The We Company, parent of the shared-office provider WeWork, has publicly released the prospectus for its initial public offering, providing a wealth of previously unseen information on its astonishing growth, the risks the business faces, and the strategy being pursued by co-founder and chief executive Adam Neumann.
FT reporters are combing through the filing and will update the findings progressively. Here is where they will share the key revelations.
Adam Neumann, tenant and landlord
WeWork’s core business starts with leasing properties from landlords, and for parts of its short history one of those landlords has been its co-founder.
Over the past three-and-a-half years, Thursday’s SEC filing reveals, WeWork made a total of $20.9m in lease payments to four properties in which Mr Neumann has an interest, receiving $11.6m back in “tenant improvement reimbursements” last year. Barring future discounts, it is still on the hook for almost another $237m in payments over the life of the leases.
In the early days of our business, at a time when landlords were reluctant to recognise the benefits of WeWork as a tenant, Adam bought four buildings in order to help prove WeWork as a viable tenant to landlords
Aware of public market investors’ dislike of such potential conflicts of interest, WeWork has moved to unpick this financial relationship with its leader. The company disclosed earlier this year that Mr Neumann would sell his properties to a new entity called ARK, with its own management, but on Wednesday it spelt out the scope of that arrangement: ARK will cover the costs Mr Neumann incurred in buying the four properties.
The document also shows that Mr Neumann has an interest in six other properties which WeWork does not currently occupy.
Adam has committed not to purchase any additional properties with the purpose of making them available for our occupancy
The debts of Adam Neumann
Citing the limitations on its co-founders selling equity while it was a private company, WeWork has disclosed that it lent more than $30m to Mr Neumann between 2013 and 2016, which has since been repaid in stock or in cash.
Mr Neumann secured favourable rates on those loans from the company. Two of the three-year loans Mr Neumann’s investment vehicle WE Holdings took out in 2013 and 2014 had interest rates of just 0.2 per cent per year.
A $7m three-year loan Adam secured from the company in 2016 had an interest rate of 0.64 per cent per year. For comparison, JPMorgan Chase’s prime rate (one of the lowest rates it will offer to its commercial clients) was 3.25 per cent in 2013 and 2014
The company said it also issued him with another, larger loan for $362m in April this year “in connection with the early exercise of a stock option”. That promissory note matures in 2029.
Additionally, Mr Neumann has borrowed $380m out of a $500m line of credit secured against some of his stock.
And finally, JPMorgan Chase has lent him $97.4m, the filing discloses, including mortgages — but none of those loans is secured by a pledge of his stock.
Why WeWork may accept a lower valuation
WeWork’s prospectus says the company will raise $1bn in its IPO — but that is just a place holder number until it has tested out the market appetite. The expectation is that it will raise a multiple of that. In fact, the company must raise at least $3bn to unlock additional debt financing that it is pursuing at the same time.
The filing reveals that this month, WeWork signed a commitment letter for a new senior secured credit facility of up to $6bn. On the other side of the transaction are more than 10 banks, led by JPMorgan Chase, Goldman Sachs and Bank of America.
The amount that the company raises from shareholders will depend on investor reaction to its pitch, and it will not narrow down a range for the share price until closer to the flotation date. Because of the contingent nature of the asset-backed debt financing, it is possible that WeWork will settle for a lower debut valuation in order to attract more demand for its shares.
Numbers: 29 pages of risk factors, $47bn of lease obligations, $4bn of promised revenue
Among the risks set out by the company are the sizeable payment obligations it has under its leasing deals, an issue that goes to the heart of its business model and which will be front and centre for investors considering buying into the IPO. While it takes on long leases, it offers its tenants much more flexible short-term leases.
The result is a gulf between The We Company’s obligations and the future revenue committed by tenants.
In the US, for example, WeWork signs leases for a typical initial term of 15 years. Globally, its leases carry future payment obligations of $47.2bn as at the end of June, the documents say. By contrast, The We Company’s committed revenue backlog is $4bn.
Our obligations to landlords under these agreements extend for periods that significantly exceed the length of our membership agreements with our members, which may be terminated by our members upon as little notice as one calendar month
Also among the risks is a notable quirk of its relationship with Mr Neumann.
Despite the co-founder’s controlling interest in the company, it has “no employment agreement in place with Adam, and there can be no assurance that Adam will continue to work for us or serve our interests in any capacity.”
Who owns WeWork now?
Since Adam Neumann and Miguel McKelvey founded the company in 2010, WeWork and its more recently created parent have raised almost $13.4bn. The biggest chunk of that funding came through one man: Masayoshi Son, chairman of SoftBank.
The filing does not state what percentage of the class A ordinary shares each investor owns, but it shows how large SoftBank’s looms over the current shareholder register. Entities associated with the Japanese group hold almost 114m shares, compared with 32.6m for Benchmark and Adam Neumann’s 2.4m shares.
But the IPO filing confirms that Mr Neumann will continue to control a majority of the voting rights through class B and C shares. Through We Holdings, an investment vehicle with his co-founder, and his own stock, Mr Neumann controls more than 112m class B shares as well as 1m class C shares.
The company doubled the voting rights of those class B and C shares ahead of the IPO, cementing Mr Neumann’s authority.
The filing also shows his holding could be significantly boosted by a pre-IPO award of options over 42.5m shares, set to vest over the next 10 years.
Unusually, the small print announces that Adam and Rebekah Neumann have pledged $1bn to fund charitable causes within 10 years of the IPO, starting with helping to conserve more than 20m acres of tropical forest.
“To ensure that this is meaningful,” they say, they have agreed that the supervoting shares which cement their control of the company will only be worth 10 votes per share rather than 20 if they have not contributed the $1bn within a decade.
Here are the board members who will be looking out for shareholders’ interests
Several of the directors who sit with Mr Neumann on the We board represent investors who have got it to this point. The longest serving, who joined in 2012, are venture capitalists Bruce Dunlevie, the founding partner of Benchmark, and Steven Langman, co-founder of a private equity firm called Rhone.
Lew Frankfort, the chairman emeritus of the lifestyle brand Coach, joined in 2014 and John Zhao, CEO of Hony Capital, has represented the Chinese investor on the board since 2016. The most recent arrivals, on the board since 2017, are Mark Schwartz, former Goldman Sachs vice-chairman, and Ron Fisher, the representative of SoftBank, the SoftBank Vision Fund and Masayoshi Son, Mr Neumann’s biggest backer.
Burn, baby, burn
WeWork’s top line growth has come with ever increasing bottom line losses. In its filing with the SEC, it says bluntly:
We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level . . . for the foreseeable future
Its full-year net losses jumped from about $900m to $1.9bn in 2018. For the six months to June 30 this year, net losses grew again, from $723m to $904m, even as revenues doubled from $764m to $1.54bn.
The outflows come from its race to open more new locations. “These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future,” it says. Losses should not increase as a percentage of revenue in the long term, it says, but they may do in the near term.
Unlike other unicorns, some investors have already had a chance to take a close look at WeWork’s financials. The reason: the company last year borrowed $702m through corporate bond markets and began reporting quarterly results to its new creditors. Those bonds, which slumped after SoftBank drastically scaled back a planned investment in January, have rallied ahead of the IPO and are currently trading at 98.5 cents on the dollar.
Additional reporting by Miles Kruppa in San Francisco and Jamie Powell in London