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WeWork IPO will test level of 'consensual hallucination' in market

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WeWork co-founder, Chairman and CEO Adam Neumann and other staff attend the opening bell at Nasdaq in 2018.
Source: Associated Press

Market analysts and observers still do not know whether to call The We Co. a tech or real estate concern, or some new-age hybrid, but many agree its planned initial public offering this fall is a high-risk play for investors.

In its prospectus filed last week, the company, parent to the coworking behemoth WeWork Companies Inc., touted its "beautiful spaces" alongside its "extensive technology infrastructure," its "shared experiences" and "culture of inclusivity and the energy of an inspired community."

"Our mission is to elevate the world's consciousness. ... We believe our company has the power to elevate how people work, live and grow," the company said in the prospectus summary.

James Sullivan, an equity research analyst at financial services firm BTIG, said the language in the filing will not likely resonate with the average real estate investor.

"I think everybody's a little bit nervous about coworking," he said in an interview.

Many others share a level of apprehension about the planned offering, which is expected to come to market around the end of September, barring a significant change in market conditions. "We don't have much information regarding the pricing yet, but I consider it a high-risk deal," Josef Schuster, founder of the research firm IPOX Schuster, said.

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In an interview, Schuster said The We Co., under which all of WeWork's coworking, co-living, gym and education ventures will live, has "all the ingredients of a fascinating growth story." But he compared its risk profile to that of Uber Technologies Inc.'s offering, which came to market earlier in 2019 while the ride-sharing company's business was and remains a starkly unprofitable enterprise. Through Aug. 21, Uber shares were trading more than 20% below its IPO price.

WeWork has steadily grown its membership ranks to 527,000 as of June 30 from 87,000 at year-end 2016, and it has dramatically expanded its enterprise business, involving larger-scale space deals with established companies that, for example, may be looking to grow a new division and don't want to commit to a larger long-term lease. This has helped increase revenue to $1.54 billion through the first half of 2019, up from $436.1 million for full year 2016. But its staggering revenue growth has been accompanied by equally staggering financial losses as the company has opened locations around the globe. WeWork reported net losses of $904.7 million for the first half of 2019 and $1.93 billion in net losses for all of 2018.

Schuster described the company's planned IPO as largely an opportunistic move to take advantage of market conditions while they are still favorable. "I think some appetite for a high-risk deal is still there, on the margin, although the demand is probably slowly waning," he said.

Scott Galloway, an entrepreneur, author and professor at New York University's business school, was critical of the company's $47 billion private market valuation, which he deemed bloated. And he criticized the company for co-opting, in its prospectus, the language and terminology from more robust economic sectors like technology to sell what remains essentially a real estate story, while minimizing risk factors and other items he deemed conflicts of interest.

"It appears to me that this prospectus is trying to talk retail investors into believing it is our job to enable his [CEO Adam Neumann's] dreams, regardless of the fundamentals of this company," Galloway said in an interview, later adding, "This will be, to-date, the largest test of the extent of consensual hallucination the marketplace has ever entered into with a 'unicorn play.'"

Galloway also said WeWork's business will suffer disproportionately in an economic recession, given its billions in rent commitments and the illiquid nature of its assets.

The proliferation of coworking spaces in New York City and other urban hubs belies any perception of near-term risk. Andrew Simon, a longtime New York broker at Helmsley Spear, said he continues to broker coworking deals in both older and newer buildings around the city. Once a coworking skeptic himself, he said many of the major players in New York's legacy office market have warmed to the business model over the last couple of years.

"I think many of the brokers of my ilk I've been doing this for quite a few years were skeptical as to the depth of this type of market. ... There's a lot of these [coworking] groups now and they are a significant portion of the market," he said.

Simon said the risks associated with the coworking business model have diminished to a degree as it has reached critical mass in the city, but he remains cautious about its long-term future, and he worries about its health in a recession.

"This hasn't been tested yet in a down market," he said.