(Replying to PARENT post)

It's a 1920s (pre-FDIC) bank, or a 2008-style risky financial instrument, like an Auction-Rate Preferred.

WeWork's business model is "borrow short, lend long." That is, they accept very short term promises to pay (month to month leases from customers), and aggregate them to make very long term promises to pay (mutli year leases from suppliers). Keep the spread.

This works as long as there are lots of customers who will pay a premium for short term flexibility. We can presume that will be somewhat cyclical, although in fairness they also probably have caught a secular trend toward remote / coworking / flexibility.

When the cycle turns down, those short termers are done but the long term promises to suppliers keep going ...

That also leaves aside the question of leases with escalators. I have heard a rumor that some WeWork locations have substantial out-year escalator clauses (meaning the rates they owe to suppliers sharply increase in future), meaning that even if customers stay on board, WeWork will face a need to raise prices substantially to meet its obligations.

👤rlucas🕑6y🔼0🗨️0

(Replying to PARENT post)

Their business is structured in such a way that the leases they signed on their locations aren't really enforceable against WeWork itself, but rather against "special purpose vehicles", I'm guessing one per lease?[1] It costs a bit in insurance but substantially limits their liability. So, in a downturn, even if "short termers are done", they can shed properties too, basically with impunity.

[1] https://stratechery.com/2019/the-wework-ipo/

👤99052882514569🕑6y🔼0🗨️0

(Replying to PARENT post)

I might be confused, but isn't it the opposite here? Borrowing long (long-term leases from suppliers) and lending short (month to month leases to customers)?

You yourself said "long term promises to suppliers keep going", which sounds like borrowing to me?

I could just be dense here, feel free to correct me

👤whoisnnamdi🕑6y🔼0🗨️0

(Replying to PARENT post)

This isn't that dissimilar from lots of industries.

Every airline that takes a loan to buy a plane is banking on future demand for air travel, for example.

Or take Amazon Web Services, which is building data centers to lease out on a short term basis.

Yes, there are tremendous risks involved, depending on the lease terms. But it's not at all unusual.

👤nostromo🕑6y🔼0🗨️0

(Replying to PARENT post)

It's a very interesting thing they are doing though, one must admit. It really highlights to me the fact that pricing long-term leases is really hard. Companies (the tenants) are living, breathing things that change and evolve. Their staffing and office needs are constantly changing. Not to mention changes in remote working, be it 100% remote companies, or satellites within larger companies. This makes matching supply and demand difficult, and it's a problem for owners of commercial real estate that isn't going away. Lost revenue due to vacancy is uncomfortable for them to stomach - they will pay a premium for known cash flows.

You are right in that there is risk to what WeWork is doing, but if it's a hard enough problem, the premium paid by owners may be big enough to provide an acceptable margin of error. Secondly, perhaps there is a valid hedging mechanism? Third, does their large network and brand give them a competitive advantage at top of the funnel such that they can charge a higher risk-premium (spread) to owners?

We shall see.

👤tompetry🕑6y🔼0🗨️0

(Replying to PARENT post)

I'm not sure why all these negativity. WeWork's business model is no different than buying wholesale and selling retail. Or owning a mall and selling pieces to individual shops. It's an old idea and old business model. WeWork is able to sell 200 sq ft for $5000/month. Think about that for a bit. Their strength is diversification by multi-tenancy which means even if x% of customers fissals, you got others to pay for the cost. They are tech company in a sense they enable instant on-demand exchange of goods online just like on-demand renting of cars or scooters. They are fast movers and online-first company. We don't know if they are losing money just in growth markets or also in mature markets. If later is true then I would be worried about their cost structure and long term viability. Otherwise at their current ability to successfully convince customers to pay top dollars, they should be awesomely profitable once they stop bleeding in growth markets.
👤sytelus🕑6y🔼0🗨️0

(Replying to PARENT post)

Because someday, if it works out, they won't be on the lease at all. Real estate owners will pay them a fee for their facility to be in the WeWork network. The current leases they hold are there to get the flywheel going on the network effect.
👤momokoko🕑6y🔼0🗨️0

(Replying to PARENT post)

> That is, they accept very short term promises to pay (month to month leases from customers)

No, that is the market. Just like airbnb compared to normal renting.

👤megaremote🕑6y🔼0🗨️0