporate veil-piercing lawsuits. Given everything we know about their internal corporate governance, I'm not sure why any landlord would accept a haircut right away. There's probably a mile-long line of lawyers waiting for the chance to go after them; most would probably do it on contingency.

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