Real Estate Management & Development
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WE $1
01 Nov 2023 |
Once valued at $47 billion, WeWork prepares for bankruptcy
In August of 2019 we called WeWork (WE $1) “a ticking time bomb waiting to be offloaded to unsuspecting investors.” Over the course of the last four years, we have been proven right time after time. Once carrying an inflated valuation of $47 billion, the real estate services firm’s shares now sit slightly above $1, giving it a market cap of around $60 million. According to a report from The Wall Street Journal, the company will file for bankruptcy as soon as next week. We like the concept behind the firm: lease properties from landowners, transform the space to give it a community business feel, and sublease it to startups, freelancers, and corporations in need of office space. The business model may be sound, but the wheels begin to fall off the cart after that point. It all starts with WeWork’s wacky founder, Adam Neumann, who seemed to have an odd power to persuade certain ultra-wealthy individuals and financial institutions to give him money. SoftBank’s Masayoshi Son, for example, invested a whopping $17 billion of his Vision Fund into WeWork. Jamie Dimon’s JP Morgan (JPM $139) not only provided billions in loans to the firm, but had also extended Neumann a $100 million or so personal line of credit. But the founder’s biggest act was saved for the millions of investors who would plop down hard-earned money to buy into his house of cards. Never mind the fact that he rigged the share structure so that his super-voting-rights class would count as ten share votes apiece. The IPO fell apart in 2019 after concerns arose surrounding the founder’s questionable business dealings. As Neumann’s façade was finally uncovered, he was forced out of the company—getting a golden parachute worth north of $1 billion. The company did finally go public via a SPAC (another financial side show) a few years later, but it was a downward slide from there, leading to $95 million worth of missed interest payments in early October. WeWork still maintains around 800 locations spread across 39 countries (they don’t own any of the properties), with an estimated $10 billion in lease obligations due through the end of 2027. Last year the company had around $3 billion in sales and recorded a $2 billion loss. Considering the company owns no real estate, it is hard to imagine anyone wanting to pick WeWork up in bankruptcy to keep such a soiled name. Masa’s SoftBank still owns 68% of the firm, so they could try to strike a deal with the holders of roughly $1.2 billion worth of debt (including BlackRock), which may include swapping debt for equity in the reorganized corporation. There is another interesting scenario in which the landlords, who obviously don’t want to lose the leases, may take partial ownership in the new firm. Remember how property owners Simon Property Group (SPG $112) and Brookfield Asset Management (BAM $29) bought JC Penney out of bankruptcy? As for the tenants, or “members” as they are known by WeWork, the future is uncertain. In locations which have been somewhat profitable, they may be allowed to continue on as usual. In less profitable locations, the operation may be shut down with the tenants asked to leave, allowing the landlord to lease the space to new occupants. The winner in this drama may be competitor firms such as privately held Regus. |
Following a pandemic-driven office exodus, One World Trade Center is bucking the trend with its 95% occupancy rate
(30 Mar 2022) Despite what big-city politicians are telling us about the great worker return of 2022, the pandemic—and subsequent advances in telecom technology—helped generate a seismic shift in the corporate real estate environment. Companies which never gave a thought to allowing any of their employees to work remotely have suddenly embraced the hybrid, home/office work model. As financial managers gaze at their leases, which continue to become more costly thanks to inflation, they are even more inclined to change their ways. On top of this transformation, many big financial firms have been fleeing NYC for greener pastures in Florida, despite the fact that the self-proclaimed socialist mayor (DeBlasio) is finally gone. Even as COVID-19 cases continue to subside, the city is still facing 40-year high vacancy rates. Against that backdrop, we have One World Trade Center, the 104-story "tallest building in the Western Hemisphere." After an existing tenant, Germany's Celonis (data processing), expanded its footprint to the entire 70th floor of the building, the skyscraper is now at 95% occupancy. Considering its 3.1 million square feet of space garners some $75 to $85 per rentable square foot, that is impressive. Breaking that down, and assuming Celonis is paying $80 per square foot, that comes to $3.28 million per year for the 70th floor alone. With additional space hitting the market, and with financial firms still pulling out, we can expect a dichotomy to form between the high-tech, glass-imbued modern skyscrapers and the clusters of older, less energy efficient buildings in need of constant repair and renovation. The older buildings also lack many of the amenities and features workers are looking for today, including state-of-the-art gyms, plenty of large windows, higher ceiling heights, and outdoor spaces. In many cases, it is structurally impossible to transform a 1970s-era building into one which can compete with its newly-built counterparts. And that will continue to be a major source of consternation for landlords and office property REITs relying on contract renewals and a steady stream of new tenants. While many office property REITs will struggle with the new hybrid work model, investors should remember that this is an industry full of opportunities in areas outside of office and retail space. Digital Realty Trust (DLR $144), for example, owns and operates 300 data centers worldwide. American Tower Corp (AMT $250) is a specialty REIT which owns a quarter of a million cell towers around the world. Both of these companies are members of the Penn Global Leaders Club.
(30 Mar 2022) Despite what big-city politicians are telling us about the great worker return of 2022, the pandemic—and subsequent advances in telecom technology—helped generate a seismic shift in the corporate real estate environment. Companies which never gave a thought to allowing any of their employees to work remotely have suddenly embraced the hybrid, home/office work model. As financial managers gaze at their leases, which continue to become more costly thanks to inflation, they are even more inclined to change their ways. On top of this transformation, many big financial firms have been fleeing NYC for greener pastures in Florida, despite the fact that the self-proclaimed socialist mayor (DeBlasio) is finally gone. Even as COVID-19 cases continue to subside, the city is still facing 40-year high vacancy rates. Against that backdrop, we have One World Trade Center, the 104-story "tallest building in the Western Hemisphere." After an existing tenant, Germany's Celonis (data processing), expanded its footprint to the entire 70th floor of the building, the skyscraper is now at 95% occupancy. Considering its 3.1 million square feet of space garners some $75 to $85 per rentable square foot, that is impressive. Breaking that down, and assuming Celonis is paying $80 per square foot, that comes to $3.28 million per year for the 70th floor alone. With additional space hitting the market, and with financial firms still pulling out, we can expect a dichotomy to form between the high-tech, glass-imbued modern skyscrapers and the clusters of older, less energy efficient buildings in need of constant repair and renovation. The older buildings also lack many of the amenities and features workers are looking for today, including state-of-the-art gyms, plenty of large windows, higher ceiling heights, and outdoor spaces. In many cases, it is structurally impossible to transform a 1970s-era building into one which can compete with its newly-built counterparts. And that will continue to be a major source of consternation for landlords and office property REITs relying on contract renewals and a steady stream of new tenants. While many office property REITs will struggle with the new hybrid work model, investors should remember that this is an industry full of opportunities in areas outside of office and retail space. Digital Realty Trust (DLR $144), for example, owns and operates 300 data centers worldwide. American Tower Corp (AMT $250) is a specialty REIT which owns a quarter of a million cell towers around the world. Both of these companies are members of the Penn Global Leaders Club.
RDFN
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Redfin, a company you've probably never heard of, just beat expectations and spiked over 18%. (13 Feb 2020) Quick, answer this question: What does Redfin do? Sort of sounds like Red Hat, which IBM just bought, so your first guess might be, "technology of some type." Partially right. Redfin (RDFN $15-$30-$26) is a tech-based real estate brokerage company. It is—to real estate—what fintech is to the financial services industry. For around a 1% listing fee, the company will deploy a host of technology and social media solutions, combined with a Redfin agent on the ground, to sell your home—or find you one to buy—while saving you "thousands of dollars" (according to the company). Investors have been buying into the hype, with shares of the $2.8 billion Zillow (ZG) competitor jumping 18% after posting a smaller loss than expected. With this week's bump, shares of Redfin have now gained 65% over the past year. The company, which has yet to turn a profit, brought in $233 million in revenues in Q4, losing $0.08 per share in the process. The Street was expecting a per share loss of 12 cents. This is a highly competitive industry, and $10 billion Zillow has a lot more firepower to deploy. Furthermore, traditional real estate companies are getting more savvy at deploying technology, either organic or third-party. We would steer clear of this current small-cap darling.
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WeWork
SoftBank |
Is WeWork really going to hire a loudmouth nut-job to take over for a loudmouth nut-job? (12 Nov 2019) Just when you think things can't get any crazier for the dysfunctional entity known as WeWork, the board swoops in and surprises once again. Adam Neumann may have co-founded the company, but his oddball, mercurial behavior and greedy lifestyle doomed the company's IPO. In crazy-debt, the board was forced to take another bailout offer by made by Masayoshi Son's SoftBank, giving Son virtual control over the company. He moves in his buddy, Marcelo Claure, to lead the turnaround effort. Son had previously hired Claure to turnaround Sprint (the jury is still out on his success there, pending the T-Mobile merger). One or both of the men, Son and/or Claure, then decide it would be a good idea to hire the loudmouth, flamboyant CEO of T-Mobile, John Legere, whom they have been working with intimately on the Sprint/T-Mobile merger, to take over as CEO at WeWork. So, the biggest wildcard with respect to the telecom merger—Legere and his slick salesman personality—will probably now take over for Neumann at WeWork. Wow. Masayoshi Son is still living off his fame—and wealth—from being an early investor in Alibaba (BABA). But the incredibly arrogant Son, who has a 300 year business plan for SoftBank, has made some critically dumb mistakes over the past few years. This is yet another one. Imagine Son, Neumann, and Legere in a room at the same time, throw in some booze, and imagine the fanciful stories that would be told.
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WeWork
SoftBank |
In a truly disgusting business saga, the erratic founder who ran WeWork into the ground may get $1.7 billion to go away. (22 Oct 2019) If there is one positive aspect to the WeWork saga, it is the fact that millions of unsuspecting investors didn't lose their shirts by buying shares of the We Company IPO that went up in smoke. Which points to one of our main problems with technical analysis purists. Granted, there weren't any charts to look at yet, but only a thorough fundamental analysis of an entity would uncover the fatally-flawed humans running some of these companies. Which brings us to Adam Neumann. The guy who demanded super-voting-rights (each of his shares would be worth ten voting shares for us common rubes) on WeWork once it went public, the guy who demanded that his wife be given overarching control if anything happened to him, the guy who (ab)used a $500 million line of credit by buying mansions, is now set to walk away with up to $1.7 billion in severance. All of this as loyal WeWork employees are fired en masse. (Did we mention that the company couldn't afford the severance payments for the employees being firing?)
It appears that the WeWork board will take SoftBank's offer to take control of the company for another $5 billion or so (they are already on the hook for $11 billion, after all). As part of the agreement, SoftBank will pay around $970 million to buyout Neumann's shares, $185 million consulting fees to Neumann (WHAT?!), and they will pay off the $500 million line of credit he already spent! How does one respond to this? What do the fired workers think of this? This guy is the poster boy for arrogance and greed. The fact that SoftBank is stepping in to save their $11 billion investment makes us root against the firm all the more. Disgraceful. SoftBank will have the guy they sent to Kansas City to fix Sprint (S), Marcelo Claure, now fly to New York to run WeWork. First of all, if Sprint doesn't get its merger with T-Mobile (TMUS) approved, it "ain't" fixed. Second of all, good luck. Oh, and the company that is set to run out of money next month (at least until the new $5B comes in) is also on the hook for nearly $50 billion in lease payments over the coming years. Again, good luck. |
WeWork
SoftBank JPM |
Is SoftBank about to take control of WeWork after its nightmarish investment in the startup? (14 Oct 2019) It hasn't been a good year for SoftBank, Masayoshi Son's investment holding company. In fact, the recent quarter or two can be summed up in two words: Uber and WeWork. Thanks to major investments in those two once-golden startups, the company appears poised to potentially writedown as much as $5 billion. The WeWork investment is particularly painful, as SoftBank has already plowed $11 billion into the boondoggle, giving it one-third ownership of the office space leasing company. Now that We has pulled its IPO and relegated mercurial founder Adam Neumann to a support role (a far cry from the former dictate giving his wife near-absolute power if anything were to happen to him), it is in desperate need of cash to avoid insolvency. SoftBank may come to the rescue yet again, but this time the gift is a Gordian knot: Son's Vision Fund will offer a sorely-needed finance package in return for control of the firm.
But SoftBank is not the only one on the hook for its WeWork losses; Jamie Dimon's JP Morgan (JPM) has not only provided billions in loans to the firm, the bank's personal wealth management side had also extended around $100 million in personal loans to Neumann, which he tapped to buy mansions and other symbols of the exorbitantly wealthy. A consortium of banks, including JPM, provided the founder with upwards of a $500 million line of credit. We have always held Dimon in the highest regard, and this level of financial sophistry by the bank surprises us. To counter a potential SoftBank offer, JPM is reportedly trying to cobble together a multibillion-dollar rescue package designed to better protect its own investments in the firm. In the meantime, few landlords or real estate developers are interested in doing any further deals with WeWork, making a comeback all the more tenuous. There is a point at which an investment firm, be it a bank or a private equity fund, must bite the bullet and cut its losses. Perhaps if SoftBank took the entire operation over, it could turn the company around, but we wouldn't bet on it. |
Airbnb will probably go the direct listing route, and we think that makes great sense for the company. (02 Oct 2019) In the last Penn...After Hours report, we asked the question, "what percentage of IPOs going public in 2019 are profitable?" The answer was not pretty. It won't be going public this year, but we can sure point to a company coming to the market in 2020 that is quite profitable: Airbnb. The online property rental marketplace has truly infused life into a tired industry, and it has plenty of room to grow. More importantly, from an investment standpoint anyway, the company has been profitable since 2017. That fact certainly sets it apart from the WeWorks of the world. Now we hear that the company is leaning toward doing something WeWork would never be able to pull off—taking the direct listing route to the public markets over the traditional dog-and-pony IPO roadshow. We love that idea. When we defined the direct listing on our Financial Terms & Concepts page, we made this comment: "Our favorite aspect of a DPO (direct public offering) lies in the fact that a small, select group of 'elite' clients of the big brokerage houses can't get their hands on the shares before the rest of the investing public." For companies built on smoke and mirrors, the DPO equates to a cross being shown to Dracula. These companies need the roadshow so Goldman Sachs sales reps can create the illusion of a tasty yolk inside of that cracked egg. You know, like "WeWork is a technology company...which fosters human connection through collaboration and holistically supports members both personally and professionally." Gag. Just don't try to bring meat to the joint if you are an employee, that is verboten. But we digress. Certainly, there are still a lot of unknowns lurking in the books of a private company, but we don't expect any nasty surprises in the case of Airbnb. And the direct listing rumors make us even more comfortable with that view. Our one IPO to buy in 2019 has been Beyond Meat (BYND), which was certainly a winner. Palantir is the next one we expect to buy on day one. After that, Airbnb.
WeWork's largest private investor asks the company to shelve its IPO. (10 Sep 2019) When SoftBank, Masayoshi Son's Japanese holding company best known for its majority ownership of Sprint (S), invested $2 billion in WeWork this past January, the workspace company had a valuation of nearly $50 billion. Around that time we wrote of how insanely overvalued the company was, especially considering the startup's goofball founder, Adam Neumann. Since January, as more light has been shed on the convoluted inner workings of this operation, an increasing number of analysts have begun to question virtually every aspect of The We Co., as it is formally known. Now, the wheels appear to be coming off the cart, as SoftBank has urged the firm to shelve its IPO altogether. The more enlightened would-be investors became, the faster WeWork's valuation dropped. As SoftBank was making its request, M&A experts were valuing the company between $15 billion and $20 billion, and even that level was facing resistance. There is still a strong desire at WeWork to go public, which makes sense considering the firm needs an estimated $10 billion infusion of funding to become cash-flow positive. A part of us really wants to see this company go public soon, as it would be a textbook case in poor corporate governance. On the other hand, would-be investors may now get to keep their hard-earned money.
WeWork: a ticking time bomb waiting to be offloaded on unsuspecting investors. (20 Aug 2019) It didn't take long for us to begin questioning the business antics of WeWork, an office space leasing firm readying itself to go public. WeWork's parent entity, the We Company, filed its S-1—the requisite pre-IPO registration statement—with the SEC last week, and the report only exacerbated our concerns. The company's business model seems solid enough: in an era of new startups and a transitory, mobile workforce, offer shared workspaces at locations around the world for a reasonable monthly fee. The facade of that apparently-sound model begins to crack as soon as we meet the company's founder, Adam Neumann. Bizarre is the best word we can think of to describe this man. Carnival side show act might be the best term. Sticking to the S-1, however, the most glaring aspect is probably the company's reported $900 million in losses through the first six months of 2019, following $1.9 billion worth of losses in 2018. A senior equity analyst at MKM Partners estimates the firm will have about "six months in execution runway ahead before facing a cash crunch." While we see that expenses quadrupled between 2016 and 2018, the company provided no occupancy rate detail in the report. In the past we have railed against the dual-class share structure, a "gimmicky" system that keeps power in the hands of a few anointed individuals. WeWork won't have a dual-class share structure. It will, instead, have three classes of stock. This company comes to the market looking like the world's largest Rube Goldberg machine. Sadly, that fact won't stop millions of investors from getting suckered in by the headlines and investing their hard-earned money in the least-favorable class of shares. When this company begins trading, just stay away. After the shares' initial spike and eventual fall back to earth, just stay away.
Amherst looks to raise $1 billion for investment in single-family rental homes. (22 Aug 2018) Amherst Capital Management, a real estate LLC specializing in single-family equity, commercial real estate lending, and mortgaged-backed securities, looks to raise a whopping $1 billion from investors to buy single-family rental homes. The company already owns and manages 20,000 properties through its Main Street Renewal subsidiary. Private equity funds such as the Blackstone Group (BX, a Penn Strategic Income Portfolio holding), have been pouring money into the single-family rental (SFR) space since the housing crisis of 2008/2009. According to Amherst, the total institutional investment in SFR homes hit $33 billion at the end of 2016. The duration of an investment within the new Amherst fund will be at least ten years.
Zillow falls 14% after poor results, lower guidance. (08 Aug 2018) We have often railed against companies which issue dual class shares of their stock, labelling this as an act of financial engineering (as opposed to sound strategic planning) and a way for privileged shareholders to control voting rights. Real estate services firm Zillow (Z $38-$50-$66) is no exception. The "Z" symbol denotes the Class C non-voting shares, while the symbol "ZG" denotes the voting-class A shares. So, even before the company's latest earnings report, they were behind the eight ball in our minds. As for the Q2 earnings report on the company, which hasn't turned a profit since 2012, revenues came in below expectations and full-year guidance was lowered. Revenue was up 22% from the same quarter last year (to $325M), and Zillow's new house-flipping business is intriguing, but with a negative earnings-per-share and a dual class scheme, we would stay away. The stock fell about 14% after the quarterly results were released.
The Howard Hughes Corp unveils its new luxury living tower in Honolulu's urban core
(04 Jan 2018) Architectural Digest called the Howard Hughes Corp's (HHC $105-$127-$133) Ward Village in Honolulu the "best-planned community in the U.S." Now, the 60-acre luxury paradise is about to get a new addition: the 751 "home" 'A'ali'i luxury tower. The tower, touted as a "turnkey luxury living solution," will have resort-style amenities, top-line appliances, and a stunning ocean and mountain view. 'A'ali'i (the name of a native flower, by the way) will join four other Hughes-built towers, and is slated for completion around 2020. Ultimately, the Ward Village community will consist of over 4,500 residences and one million square feet of retail space—all within walking distance. Want to reserve your new digs? Visit the company here.
(04 Jan 2018) Architectural Digest called the Howard Hughes Corp's (HHC $105-$127-$133) Ward Village in Honolulu the "best-planned community in the U.S." Now, the 60-acre luxury paradise is about to get a new addition: the 751 "home" 'A'ali'i luxury tower. The tower, touted as a "turnkey luxury living solution," will have resort-style amenities, top-line appliances, and a stunning ocean and mountain view. 'A'ali'i (the name of a native flower, by the way) will join four other Hughes-built towers, and is slated for completion around 2020. Ultimately, the Ward Village community will consist of over 4,500 residences and one million square feet of retail space—all within walking distance. Want to reserve your new digs? Visit the company here.