5 Things to Watch for as You Read WeWork’s IPO Filing

At long last, WeWork has dropped its IPO filing.

The company now known as The We Company filed confidentially to go public back in April, but accelerated releasing its Securities and Exchange Commission (SEC) filing this week.

Previously, according to a Bloomberg report, the company was rumored to be planning to raise over $3.5 billion with its IPO.

The office-space rental company has certainly had a tumultuous few months. In July, WeWork announced a plan to raise some $4 billion in a debt offering before their IPO. Shortly after that, WeWork’s CEO Adam Neumann cashed out over $700 million of a mix of stock sales and debt prior to their IPO, according to The Wall Street Journal (although according to the company’s filing, Neumann last sold shares in 2017). And last but not least, according to documents seen by the Financial Times, the company is planning to become what’s known as an umbrella partnership corporation, or Up-C, giving WeWork insiders a tax advantage over public investors.

As of its most recent valuation, WeWork is supposedly worth some $47 billion per a January funding round. But the company’s cash burning problems are another story.

The office-space manager lost a whopping $1.9 billion on $1.8 billion revenue in 2018. And while the company would be set to become the second-largest IPO this year (behind Uber), the Street has a lot of questions.

“They have a good brand,” says Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO ETFs. “I think that the concepts are of interest to investors, … [but] it’s going to take a long time to make sense from a profit standpoint. It’ll be hard for the company to get its last round of valuation.”

So, what should investors watch out for as they examine WeWork’s IPO filing?

A plan for profitability

One of the main questions on investors’ lips is how WeWork, a highly-valued, high burn-rate company, is planning to achieve profitability.

“Typically you want to see decelerating loss—if it’s not, [then] just a really good and reasonable explanation and when it will,” Deloitte & Touche’s Barrett Daniels told Fortune. Daniels says that while revenue growth is key to IPOs (something WeWork has been able to show on a massive scale), a path to profit is still important.

As what may become the second-largest IPO this year behind much-plagued Uber, Reena Aggarwal, professor of finance and director of the Georgetown Center for Financial Markets and Policy at Georgetown University, believes WeWork needs to avoid Uber’s prospectus’ mistakes.

“Uber put out the story that they’re here to change the world, … so the future prospects were made out to be really big,” Aggarwal told Fortune. “In some ways, WeWork is kind of putting out the same story—that this is big, this is transformational. You have to be careful about those kind of stories until you see more progress.” 

As something that companies like Uber and Lyft seemingly failed to do, Renaissance’s Smith says WeWork needs to show a clear model going forward—and can’t shy away from getting into the weeds.

Detailed unit economics

In fact, one key thing investors should especially pay attention to while digesting WeWork’s S-1 is a detailed look at the company’s unit economics.

“How do we see the unit economics of this? How is this supposed to work?” Smith asks. “You have to make a lot of assumptions about rents and rent increases and costs. We’ll see how well they make the [unit economics] case with WeWork.”

What’s more, while taking a long, hard look at their financials is key, Deloitte’s Daniels suggests studying WeWork’s management’s discussion and analysis (or MD&A) section of their prospectus. He says that while WeWork’s MD&A will give data and numbers, it is “also going to provide some of the color around those numbers and why things changed year over year, quarter over quarter, period over period.”

Daniels suggests looking at why revenues went up (or down) and what’s going on with the company’s margins. Even things like examining how per-square footage rent is contributing to revenue (and changes in rent) will be important, Aggarwal says.

But given WeWork’s losses, Smith says, “they’re going to have to make a very good case and help guide analysts in how they value this.”

Valuation justification

As a company that fetched a $47 billion price tag in their last private valuation, WeWork has a lot of work to do when it comes to justifying a public valuation, experts say.

Aggarwal believes one of the bigger problems the office-space rental company has is articulating exactly what kind of business they are. “Are investors going to view this as a tech company, as a real estate company, or as a combination?” she asks. “What are the [comps] that are going to be used, what is the valuation going to be based on?”

To boot, Renaissance’s Smith says that the $47 billion valuation is especially large, and that “large IPOs like this are challenging to digest in the IPO market.” But as a company that seemingly straddles the line of real estate and technology, experts think WeWork’s prospectus will highlight their unique position in the market.

“I think that companies like this that are able to raise this much money—there’s something special going on,” Daniels says. He suggests the negativity around WeWork’s valuation may not be entirely warranted, as it’s “really, really hard to grow a company at 100% when you’re talking in the billions of dollars,” as WeWork has.

Breaking down rentals and liabilities

But as a company burning almost $2 billion last year and an already whopping net $904 million in the first six months of 2019, WeWork has a lot of question marks on their balance sheet.

Smith says that the company’s new debt and the “mismatch” between their long-term leases and short-term rentals are things to keep an eye on while examining WeWork’s financials. Having begun plans to issue some $4 billion in debt, those like Smith are interested to see how the new debt will affect WeWork’s valuation.

But one major thing that could cause some stir in WeWork’s financials is their leases. As one of the largest commercial lessee’s in the world, David Snider, founder and CEO of Harness Wealth, says that “while historically [WeWork] would not have had to disclose the value of all of the leases they have signed, a recent accounting change, ASC 842, will require that they include all of those on their balance sheet,” Snider explains. “It will be a clear reminder to investors of the long-term liabilities the company has undertaken to serve the mostly short-term agreements they have with their own clients.”

Governance and management structure

WeWork’s governance section is a key area to take a highlighter to, experts say. One point of interest, say analysts, is how control and voting power will be distributed, especially as the company has leaned toward favoring the founders and insiders in the past.

In the meantime, expect plenty of investors to be spending today’s workday digging into how, exactly, WeWork is going to work.

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