12/01/21 07:05 AM EST

REITS DAILY BRIEF | 12.1.21 | (U.S. OFFICE UTILIZATION, WE)

Takeaway: U.S. office utilization fell in holiday-shortened week

Tickers: PGRE, SLG, VNO, BXP, KRC, DEI, ESRT, JBGS, BDN, CUZ, HIW, WE

Headline: Kastle Systems Back-to-Work Barometer

Office Utilization: Kastle Systems released its weekly office utilization tracker for the 7-day period ending 11/24, which showed a large -630bp sequential decline in the 10-city average utilization rate to 32.5%, which has been tracked since the pandemic began (Figure 1 below). As a reminder this tracks "bodies through turnstiles," and is different than "occupancy" which represents tenant leased/occupied space as a percentage of total square feet. An easy way to think about this metric is: "how many bodies are coming into the office versus the pre-pandemic norm." All 10 markets tracked fell in the Thanksgiving holiday-shortened week, which followed a similar pattern to the year-ago period so its probably impossible to draw any conclusions other than that the trend on office utilization continues to grind higher slowly. Texas decided it just wasn't worth coming into the office for ~3 days, with Houston (-9.9%), Austin (-9.6%) and Dallas (-7.5%) leading the declines but still maintaining the highest overall utilization in the country. This has been a recurring theme, but some areas of the U.S. have clearly moved on from the pandemic and are "returning to normal" faster than others. California remains well-below average with Los Angeles (31.7% utilization), San Jose (24.9%) and SF (21.8%) all significantly trailing the national average. In terms of office positioning, we have (1) tilted a bit towards NYC which has been recovering at a slightly faster rate and has further to climb (SLG and VNO), and (2) went Long WE given the unique need that it fills in office in the hear-and-now.

Figure 1: Kastle Back-to-Work Barometer for Week Ending 11/24

Source: Kastle Systems

Ticker: WE

Headline: Feedback post-black book

Speaking of Best Idea Long WeWork, as expected there has been a wide range of feedback on the controversial name, as well as wish-list of items from REIT-dedicated investors:

As we talked about in our presentation and deck, the risk but also asymmetric upside mandates a small position size. In general people agree that (1) the idea is interesting and (2) the company has materially evolved from its former self.
Without solving management and governance concerns vis-a-vis the founder, the company would be uninvestable. So the management and Board changes, but prhaps more importantly the voting structure was absolutely critical for WE to be on institutional radars.
Investors generally agree that WE fills a near-term need as office tries to figure itself out, but a TAIL duration view is almost impossible to handicap right now.
Given the nature of the model (more of a membership club versus traditional office company), it may make sense to think less about "SF leased in a market" and more along the lines of "what percentage of job growth/bodies does WE need to capture in each year market-by-market." I.e, if NYC produces "x" number of office-using jobs in a year, WE would need to capture "y" percentage of those jobs to move its utilization higher, given a lower average SF/employee for WE versus traditional office. The capture would need to be well-above average to move the needle.
Investors want to better understand the subscriber acquisition costs and related lifetime value of a customer - how much is being spent on search, discounts, incentives, etc.?
The model is clearly more capital-light than legacy WeWork, but what is the recurring or maintenance capex burden?
More data is needed and would be helpful, similar to a typical REIT supplemental - unit profitability, market-by-market stats and contribution, segmentation by membership offering and building vintage, the "development pipeline" etc. It is early innings and WE just de-SPAC'd, so we would expect/hope that this is forthcoming eventually.

Prior Notes:

11.30.21 - REITS DAILY BRIEF | 11.30.21 | (AMH)

11.28.21 - SUNDAY NIGHT REIT READ | 11.28.21 | (COLD)

11.23.21 - REITS DAILY BRIEF | 11.23.21 | (U.S. OFFICE UTILIZATION, WE)

11.21.21 - SUNDAY NIGHT REIT READ | 11.21.21 | (WE)

11.19.21 - REITS DAILY BRIEF | 11.19.21 | (CUBE)

11.17.21 - REITS DAILY BRIEF | 11.17.21 | (STYLE FACTOR WORK)

11.16.21 - REITS DAILY BRIEF | 11.16.21 | (U.S. OFFICE UTILIZATION)

11.15.21 - CUBE ANNOUNCES STABILIZED ACQUISITION | 11.15.21

11.15.21 - REITS DAILY BRIEF | 11.15.21 | (WE, ILPT)

11.14.21 - SUNDAY NIGHT REIT READ | 11.14.21 | (CUBE, EXR, LSI, NSA)

11.11.21 - REITS DAILY BRIEF | 11.11.21 | (LSI, NYC CBD OFFICE)