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  • WeWork's IPO is coming as soon as next month.

  • Investors might rightly be wondering if it's a bridge to nowhere.

  • This is, obviously, an unprofitable company.

  • We've seen a number of these companies come to market this year with actually mixed results.

  • A lot of numbers are swirling around.

  • But if you really wanna understand WeWork's business model, look at this one, $47 billion.

  • That's how much the company is on the hook for in lease obligations leading up to its public offering.

  • It says a lot about how the company works and why some investors are eyeing the risks.

  • You probably know WeWork, which recently changed its name to The We Company, as an office space with a specific aesthetic.

  • You know what we're talking about.

  • The glass walls, plants, cafes, mid-century-style furniture.

  • WeWork's basic business model is to lease large spaces, transform them to look like this, and then rent them out to individuals and companies at a higher price.

  • Our software finds the best buildings in the best locations.

  • Before we even begin construction, we build full 3D models to make sure we're creating environments that allow members to thrive.

  • As of 2018, the company operated more than 35 million square feet of space globally.

  • And it currently occupies 528 locations in 29 countries around the world.

  • Speed is important, because on average, we open two new locations every single day.

  • To cover the costs of the renovations and leases, WeWork charges individuals and companies through four different membership options.

  • For one of the cheaper plans, a member can bring their laptop, and sit in a common area if space is available.

  • And for the most expensive plan, companies can rent out full offices, suites, or entire floors.

  • WeWork also offers a service called Powered by We, full custom build-outs for larger companies.

  • So why are some analysts and investors skeptical?

  • Well, some are concerned with those lease obligations.

  • When WeWork signs a lease on a building in the U.S., they commit to an average of 15 years.

  • But WeWork's members only commit to an average of 15 months.

  • WeWork's obligations top $47.2 billion, but its customers have only signed leases on $3.4 billion worth of space.

  • Recently, the company has started signing more long-term clients, but still, with 528 locations, that's a lot of time and space to fill.

  • It's unclear how much space WeWork needs to fill to break even, but the company's occupancy rate fell from 84% to about 80% in the final quarter of 2018.

  • The company said the drop was caused by expansion.

  • New offices traditionally take up to 18 months to fill.

  • But it's unclear what would happen if suddenly fewer start-ups and freelancers were looking for workspace, which could happen in an economic downturn.

  • It's also unclear what would happen if existing tenants started to default.

  • One place investors are looking for precedent is International Workplace Group, formerly known as Regus, a Swiss company with a similar business model to WeWork.

  • During the economic downturn in the early 2000s, IWG's U.S. unit filed for bankruptcy as its revenue fell but long-term leases remained in place.

  • WeWork has said its flexible business model would help keep it safe in a downturn.

  • The company's rapid expansion has helped it stay out in front of competitors, but some investors are concerned that could change.

  • That's because WeWork's business model is easy to replicate.

  • The company has filed for some industrial design and furniture patent protections.

  • But anyone with enough cash can lease out industrial office space and flip it, and they have.

  • A New York-based rival, Knotel, hit an estimated $1 billion valuation following a recent round of funding.

  • And in 2017, Blackstone acquired a majority share of The Office Group, a flexible workplace provider in the U.K.

  • Investors will have to decide if WeWork's size and flexibility are enough to protect it in a period of economic uncertainty.

WeWork's IPO is coming as soon as next month.

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Why WeWork's Business Model Is Risky | WSJ

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    Annie Chien posted on 2019/10/17
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