WeWork’s earnings don’t show how the company could perform in a downturn


WeWork showed lofty growth numbers in the first quarter, with revenue and memberships more than doubling from the same quarter last year, but that’s not enough for some analysts.

Despite the positive numbers, analysts told Business Insider they’re still worried about the 9-year-old company’s future, largely because WeWork hasn’t seen a full market downturn. Rett Wallace, the CEO of the New York-based research firm Triton, says it is even harder to understand how WeWork would fare in a downcycle since the company doesn’t report the percentage of its desks that are occupied.

WeWork’s occupancy rate for the first quarter stayed about the same as it was a year ago, about 90% for locations open at least 18 months, a source with knowledge of financials said. The publicly traded workspace provider IWG had about 74% occupancy across its similarly mature locations last year, according to its annual report.

Wallace said a healthier number for WeWork would be locations with waiting lists, rather than with 10% vacancy. He compared the company with Uber, which, in a downturn, would see expenses decrease almost in tandem with revenue, since the car company has comparatively little physical infrastructure and long-term liabilities.

“For WeWork, if they have an occupancy problem, it’ll take them months or years to unwind the expense equation,” he said. “If you get on the wrong side of it, it could get so much uglier than these asset-light businesses.”

WeWork’s cofounder and CEO, Adam Neumann, told Business Insider last week that a downturn could actually benefit the business. He highlighted that WeWork was 50% to 70% cheaper than other office buildings and benefited from US accounting changes on how businesses allocate money for leases. WeWork also offers “flexibility and mobility,” which helps in a slowing market, and because half of its members do business with one another, they could buoy one another.

Neumann also pointed to local downturns in Buenos Aires, Argentina; São Paulo, Brazil; China; and the UK, all of which saw memberships growing faster than ever and lower construction costs when the market went down. WeWork is also expanding its work with major companies, which have longer leases and could presumably ride out a downcycle better than smaller clients.

WeWork now has $3.4 billion in multiyear agreements with big companies, a major revenue driver as it moves away from overseeing coworking spaces for small startups and into managing office space for big companies. Chris Lane, a Hong Kong-based analyst with Bernstein, said that growing exposure to enterprise was “a healthy sign.”

“My basic view is that the business model is ‘sound’ and that much of the losses are driven by expansion,” Lane told Business Insider. “However, I still struggle to see how they will justify a valuation anywhere near what SoftBank was reported to have paid in the last funding round.”

See more: WeWork’s latest earnings report shows it’s still using a controversial accounting method that reminds experts of tech-bubble shenanigans

Barry Oxford, a senior research analyst at DA Davidson who covers real estate, said he’s concerned about a downturn that’s longer than a “short, mild recession.”

“Do they lose more tenants than a regular office building in a recession? My gut tells me they’d probably lose a few more,” he said.

That doesn’t seem to bother the big-office real-estate investment trusts that Oxford covers, many of which, including Boston Properties, have WeWork as a tenant.

“From a real estate and landlord perspective, I can say there’s not a lot of pushback from allowing them in buildings,” he said.

Another analyst, Andrew Shepherd-Barron at Peel Hunt, has followed IWG — formerly known as Regus — for 17 years. He said WeWork had built up brand loyalty that shouldn’t be discounted but was unlikely to carry the company through a recession.

“Just flicking through Q1 numbers, you’ve got to say they’re growing rapidly,” he said. “Then again, if you throw enough money at a business, that tends to happen. But if there’s any hiccup in the market — watch out.”

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