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Transactions - JANUARY 9, 2019

SoftBank to invest $2b in WeWork, below initial plans

by Loretta Clodfelter

Japan-based SoftBank is planning to invest an additional $2 billion in WeWork Cos., according to the latest media reports, a considerably smaller amount than initially indicated. And that investment is going to come directly from the bank, not its $100 billion Saudi-backed Vision Fund. In total, SoftBank has invested $6 billion in the company.

The scaled-back investment in the shared office company is likely due to multiple factors.

The New York Times points to a reassessment by those in the technology industry of their willingness to accept investments from the government of Saudi Arabia, following the murder of journalist Jamal Khashoggi. The Wall Street Journal, however, suggests it was the sovereign wealth funds backing the SoftBank Vision Fund that have gotten cold feet about WeWork’s business model. And in an interview with FastCompany, WeWork founder Adam Neumann says December’s stock market turmoil had a negative impact on the deal.

“The reduced investment by SoftBank of course begs the question: Is it because they see cracks in WeWork’s business model? They have more information on the company than just about anybody and, without knowing for sure, it’s not an unreasonable conclusion for an outsider to jump to,” says Alexander Snyder, senior analyst at CenterSquare. “However, it’s not necessarily the case. Enough growth can justify just about any valuation. Maybe the decision was based on SoftBank’s changed view of the equity markets. … The reduced investment could be more about how much money they’re willing to put in now that they aren’t sure they can get it back soon; it could be more about liquidity than valuation.”

SoftBank is reportedly investing in the privately held company at a $47 billion valuation. Such a number reflects more than simply its real estate position, but also the company’s growth potential. (Boston Properties, the largest office REIT, with a portfolio of more than 48 million square feet, has an equity market capitalization of $20 billion.)

Many in the commercial real estate industry have looked askance at the company’s growth-driven valuation, given WeWork’s role as an intermediary in the office sector. The co-working concept has captured tenants’ hearts and minds, but a softening office leasing market could lure them elsewhere, leaving WeWork on the hook.

“As far as WeWork’s business model, I think co-working is absolutely here to stay,” says Snyder. “Office buildings grew up as a factory of the mind, making mental widgets, replicable and consistent. Today’s environment demands more flexibility, creativity of the mind, and the real estate employees are in has a direct impact on their ability to be productive in this way. WeWork has done a great job addressing that need and helped spearhead a movement that’s changing office from an often-stodgy gray explosion of carpet to a more hospitality-like setting with a true sense of place.”

But, Snyder says, “while the business model is great, and while I think co-working has a permanent place, it doesn’t make WeWork infallible. That being said, I don’t think they’re going anywhere because if they turned off the spigots, they’d be profitable today. If they stopped growing so fast, they could stand alone as is and not fall apart. They’ve already built a three-legged stool.”

One factor to note: a smaller stake from SoftBank means WeWork may be looking for other sources of investment dollars. That could push the company toward the public markets sooner rather than later.

Despite any concerns stemming from the scaled-back SoftBank investment, WeWork appears undeterred. The firm is rebranding as “The We Company,” with plans to expand beyond commercial real estate, with residential and education business lines, in addition to the WeWork office unit.

WeWork’s Neumann, according to Snyder, has “had a vision from day one to do more than just co-working, and he’s already dangled lines into residential and hotel concepts. … Their avenues for growth give them a lot of ways to survive if any one business line flounders.”

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