WeWork Works Bond Market Despite Unusual Accounting Practices

Despite having cash to burn, WeWork turns to the bond markets to raise capital.

WeWork CEO Adam Neumann

The buyers of a debut bond offering by unicorn WeWork Companies (WeWork) have to be feeling some remorse.

The commercial office space renter raised $702 million of seven-year bonds yielding 7.875% on April 25. The price of the bonds—rated speculative grade by all three credit rating agencies—then fell by 8% in the first two weeks of trading, wiping out the entire first-year yield on a total return basis. The bond price has since recovered to 95 on May 21, now giving a yield of 8.3% for new buyers.

WeWork aims to disrupt the market for commercial workspace by entering into long-term leases on commercial properties, fixing them up and renting them out on a short-term basis to individuals and companies. It targets freelancers, independent contractors and small businesses looking for flexible operating spaces as opposed to longer-term leases or their own brick-and-mortar facilities.

The company’s financials would make a turn-of-the-millennium dotcom proud. Its revenues more than doubled last year to $886 million, continuing its rapid growth globally. WeWork now has more than 225 locations in over 20 countries and reportedly $18 billion in lease commitments through 2023. Expenses last year also more than doubled to $1.818 billion, resulting in a net loss of $933 million.

Like the dotcoms of the tech bubble, WeWork has a penchant for creative financial metrics. Using the conventional EBITDA (earnings before interest, taxes, depreciation and amortization) calculation, WeWork had negative earnings of $769 million last year. However, in its disclosures to bond investors, the company added back items like stock-based compensation, sales and marketing expenses, even general and administrative expenses to arrive at what it called a “community-adjusted EBITDA” of positive $233 million.

“Conceptually, I understand they’re trying to shoehorn a unicorn equity story into a bond-raise and typical metrics don’t apply,” said CreditSights analyst Jesse Rosenthal, whose report on the offering was titled WePass. “But they took liberties way beyond what you normally see.”

WeWork’s business model matching long-term lease liabilities with short-term rental income has yet to face a tougher economic environment or declining real estate values. “The model is a classic asset/liability mismatch and it hasn’t been tested yet,” said Rosenthal. WeWork was launched in 2010. “They’ve never been in a down market and that’s the clearest risk.”

WeWork does have plenty of cash to burn. At the end of last year, it had over $2 billion on its balance sheet—much of it from the $4.4 billion investment by giant Japanese tech investor Softbank Group. That sizable equity cushion could provide some comfort to bond investors.

“Softbank is the wildcard,” said Rosenthal. “I don’t think anyone has a good sense of what [Softbank CEO] Masayoshi Son is going to do. I’m negative on the bonds but with the caveat that Softbank could keep throwing cash at the company and push problems down the road.”

It appears that was enough for bond investors, at least initially. WeWork increased its debut debt offering from $500 million to $702 million because of strong market demand—and because the company reportedly thinks 702 is a lucky number.

Just not for investors.