03/06/22 04:00 PM EST

SUNDAY NIGHT REIT READ | 3.6.22 | (WE)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: Hope everyone enjoyed the weekend!

Cartoon of the Weekend: Dovetail Out of There

Ticker: WE

Subsector: Office

Headline: Thoughts on WE after "pulling the plug"

On Friday afternoon about one hour before the close, news broke HERE out of nowhere that (at the time) Best Idea Long WeWork (WE) was exploring options for raising additional equity perhaps via a PIPE. This sent shares down ~20% almost immediately, as it represented a DRAMATIC change from both (1) WE's financial condition as presented by the company and (2) the facts as we analyzed/understood them. Just a few days earlier WE had released a presentation representing 4-wall break-even and improving Revenue/EBITDA RoC which had been our expectation since we launched in December 2020. At that time, our work showed just under ~2 years of cash burn before WE would need to tap equity/debt financing if at all, so a near-term equity raise post-SPAC would not be needed. Something here makes no sense, and Quad 4 is the absolute worst time for uncertainty.
After reading the story, which we viewed as highly credible given the source, we reached out but received no color until post-close and after a one-sentence press release. At around ~3:50pm ET we removed from the long side of our position monitor, as candidly in our view the management team had completely lost credibility (the market clearly agreed) and we could no longer recommend as a long. We would recommend longs use any post-announcement bounce on Monday to reduce or exit what was hopefully just a small position, and we are now thinking about WE more on the short side. In just 4 months time the company went from a place of seemingly improving stability (including improving operating metrics) to (1) beginning to acquire additional bolt-on acquisitions which we did not think was prudent, (2) suffering a public and ugly split with its Chairman (albeit Softbank induced), (3) seeing rumors of founder Adam Neumann returning to more active Board participation in some form, (4) candidly not appearing ready to report as a public company (such as mirroring the many REIT supplementals out there in an organized way), (5) not engaging nearly enough with both the sell-side (us) and buy-side, and then finally (6) leaving the Street utterly blind-sided with a potential equity raise reported by a third party. We cannot think of a reason why BB would want to nuke a quarter of WE's market cap randomly on non-credible information (given the legal risk), and would also point out that the author is highly credible at least historically.
Regarding the press release, which by the way was only one sentence, we are not buying (1) the argument that it took ~50 minutes to produce that one sentence and (2) we as the only sell-sider covering the stock could not receive a call simply affirming or refuting the report, or receiving a "hey, there is an announcement coming out shortly, hang in for more color. The story is inaccurate, etc." We felt left out to dry on this one and have lost confidence, both from an execution standpoint (i.e. even a thought of raising equity below $6/share), but also a messaging and engagement standpoint. If someone put out a fictitious story about our company sending shares down 20%+, we would be kicking down doors IMMEDIATELY to refute it as non-credible. We would also highlight that "no plans to issue equity at this time" is ambiguous and open-ended, and does not rule out the thrust of the article which was that meetings exploring the idea took place, or that plans could change and equity could be raised over the near-term. SPACs have a short credibility leash, especially in Quad 4, and to our minds WE has reached the end of it.
We saw WE as an interesting but risky way to play asymmetric upside in flexible office post-COVID via a small position. We got it wrong and cannot credibly sit here and recommend that anymore, rather think its time to look at WE on the short side on any relief rallies. It is unfortunate that it changed so quickly, but there are plenty of places to play on the long side in real estate and WE is not one of them. If the story is false and this leaked out it is BAD, if it is true that means the company is in far worse financial shape than it has represented and that is WORSE. Either way, it looks like a mess right now and we need to stay away from the long side before it heads lower.