Howard Marks says that the only way to generate market-beating returns is to have a view that is different than market consensus, and then be right. One contrarian view that I’ve held for a while now is that WeWork, the co-working company that recently raised money from Softbank’s Vision Fund at a $20 billion valuation, is a house of cards. I first encountered WeWork during my time in private equity — they were a godsend for value-add office deals because they would take huge swaths of office space and make an entire building seem cooler, and subsequently more valuable. I’ve toured some of their space in New York and was impressed by the quality of the build out and the energy of the tenants. For the short-term holds we were underwriting WeWork was great, but the more I thought about their business model, I became more gloomy about their prospects as a standalone business

I’m sure that everyone reading this is familiar with WeWork’s business model, but for those who are not WeWork takes long-term leases on raw office space, builds out the space into cool, flexible spaces and subleases them to smaller tenants. Essentially their business is borrowing long to lend short with limited liquidity. Other firms that have engaged in similar business models include Long Term Capital Management, AIG, Bear Stearns, and Lehman Brothers. Things didn’t turn out great for them.

Despite my skepticism WeWork does have a couple things going for it, first and foremost that Adam Neumann is an incredibly charismatic salesman. Most everyone can agree that a company that makes $1 billion in annual revenue (and is unprofitable) is not worth $20 billion, but Neumann has created the narrative that the data the company collects about their tenants work habits and space usages is the real driver of value. The second, and only slightly less important thing, is that WeWork was founded at an incredibly fortuitous time. Back in 2010 commercial landlords were scarred from the Great Recession and were more than willing to lease out huge amounts of space at affordable rates to WeWork simply because there were not a ton of other bids which allowed the company to grow incredibly fast.

However, 8 years later as the economy has recovered, commercial rents are significantly higher, which means that WeWork faces more competition for space and has to pay higher long-term rates to grow. The downside of WeWork’s timing is that the business model has not been tested during a down market. I know that people will say “Adam and Miguel founded a co-working company prior to WeWork that did very well during the Great Recession!” Sure, that’s true but the company had one building under management, they now have 170 locations. They have high, long-term fixed costs at those 170 locations that they are going to have to keep filled when the economy eventually experiences a downturn. I have little confidence that they’ll be able to do that. Mr. Neumann seems to agree with me, seeing as how he’s cashed in more than $100 million of WeWork stock.

When the real estate market turns, as it invariably does, WeWork’s revenue is going to dry up faster than you think. As Barry Sternlicht has said, “When these things go down they do not go from $16 to $14, they go to from $16 to $2. There is no elevator down, you hit the floor.” Value investors try to value companies by looking at liquidation value, or in real estate replacement cost. They try to find the floor at which the company can be valued based on what it owns. The problem WeWork faces is that it doesn’t own anything. When things go south, they do not have assets to sell to raise cash. While Mr. Neumann is an undeniably excellent salesman, even he can’t sell charisma to meet margin requirements.

Zed’s dead baby, Zed’s dead

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