The Single Most Important Disclosure in WeWork’s S1 Filing — “ARK”
Neumann’s IPO investors get two unicorns for the price of one!
Last year I wrote a piece here in Medium calling out WeWork for their failure to invest in real estate titled, “We Work owes $18 Billion in Leases?” I argued that WeWork’s achilles heel was the fact they they were renters and not owners.
In reality WeWork was simply improving the value of property owned by others (i.e. their landlords) at the expense of their investors. I concluded that this should be a huge red flag and recommended a massive pivot for the company. WeWork’s IPO filing reveals that the company’s founder, Adam Neumann, had the same idea.
Just last month we learned that Neumann was borrowing heavily against his stock to purchase buildings where WeWork is a major tenant. In a piece titled, “Why is WeWork Founder, Adam Neumann Cashing Out Early” I suggested that such a scheme was a massive conflict of interest. The Wall Street Journal reported at the time that as part of the IPO WeWork was planning on buying the properties from Neumann to eliminate the conflict.
WeWork’s S1 reveals a larger plan — the creation of an investment vehicle called “ARK” to purchase stakes in buildings where WeWork rents space. There is no word as to whether or not the company will be purchasing Neumann’s buildings, but the IPO filing indicates that ARK will manage ten commercial properties he owns (including the four where WeWork is a tenant). If investors can get past the messy (and unnecessary) conflict of interest they should be pleased by this disclosure — owning real estate is the only way forward for WeWork’s business.
The reality is that we’ve known about ARK since May when WeWork announced Ivanhoé Cambridge’s $1B investment in the investment vehicle to create a $2.9 billion dollar fund to begin taking ownership stakes in the buildings WeWork occupies. WeWork realized that their presence in a building increased the building’s value as well as the values of nearby buildings. For example, WeWork’s San Francisco location on Taylor doubled in value shortly after the company began occupying the building. The same is true in Miami where WeWork’s location was bought for $25M in 2015 and sold for more than $65M this year.
WeWork’s S1 reveals that the company is growing like crazy but has razor thin margins — owning their own real estate will not only improve their margins, but give them a portfolio of assets that they make more valuable by simply existing. Combine WeWork’s rocketship like growth (the company doubled their $1.7B in rent revenue from 2017 and is on pace to increase by the same amount this year) with ARK and you’ve got two unicorns for the price of one! Kudos to WeWork’s management and good luck on your IPO!
About The Author
Alexander Muse is a serial entrepreneur, author of the StartupMuse, contributor to Forbes and managing partner of Sumo. Check out his podcast on iTunes. You can connect with him on Twitter, Facebook, LinkedIn and Instagram.