July 31, 2019 / 2:50 PM / 4 months ago

WeWork hosts analysts before IPO; debt, lease obligations in focus

NEW YORK, July 31 (Reuters) - Wall Street banks are set to grill WeWork on its finances on Wednesday as it prepares to publicly sell stock for the first time, possibly in September, a sale that will create a benchmark for the rapidly expanding flexible office industry.

WeWork declined to comment on the analyst day, which people familiar with the matter told Reuters about last week. The event will educate analysts about the company's business in preparation for its IPO.

WeWork, a unit of The We Company, has been bankrolled by more than $10 billion in venture capital, which raises questions of whether the money-losing workspace provider can stand on its own or if it still needs large cash infusions.

Details of the IPO are not known. A formal filing with the Securities and Exchange Commission is still forthcoming.

WeWork also is seeking to raise up to $6 billion in debt before its initial public offering, a source told Reuters. The debt would help cushion the company against potential future cash needs like the dilutive secondary stock sale that Beyond Meat announced Monday just months after its IPO.

Analysts will want to know if WeWork has stabilized its operations, whether it is making money, its costs and growth potential, said Alex Snyder, a senior analyst at CenterSquare Investment Management in Philadelphia.

"When will you be self-sustaining? When will you be profitable without continually having to ask for more and more money from debt holders and equity investors?" Snyder said.

Investor tolerance is limited for a company that needs to keep raising capital without returning anything, he said. WeWork lost $264 million in the first quarter but revenues continued to double annually.

Investors will also have questions about WeWork's $34 billion in lease obligations, far more than the largest U.S. corporations, after a new accounting standard by the Financial Accounting Standards Board (FASB) took effect this year.

The rules will force investors to take notice whereas before the issue may have been swept under the rug, Snyder said.

In less than a decade WeWork has created a brand with global recognition that investors valued at $47 billion in its latest fundraising. That valuation is 10 times the market cap of its larger rival, Zug, Switzerland-based IWG Plc.

"There's a lot of desire to handle this IPO in an intelligent way and present a viable business model to the Street and to the analysts because nobody wants WeWork to fail," said Michael Cohen, president of greater New York City at brokerage Colliers International Group Inc.

Property owners have embraced flexible workspaces that allow a variety of tenants to house temporary operations at the same site without signing long-term leases. But short-term contracts pose an investment risk if tenants vacate and revenue dries up during a downturn.

It is unclear how creditors will use the new FASB standard, which may have a disproportionate impact on WeWork because of its far greater percentage of leased than owned properties, said Mark Berry, a managing director at Kroll Bond Rating Agency. If treated as debt, it could factor into leverage ratios lenders use to determine a borrower's ability to meet obligations.

Ane Ohm, co-founder and chief executive of LeaseCrunch, a provider of lease accounting software in Milwaukee, said commercial loans often are written so a lease liability would be considered debt.

WeWork's leading rivals have adopted revenue-sharing agreements with landlords to lighten their liability burden. For instance, almost one-quarter of the new locations at IWG were franchise or management agreements last year, the company said.

Workplace operator Industrious moved to management contracts and stopped leasing more than a year ago, primarily to be better aligned with landlords but also to mitigate risk, said Jamie Hodari, co-founder and CEO.

Serendipity Labs has negligible lease liability to disclose because of joint ventures and franchising, or licensing structures, that the firm uses, said John Arenas, chief executive of the flex space provider who was U.S. president of Regus when it filed for bankruptcy in 2003.

"That's intentional and that's what we've been doing since the beginning," Arenas said. (Reporting by Herbert Lash; Editing by David Gregorio)

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