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WeWork slipping into 'negative spiral' as IPO hopes dim

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WeWork space in Beijing's Sanlitun area.
Source: WeWork

The We Co.'s planned initial public offering, once expected to be among the largest this year, is on hold until further notice, and some are questioning whether it will come to market at all.

Much of the hype surrounding the WeWork Cos. Inc. parent's public debut has fizzled. In an effort to stem the tide of negative sentiment around the company's unusual corporate governance structure, WeWork's board this week pushed co-founder and Chairman Adam Neumann out of the CEO seat. The flare-up has reportedly even singed JPMorgan Chase & Co., Goldman Sachs Group Inc. and other advisers to the company, who face potential reputational fallout for having pushed an estimated valuation of $47 billion or more with the offering. Critics say the company is worth only a third of that, at the high end.

"It is astounding that [the IPO] got this far before the train sort of jumped the tracks," Joe Pagliari, clinical professor of real estate at The University of Chicago's Booth School of Business, said in an interview. "They have a corporate governance structure, and conflicts of interest, that [are] just not acceptable for a public company. And the proof is, it's being corrected right now. The price is coming down. Adam Neumann has been asked to step down. And the offering is being restructured."

There is growing skepticism, meanwhile, about the viability of WeWork's business model — leasing vast amounts of space on a long-term basis from landlords, then renting to smaller-scale tenants and some enterprise customers on a shorter-term basis — in an economic downturn, particularly in light of WeWork's tenuous financial position. The company has spent huge sums in recent years to grow internationally, needs more working capital now, and is not yet turning a profit.

At a conference earlier this month, Jonah Sonnenborn, Access Industries Inc.'s head of real estate, said WeWork's dominance in the coworking field does not insulate it from failure.

"There's this theory that they're too big to fail," Sonnenborn said of WeWork. "I don't believe in that. I believe that anyone can fail."

A 'knife's edge company'

In interviews, The University of Chicago's Pagliari and other academics said it will be challenging for WeWork to pull off an IPO this year given the damage to investor confidence.

"I think [the IPO] is going to be challenging. It's not going to be easy," David Erickson, senior fellow and lecturer in the finance department at the University of Pennsylvania's Wharton School. "The question is, how do you de-risk it the best you can?"

Aswath Damodaran, professor of finance at New York University's Stern School of Business, called WeWork a "knife's edge company," one whose future is uncertain. "When you have a knife's edge company and bad things start to happen, they very quickly start to spiral out of control," he said, later adding, "The risk of it slipping into that negative spiral has increased substantially, because people have lost trust."

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Damodaran has estimated WeWork's valuation at $14 billion, but he noted in an interview that that figure is contingent on the company raising capital on the order of billions of dollars over the next few years a prospect that now seems daunting. He cited a critical lack of "self-awareness" on the part of WeWork's management around the corporate governance issues and conflicts of interest, and said its relationships with established landlords will likely suffer.

"[WeWork] are now sitting across the table from somebody who's much more skeptical about everything they say," Damodaran said. "It's going to show up in their operations. It's going to show up in what they can and cannot do. And that can be very dangerous for a young company that needs capital to keep growing. If people don't trust you anymore, then you don't get the capital."

Some have suggested that WeWork could bring REITs themselves on board as strategic partners, via private placements alongside the IPO. But David Harris, a longtime REIT market observer, said the prospect is not likely to appeal to many landlords.

"The issues are valuation and no profit in sight, so it's hard to see how any REIT would be able to justify investing," Harris said in an email. Such an investment likely would hinge on WeWork materially reducing its expansion plans and laying out a well-defined map to profitability, he added.

The bigger CRE picture

In the space of a few years, WeWork became a dominant tenant in many global office markets, and it is now the largest office tenant in New York City, according to Cushman & Wakefield. But Pagliari does not think the trouble surrounding WeWork's IPO will substantially impact REIT valuations, or the valuations of the core properties that are home to WeWork locations.

"Maybe WeWork's troubled IPO will have some adverse effect [in] New York City, but even that, I think, is a stretch," he said.

NYU's Damodaran said traditional commercial real estate and conventional real estate IPOs stand to benefit from WeWork's troubles. The arc of the WeWork story suggests the real estate industry, which historically has been slow to adapt to vanguard trends and technology, is more difficult to disrupt than people thought, he said.

"It might actually be good news for the rest of the real estate business, because WeWork was ... driving the business off tracks by being out there, by being so impressive at leasing properties," he said. "It was actually making properties more expensive for the rest of the real estate business."

WeWork did not return a request for comment for this story. JPMorgan and Goldman Sachs declined to comment.

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