The Call @ Hedgeye | August 10, 2022

Takeaway: Changes related to predecessor BOWX, pre-merger w/ WE

Below is an excerpt from a complimentary research note by our REITS analyst Rob Simone published on 12/1/21. We are pleased to announce our new REITs Pro Product as well. Click HERE to learn more.

Brace Yourself, But Ignore CNBC's WeWork Restatement - 12 2 2021 9 59 00 AM

To be clear re: Best REIT Idea Long WE...

  1. The timing isn't great given the recent de-SPAC and
  2. The stock will likely trade lower tomorrow on the news. It's annoying, so let's just get that out of the way. We said the trip higher would be a volatile one, while of course not anticipating this. 

With that said, we would seriously ignore (or use to your advantage) CNBC dropping a 10 second clip on material weakness in accounting and non-reliance for WeWork.

This evening WE filed an 8-K announcing non-reliance on balance sheets for periods up to and including the 9/30 quarter-end.First, it is important to consider that the BOWX merger with WeWork closed 10/19, so these filings are for WeWork's SPAC predecessor and not WE. 

Next, our understanding is that BOWX in its corporate charter had a provision requiring the classification of at least $5 million of equity as "permanent" versus "temporary" equity, on the basis that BOWX would not redeem its public shares in an amount that would cause is net tangible assets to be less than $5,000,001.

In response and proactively to comment letters issued by the SEC to DCGO which had a similar provision in its charter, WE's board and audit committee determined that ALL of the predecessor BOWX equity should be classified as "temporary." I.e., moving an accounting entry amount dollar-for-dollar from one equity line item to another, retroactively, and for the predecessor entity. 

The material weakness was identified for the predecessor entity, as WE has yet to file a 10-Q/K post-merger. SPGS also took the same action, so this is SPAC accounting driven and not idiosyncratic to WE. 

The headline looks bad at first glance, and CNBC of course didn't mention the above details. The stock will likely be down, but we view this as an economic non-event.

We are not sure if it is a buy-the-dip moment tomorrow, but any material weakness would be very interesting given the asymmetric upside in shares.