WeWork Inc (WE) 2021 Q3 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the WeWork Third Quarter 2021 Results Conference Call. (Operator Instructions) Thank you. Chandler Salisbury, VP of Investor Relations. You may begin your conference call.

Good morning, and welcome to our third quarter 2021 earnings call. I am Chandler Salisbury, VP of Investor Relations and Corporate Development. With me today is Sandeep Mathrani, our CEO; and Ben Dunham, our CFO.

During today's presentation, we will refer to our earnings release and supplemental presentation, which have been filed with the SEC and can be accessed at investor@wework.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. We'll also discuss certain non-GAAP financial measures which we believe are meaningful in evaluating the company's performance. Additional disclosures regarding these non-GAAP measures, including a GAAP to non-GAAP reconciliations, are included in our quarterly report and supplemental presentation.

With that, let me turn it over to Sandeep.

Thank you, Chandler, and thank you all for joining us today for our very first earnings call as a public company. As I look back on the journey to this point, I recognize that it would not have been possible without the support of our core contingents: our members, employees, shareholders, landlords and service providers.

As I've said before, but can't say enough, I'm a firm believer in the world of Peter Drucker that culture eats strategy for breakfast. We have spent the past few years focusing on our core values and incorporating them into our company's DNA. Our core values are: do the right thing; strive to be better together; be entrepreneurial; give gratitude; and be human, be kind. Today, as a public company, we believe we have a clear strategy for growth with a focus on executing across our product suite.

Now turning to the third quarter results. I'd like to break down the results into our 3 business strategies: Space-as-a-Service; WeWork Access; and WeWork Workplace Management, our workplace management solution. I like to call these 3 elements, the 3 legs of a stool. Each provides unique support to the WeWork organization as a whole by providing differentiated offering and revenue streams.

We'll start with our Space-as-a-Service service. As we previewed during our Investor Day last month, our third quarter sales and operating results were very strong. Consolidated net desk sales were 84,000 in the third quarter; gross desk sales, which include new desk sales as well as renewals were 155,000 in the third quarter, which equates to approximately 9.3 million square feet sold. Through this, we are starting to see a flex as a separate channel of distribution. Certain of the medium to large bid members and enterprise clients anticipate flex, growing to approximately 20% of their office network, and in that way, a separate channel of distribution, a case of e-commerce becoming a separate channel of distribution to be tapped.

As of the end of 2019, flex office were at 2% of commercial office and is anticipated to grow to 20% to 30% according to CBRE and JLL to meet the needs of potential TAM, the total addressable market, for our business is quite large.

For 2 quarters in a row, we have shown flex office has taken a growing share of demand. Our WeWork accounts were about 0.5% of the U.S. inventory. The company stored the equivalent of over 9% of U.S. office leasing activity in the third quarter, an 18x multiple. At the market level, WeWork's Q3 gross sales in Manhattan were equivalent to 20% of the traditional office market take-up, while WeWork's portfolio of 7 million square feet accounts for approximately 1% of the total office.

WeWork saw similar leasing activity in a number of its largest markets. WeWork's gross sales equated to 37% of London's traditional office take-up and 13% of Paris' take-up, while approximately paying 1% of the stock in both those markets, and 23% of office take-up in the third quarter, where WeWork represents approximately 2% of the office market.

As you look at some of the largest landlords in the U.S., Boston properties, which have a national footprint of over 52 million square feet and Alexandria, which has a footprint of approximately 32 million square feet, leased 1.4 million to 1.8 million square feet, respectively. By comparison, WeWork has a global footprint of 47 million square feet and entered into membership agreements of over 9 million square feet in the same period.

At the city level, if you look at some of the largest landlords in New York City, like Vornado and SL Green, they have 20 million square feet and 27 million square feet of office space in Manhattan, and they lease 757,000 and 450,000 square feet, respectively. WeWork has about 7 million square feet in New York City, an estimated membership agreement for approximately 1 million square feet, again, demonstrating the flex as a separate channel distribution.

Small and medium businesses comprise roughly 2/3 of our new desk sales in the third quarter. And these smaller scale businesses continue to see the impact of long-term remote work and look to flexible solutions for bringing people together. The average commitment term for SMB, small and medium businesses, was 14 months in the third quarter, and the average commitment term for the enterprise was 28 months. Overall, on average, commitment length remains steady at 21 months.

Mostly, we have also seen a marked improvement in churn and an average revenue per member. As of the third quarter, churn has decreased to approximately 3.5%, which is below pre-pandemic levels and some of the lowest levels in WeWork's history. For reference, in 2019, churn was about 4.5%. Average revenue per member, for new members signing with us, has also increased approximately 30% since year-end 2020 level.

Take New York and London, our 2 largest markets that were highly impacted by the pandemic. We have seen meaningful improvements in ARPM throughout 2021 in conjunction with membership growth and improving occupancy. In London, ARPM is 14% higher than pandemic lows and is actually 4% greater than the pre-pandemic Q4 2019 levels. Physical occupancy has increased 10 percentage points throughout the course of 2021 to 51% in September. It is important to note that we achieved these occupancy improvements despite opening approximately 10,000 net desks for approximately 70% of the portfolio between Q3 2019 and Q3 2021, related to locations that have been signed in the pre-pandemic era. Excluding the 10,000 desks, our occupancies would have been in the high 60s.

Similarly, in New York, ARPM is 11% higher than the pandemic lows and is within 10% of Q4 2019 pre-pandemic levels. Occupancy in New York has increased approximately 20 percentage points throughout 2021 to 62% in September. This trend is not isolated to these larger cities. We are experiencing positive ARPM and occupancy momentum across the portfolio and expect this trend to continue as more people return to the office and demand for flex workspace continues to rise.

Our strong second quarter desk sales translated into continued sequential occupancy increases in the third quarter as we saw fiscal memberships grow by 12% from June to September 2021. Our physical consolidated membership increased to 432,000 for a physical occupancy of 56% as of the end of Q3. If we include the incremental 30,000 net membership that WeWork already contracted to move in, our physical occupancy, including the signed but not occupied memberships, would increase to 60%. In October, preliminary physical membership occupancy rose another 3 points to 59%. Including signs with our occupied membership, physical occupancy was up to 61%.

If you look just at membership, we have only 29,000 physical memberships or 6% lower than pre-pandemic levels in Q3 2019. We've almost recovered to pre-pandemic levels from a membership perspective. It is important to note that this is -- it is important to note the footprint expansion is a 31% growth in desk over the same period. So from Q3 2019 to Q3 2021, we grew our footprint in the pandemic by 31%, which is the primary driver of the lower occupancy figures. Without this increase of 31%, occupancy would have been in the 80s.

In October, we also announced the closing of our Latin American joint venture with SoftBank, which we will continue to consolidate. To date, we have franchised or established a joint venture agreement with Japan, Israel, China, India and LatAm.

Now let me turn to the second leg of the stool, WeWork Access. Our WeWork Access offerings, which includes both our on-demand and monthly subscription products across hundreds of enabled locations around the world continue to see demand as a full spectrum of flexibility. All Access represented 32,000 membership as of September 2021, an increase of 60% quarter-over-quarter and equivalent declining roughly 1,000 memberships each week. In October, the total number of All Access membership was 38,000, almost 1,500 members per week, showing further acceleration of our sales activity. We believe the All Access product also increases the stickiness of our customer base as companies often bundle access passes with their flex agreement, opening the doors to our global network of All Access locations to their employees.

And now on to the third leg of the stool: Workplace Management. As companies increasingly embrace more flexible and hybrid work strategies, many are looking for tools to optimize their real estate portfolio while managing how and where employees work across assets and markets. Leveraging the software that we have built to manage and analyze our own spaces, our workplace experience management software provides a turnkey solution that enables companies and employees to seamlessly implement the right hybrid model for their needs while maximizing on their existing portfolio. We're in the early days, of course, but we anticipate selling our workplace management product commercially beginning in 2022.

We've begun to see initial successes in our software product through several key strategic initiatives. The first, Hudson’s Bay Company currently utilizes WeWork's hospitality and workplace management software to power its new co-working business, SaksWorks, at 5 initial locations in Manhasset, Greenwich, Eastchester and Brookfield Place and the Saks Fifth Avenue New York flagship in Manhattan. Building on this, we most recently announced an agreement with Ivanhoé Cambridge where WeWork will power Ivanhoe's first flexible work with amenity offering at the iconic Place Ville Marie building in Montreal. Anticipated to open in early 2022, the 11,000-square foot amenity space will be managed by WeWork and offered exclusively to PVM tenants. This further demonstrates the value of WeWork's hospitality and management expertise as certain landlords look for opportunities to enrich their offerings with tenants with flexibility and community.

As initially announced in August of 2021, Cushman & Wakefield completed $150 million investment at a close of our (inaudible) transaction in October as part of our strategic business agreement. We continue to work with Cushman to further develop new offerings for owners and occupiers through 2 main initiatives. The first initiative is designed to help building owners and corporate occupiers improve the daily user experience to use the WeWork's proprietary software that will integrate traditional building features like active control and resonation systems with on-site hospitality and management programs. The second initiative will allow owners to create new revenue streams by operating flexible workspace centers within their portfolio. As enterprises look to seamlessly adopt new flexible hybrid work model and prioritize employee experience, we have begun early discussions with corporate occupiers for pilot program opportunities to leverage these offerings.

Hudson’s Bay Company, Ivanhoé Cambridge and Cushman & Wakefield as well as the several other enterprise companies we're currently working with, we've tailored solution to help create the specific needs of the organization, an example of how not only are our membership is still flexible but our product suite is too. We're able to offer custom combinations of our workplace management software and our hospitality space expertise to create an offering that serves business at different stages in their life cycle and with different hybrid models.

And with that, I'd like to turn it over to Ben to walk you through our third quarter financial results.

Thanks, Sandeep. Today, I'll discuss our third quarter results and provide an update of our liquidity position following the closing of the business combination with BowX. On a global basis, we ended the third quarter with 932,000 workstations across 764 locations and 546,000 physical memberships. Our consolidated operations accounted for 766,000 workstations across 631 locations and 432,000 physical memberships. Our consolidated physical occupancy rate was 56%, up from 50% in the second quarter. As a reminder, our consolidated operations include all locations except for those in China, India and Israel. All Access membership accounted for an additional 32,000 memberships as of the end of the third quarter.

Third quarter revenue of $661 million increased $68 million or 11% quarter-over-quarter. Since the profit of April 2021, revenue increased sequentially throughout the second and third quarter, reaching a high point for the year in September and our fifth straight month of revenue increases. The strengthening desk sales trend that began in the back half of the first quarter have continued through the second and third quarter. As members move in, we have seen an increase in membership and service revenue, a trend that we expect to see continued throughout the remainder of the year. As Sandeep mentioned, new sales pricing has improved throughout the year, and we are starting to see those trend reflected in the income statement as average monthly revenue per physical membership increased quarter-over-quarter.

Location operating expenses of $752 million decreased $28 million or 4% sequentially and $84 million or 10% from the prior year's quarter, predominantly reflecting the ongoing impact of our portfolio optimization efforts. Excluding stock-based compensation and certain nonrecurring expenses, SG&A was $225 million in the third quarter, roughly flat to the second quarter. Aligned with memberships reflecting in the first quarter, followed by revenue in the second quarter, adjusted EBITDA showed meaningful improvement in the third quarter. The sequential increase in revenue flowed through to the bottom line, and we also benefited from the continued focus on managing costs.

Adjusted EBITDA loss was $356 million with a $93 million improvement relative to the prior quarter and $136 million improvement relative to the prior year. Our net loss was $844 million in the quarter, an improvement of $79 million sequentially and $155 million relative to the prior quarter. Net loss included $262 million of noncash or nonrecurring expenses, which are primarily depreciation, amortization and impairment. We reported free cash flow of negative $430 million, which represents an improvement of $219 million sequentially. Operating cash flow was negative $380 million.

As all of you know, we recently completed our merger with BowX and the related PIPE and equity investments -- I'm sorry, equity investment in Cushman & Wakefield and are now a publicly traded company. The transaction provided the company with $1.2 billion of proceeds, net of transaction costs. Upon completion of the merger, we modified our existing $1.1 billion senior secured note facility to a $550 million facility and repaid $350 million of our secured commercial paper facility.

Pro forma for those transactions, we ended the third quarter with $2.3 billion in cash and unfunded cash commitments. This includes approximately $477 million of available cash on hand, $1.2 billion in net proceeds from the completed business combination, $550 million available in our modified senior secured note facility, the repayment of our $350 million secured commercial paper facility and an additional $450 million of letter of credit facility capacity.

In terms of capital structure, moving forward, like any public company, we are constantly evaluating market conditions, our liquidity profile and financing alternatives for opportunities to enhance our capital structure and diversify our investor base. From time to time, we may modify our existing debt or seek additional debt or equity financing.

I'll now turn it back over to Sandeep for some comments before we open up the line for Q&A.

Thanks, Ben. Needless to say, we are very pleased with all that we've accomplished in the third quarter and especially proud and executed on our plan. We continue to make progress towards our goal to be profitable in 2022. Adjusted EBITDA has improved substantially $93 million in the third quarter. We've also delivered meaningful improvements in operating cash flow.

Finally, we have always said that this recovery will be a matter of if, not a when. We continue to see month-over-month increases in our membership base and occupancy levels. Preliminary occupancy in October was 59%, up from 56% at the end of September. If you add the signed but not occupied members, you get to 61% occupancy. The number of markets with greater than 70% occupancy is also very encouraging and is an indicator of the broad-based momentum we are experiencing globally. 22% of the 21 of our markets had occupancy of more than 70% at the end of the third quarter, with the increase of 30% or 28 market in October.

In sum, sales and pricing momentum is strong, our occupancy continues to increase, and we remain disciplined with respect to our cost structure. All these factors give us confidence that we will become adjusted EBITDA profitable in the first half of 2022.

With that, operator, please open up the line to questions.

(Operator Instructions) And your first question comes from the line of Karru Martinson from Jefferies.

As folks return to work here in September, it was a big month, and then obviously, the pushbacks with Delta variant to October and beyond. What are you hearing from your corporate clients in terms of the pace of sign-ups and actually utilization of that office space?

So again, in our business, in Europe, footfall is back to 40% to 50%, again. And in pre-pandemic levels, they were at 60%. So it's a decline by 10%. In New York, it's about 30% to 40%. Like I said, pre-pandemic, it was about 60%. So I would say, we're about 2/3 of the way there from a footfall perspective in our assets. And as you know, I mean there's been a delay of the start. Again, everyone has sort of looked at it January from the large enterprise basis. However, the SMB client base is essentially back to pre-pandemic levels.

Okay. And then in terms of the guidance, EBITDA breakeven or positive in the first half of '22, kind of felt that the earlier guidance has been that we have that breakeven kind of around the end of the first quarter. Is this a change or an extension of that time horizon?

Actually, what we sort of maintained is, we have profitability in 2022. We feel right now that we will get to the occupancy levels and drive profitability by Q1 of 2021, and there's usually a 90-day lag or so between occupancy levels and revenue recognition. So it should be some time in the first half of the year.

Okay. And just lastly, in terms of the commentary that -- when you're looking at marketing conditions as a public company, I mean, what is the ideal structure that you guys would like to put in here from a longer-term perspective?

Could you explain your question a little bit further?

So when you stated that you're regularly evaluating market conditions to enhance the capital structure, diversify the investor base. So when you're looking at the structure that you have today, what would you like to change about it that could -- would put it into a better structure for a public company and help with -- of the market cap that you have and the time horizon that you're looking at?

So predominantly, the way we look at it is, effectively, we've got about $2.9 billion of debt coming due in 2025, $2.2 billion is the SoftBank and about $700 million in public funds. And so when we look at what we would like is, we would like to see that debt number go down over a period of time that we have 3 years and the debt number could go down. And we would like to see whether there is a way to change the holders of our debt. And so predominantly to be pay down some of the SoftBank debt earlier rather than later. So -- but we again feel having $2.9 billion of debt, which is obviously less than onetime revenue within the particular position.

And your next question comes from the line of Rajeev (inaudible) from Credit Suisse.

It's actually Sam McGovern from Credit Suisse. Just following up on Karru's questions. With regard to liquidity and the capital...

(technical difficulty)

You went out. Maybe we could move to the next question.

I apologize. It looks like his line did disconnect. And we do not have any further questions at this time. So I'm going to have to turn the call back over to Mr. Sandeep for any closing remarks.

In closing, I want to express how pleased I am with our performance and all we have accomplished in 2022. This would not have been possible without the tremendous work of our employees and the support of our global community. I would like to point out that we've been thinking a lot about what inflation means to WeWork. Since inflation is generally good for real estate, rates generally go up, and therefore, our current rental rates that we have with our landlord seems to be at or below market. We provided turnkey solution, and therefore, there is no cost included to put a fight in there. So the supply chain issues, increased construction costs should, in the short term or the next 12 to 18 months, be highly advantageous to WeWork as people come back to work.

Thank you, everyone, for joining the call today. We appreciate your ongoing support. And if you have any follow-up, please do not hesitate to reach out to Chandler Salisbury. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.