11/21/21 04:00 PM EST

SUNDAY NIGHT REIT READ | 11.21.21 | (WE)

Takeaway: Initial thoughts on WeWork pre-Black Book

Ticker: WE

Headline: Have to Re-Orient Thinking on Best Idea Long WE

The NY Football Giants don't play TB until tomorrow evening, so we are guaranteed a loss-free Sunday! Back to the grind...

Our thinking has evolved rapidly as we have stepped out of the "REIT box" in analyzing highly-controversial WeWork, Inc (WE). The reality is that the fundamental backdrop for office as an asset class has changed meaningfully post-COVID and WeWork's operating model is fundamentally different in many ways, so therefore the approach must evolve as well. The math tells us that WE hits EBITDA break-even in 2H22 and EBITDAR could 2x next year and potentially 3x by 2023, which given the degree of financial leverage in the model could likely lead to a more than 2x in the stock price by 12/31/22 from $8.70/share currently. These numbers, by the way, represent a meaningful haircut to WE's plans including moving to EBITDA positive in 2H22, so we are being rationally skeptical of a "show me" story. We also don't catch a lot of potential doubles in the REIT space, so this is an exciting one to follow. We will review our approach and math in-depth on Tuesday, but we are going to focus on the known-knowns with a few nuggets to consider as we work to finish the deck:

Our understanding is that the participating Old Wall banks will not be launching official coverage on WE for another ~2 months or so, due to self-imposed embargo periods on covering SPAC deals. This creates a huge informational void for people who actually do the work.
There was a time when WeWork was on the business-end of jokes in real estate circles, and rightfully so as the "Old" WeWork earned it through irresponsible growth efforts and gross mismanagement. We were there at PGRE and did plenty of laughing ourselves, and everyone knew (or thought that they knew) that the WE model would eventually blow up. To be candid, there is still the occasional chuckle at the very mention of WE being a long candidate. But (1) many of the what we would call "distractions" are in the rearview mirror now from an economic and governance perspective, (2) there is seasoned and credible institutional real estate leadership and support in the name today, (3) WE's global workforce has been reduced by ~70% which is incredible, (4) the company closed over ~100 locations and amended an additional ~350 leases, and (5) the post-COVID operational environment highly favors WE's flexible model and memberships are growing rapidly.
Each incremental membership has a very high flow-through rate to EBITDA and EBITDAR on a lean and at this point essentially fixed cost structure.
Occupancy (really utilization rate on desks) is depressed from locations opened during the pandemic and working to reach membership stabilization. There is a scenario where WeWork eventually carries more revenue-generating memberships than desk locations given the growth of the All Access program + flexible working arrangements where time is split between home and the office going forward.
"External" location and desk growth is set to turn positive again, with the restructuring efforts likely substantially complete by the end of 2021 and ~60 locations in the pre-opening pipeline
More to come on Tuesday...