By CCN Markets: There's a song that says, "one is the loneliest number." In fact, zero is the loneliest number, especially when it is preceded by a dollar sign. And $0 is where WeWork stock is going to go after the next recession hits, but don’t…
By CCN Markets: There’s a song that says, “one is the loneliest number.” In fact, zero is the loneliest number, especially when it is preceded by a dollar sign. And $0 is where WeWork stock is going to go after the next recession hits, but don’t count on anyone else to tell you that.
So avoid the WeWork IPO.
WeWork, or The We Company as it is officially known, will die because its business model only works in good economic times.
WeWork leases out a certain number of floors in a building. It then sets them up to be nice and pretty with lots of high-end amenities and then rents out shared workspaces or individual offices for a premium rate.
It’s like a micro–timeshare business. Yet by aiming at the luxury market, targeting roughly one-third of tenants being businesses and the rest being consumers, the question is what happens to rental rates in a recession?
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management, answers that question for CCN:
“Demand will fall, pushing rents lower. WeWork will still have to make good on its own leases, which it took out loans to pay for, and bankruptcy could become a real risk.”
This cascading effect has been seen before. A perfect analogy is in the form of the hotel industry during the last recession.
Hotels operate almost exactly the same way as WeWork, but instead of leasing the hotel rooms, hotels take out mortgages on the property. They pay the mortgages with cash flow from guests renting rooms.
When the recession hit, travel slowed. Occupancy fell. Room rates declined. A number of hotel companies defaulted on their mortgages.
The same thing will happen to WeWork.
But wait, it gets even worse.
Although the company’s revenue has been accelerating sharply, so have its expenses. Operational losses alone were $1.7 billion last year. That’s before debt service of $237 million on all those loans it has.
As a result, WeWork is doing an IPO with a net loss last year of $1.93 billion.
What idiot wants to buy stock in a company that is already sitting on massive losses that exceed even Uber’s and burned $177 million of cash last year?
The only person that will make money is WeWork’s landlord.
As Butowsky says, “A possible recession may be around the corner. You have to be very careful with companies that carry this kind of risk.”
Last modified: January 11, 2020 1:00 AM UTC