Last week, Connected Real Estate Magazine covered why co-working spaces’ popularity continues to grow at a rapid pace.
One of the reasons listed was the potential for commercial real estate building owners to generate revenue, which co-working office space company WeWork proved again as it raised another $1 billion in funding from SoftBank Group Corp., The Wall Street Journal Reported.
The company’s latest round of funding will help it continue its plan of growing quickly by doubling revenue, per recently released financial information. WeWork said its losses during the first half of 2018 more than tripled to $723 million from the same time period a year ago. The losses are a result of WeWork’s rapid openings and marketing efforts. At the same time, WeWork saw its revenue during the first half of the year double to $763.8 million.
WeWork, which currently has a valuation of $20 billion, stated the recent funding from SoftBank came in the form of a subordinated convertible note that is designed so the bank has an advantage during the next fundraising round. SoftBank also invested $4.4 billion in equity in WeWork last August.
SoftBank now sits in a position where if it leads an equity round of at least $1 billion, the notes would convert into preferred shares at the valuation the investor sets. If another investor led a funding round of $1 billion or more however, SoftBank would receive shares that value WeWork at $42 billion. Although, that amount could be increased if the shares are priced higher.
WeWork will have financial power to lease and acquire new buildings with this note, which will accrue interest of 2.8% per year starting next September. The company will also look to make offices more modern with glass walls and more up-to-date furniture. Although the company often raises funds with direct investments, which have generated more than $6 billion, WeWork raised $702 million with its first bond sale earlier this year.
“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.
Meanwhile, bond investors had a positive reaction to WeWork’s recent financial news. According to MarketAxess, WeWork’s 7.785% bonds due 2025 traded up to 100.75 cents on the dollar from 99 cents on August 8, after the numbers were released, The Wall Street Journal reported.
WeWork’s equity investors have also been happy with how the company is doing. The company has about doubled its revenue every year and accomplished that feat again during the second quarter with $421.6 million. A lot of revenue comes from monthly rental payments, or memberships, as WeWork calls them. However, services like providing technology expertise and software and other businesses like coding boot camps are making up more of WeWork’s revenue.
Despite the revenue growth, WeWork’s costs are adding up quickly—it reported a net loss of $933 million last year and it could be more this year. The losses are a result of WeWork adding more spaces and desks faster than it has before, according to Minson.
“There’s a mismatch between when we’re spending the money and when we’ll begin to generate revenue from those buildings,” Minson told The Wall Street Journal.
When investors expressed concern WeWork’s revenue per user dropped slightly, Minson explained it was due to the company moving into lower-priced cities. The metric the company likes to point to instead is, “community adjusted Ebitda,” because it considers costs of operating the buildings like technology expenses and utilities. Through that metric, WeWork’s earnings doubled to $202 million in the first half of 2018.
According to Minson, WeWork is putting more money towards an enterprise sales team so it can bring more corporate clients on board. It’s now working with Facebook and Amazon, whose employee bases are growing faster than they can build space for them. The company said corporate customers now make up about 25% of its memberships, including giants like Starbucks and General Motors.
While WeWork is expanding, it’s also trying to lower its costs. Minson said the company expects its net construction costs per desk to decrease by 20% in 2018 to $4,500. Last year, that cost fell 22%.
The issue of course is all of this growth requires funding. WeWork raised $690 million in a round Chinese investors led and in 2017, it received the $4.4 billion last year from SoftBank. A portion of those funds were spent to create WeWork companies in Japan, China and other markets, as well as to purchase existing shareholders’ stock.
Despite the significant sum of money WeWork’s raised, more fundraising rounds could be here sooner than later. Minson noted on a call with bond investors that the company’s current performance level has generated a large number of large institutions’ interest in WeWork equity.