New funding from SoftBank comes as shared-office company continues rapid growth

By Yoree Koh 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 10, 2018).

WeWork Cos. on Thursday disclosed it raised another $1 billion in funding from SoftBank Group Corp., as the shared-office company continues its rapid growth by doubling revenue but piling up losses, according to newly released financial information on Thursday.

The New York-based company said its loss in the first half of the year more than tripled to $723 million from the year-ago period as it accelerates opening new spaces and spends more to market them. Revenue for the first half of this year more than doubled to $763.8 million.

As a private company, WeWork isn't required to publicly disclose its financial numbers, but it released the figures to the media in tandem with a periodic update to bond investors.

WeWork, one of the world's most valuable startups with a valuation of about $20 billion, said the new funding from its investor SoftBank came in the form of a subordinated convertible note that is structured to give the Japanese company an edge in the next fundraising round. SoftBank already invested $4.4 billion in equity funding in WeWork last August.

If SoftBank leads an equity round of at least $1 billion, the notes will convert into preferred shares at whatever valuation the investor sets. If another investor leads a funding round of $1 billion or more, SoftBank will automatically get shares that value the company at $42 billion -- twice the previous valuation -- or more if the shares are priced higher.

The note, which accrues interest of 2.8% a year starting next September, gives WeWork more financial power to lease and acquire new buildings while modernizing the offices with glass walls and upscale furnishings. The eight-year-old company typically has raised money through direct investments, collecting more than $6 billion, but earlier this year it raised $702 million in its first bond sale.

"There is no investor closer to us than SoftBank and it was an opportunistic financing that we were able to do," WeWork Financial Chief Artie Minson said in an interview.

Bond investors appeared to react favorably to Thursday's financial update. After the numbers came out, WeWork's 7.785% bonds due 2025 traded up to 100.75 cents on the dollar from 99 cents on Wednesday, according to MarketAxess.

WeWork's equity investors have been enamored with the company's growth. It has roughly doubled its revenue each year, and it did so again in the second quarter to $421.6 million. WeWork draws most of its revenue from monthly rental payments it calls memberships, though a growing share comes from services such as offering technology expertise and software, as well as from businesses like coding boot camps.

But the costs are piling up fast. WeWork logged a net loss of $933 million last year, and it is on pace to easily surpass that figure this year. Mr. Minson said that is because the company is adding more desks and buildings at a faster pace than it has in the past.

"There's a mismatch between when we're spending the money and when we'll begin to generate revenue from those buildings," said Mr. Minson. The company has said it tends to draw higher occupancy rates and stronger profit margins for offices open more than a year, so the accelerated growth can weigh on the bottom line.

Another point of concern for investors: WeWork's revenue per user "declined slightly," said Mr. Minson on the call with bond investors Thursday. Mr. Minson said this drop was due to its shift into lower-priced cities. This latest decline comes after WeWork said its revenue per user fell 6.2% to $6,928 in 2017, according to a bond-offering document in April.

WeWork prefers to point to a new metric it calls "community adjusted Ebitda," which it says is a better measure of its profitability because it backs out the costs of running the buildings, such as utilities, technology expenses and personnel maintaining the occupancy rate. Those earnings more than doubled to $202 million in the first half of this year.

Mr. Minson said the company is investing heavily in an enterprise sales team to sign on more corporate clients. The company has found willing clients beyond its original cohort of startups and small divisions of tech giants like Facebook Inc. and Amazon.com Inc., whose workforces are expanding faster than they can build out their own office space.

WeWork said corporate customers such as Starbucks Corp., General Motors Co. and JPMorgan Chase & Co. now account for roughly 25% of its 268,000 memberships.

Still, WeWork's business model of renting office space with long-term leases, then subleasing it out a month or year at a time, is perhaps less novel than its image as a hip shared office space that provides fruit water and craft beers. WeWork's charismatic chief executive, Adam Neumann, has bristled at the notion that it is an office-leasing company, preferring instead to call it a "physical social network" or a "platform" to sell various services.

There are signs that WeWork's scale is driving down costs. Mr. Minson said the company expects net construction costs per desk to fall 20% in 2018 to $4,500, after it declined 22% last year.

All this growth has required enormous capital. In 2016, WeWork raised $690 million in a round led by Chinese investors, followed by a $4.4 billion round in 2017 from SoftBank and its giant Vision Fund. Part of that SoftBank money went to create new WeWork companies in Japan, China and other markets, and to buy stock from existing shareholders.

Future funding rounds may not be far off. On the call with bond investors, Mr. Minson said: "I will say at this level of operating performance, there is strong interest in WeWork equity from a number of large institutions."

--Sam Goldfarb contributed to this article.

Write to Yoree Koh at yoree.koh@wsj.com

(END) Dow Jones Newswires

August 10, 2018 02:47 ET (06:47 GMT)