Earnings Transcript for WE - Q4 Fiscal Year 2021

Operator: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the WeWork Fourth Quarter and Full Year 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chandler Salisbury, Vice President of Investor Relations, you may begin your conference.

Chandler Salisbury: Good morning and welcome to our fourth quarter 2021 earnings call. I'm Chandler Salisbury, VP of Investor Relations. With me today is Sandeep Mathrani, our CEO; and Ben Dunham, our CFO. During today's presentation, we'll refer to the earnings release and supplemental presentation, which we filed with the SEC and can be accessed at investor.wework.com. Today's presentation includes forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. We will also discuss certain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. Additional disclosures regarding these non-GAAP measures, including a GAAP to non-GAAP reconciliations are included in our quarterly reports and supplemental presentation. With that, let me turn it over to Sandeep.

Sandeep Mathrani: Thanks, Chandler. Before we start, I want to reiterate that WeWork have suspended all expansion plans in Russia and together with our colleagues, members and landlords, are executing on divesting operations in the region. Our deepest sympathies go out to the Ukrainian people, whom we stand with in solidarity. We have been moved by outpouring of support shown from both our members and employees, since we announced our partnership with the UN Refugee Agency last week. The partnership supports refugees across our locations in Eastern Europe, as well as providing access for free space in Warsaw, Stockholm, Prague, Hamburg, Frankfurt and Brussels, to displaced Ukrainian businesses and non-profit organizations, helping with relief efforts. With that, I will now turn to our financial results for the quarter and fiscal year 2021. For the past year, I opened our earnings call by remarking on some of the different ways in which the pandemic has made WeWork's core product more valuable than ever before. Choice and flexibility are no longer a nice to have, but a must have. WeWork has established itself as one of the organizations that’s positioned to support our employees today, want to work in this hybrid and flexible environment. Before COVID, we saw many companies adopted amenity-rich on-campus experience as a foundation for the employee culture and recruitment strategy. Throughout the pandemic, we've heard from these organizations that their priority is finding a way to maintain and foster the same sense of culture and connection in a hybrid world. As companies recognize the need for purposeful engagement and intentional collaboration and design a strategy tailored to the unique needs of their people and businesses, we are seeing a greater shift to flex. CBRE and JLL have projected flex becoming between 13% and 30% of total office in a post-pandemic world in the US alone, which represents a revenue opportunity of between $45 billion and $105 billion from $7 billion in 2019. We are seeing these projections play out in real time. Just last month CBRE's annual report on the state of the flex market reported that over half of those surveys expect to have more than 10% of their real estate portfolio in flexible spaces over the next two years. With this in mind, we feel confident that we will continue to lease categories based on several key factors. Our co-working spaces that cater to SMB, which is small and medium businesses provide both a design environment that fosters engagement and collaboration, technology to pilot their devices and a hospitality first community team to alleviate the pain points. Our footprint includes established locations in high-demand gateway cities. This puts WeWork in a prime position to provide turnkey solutions in markets that have become magnet for knowledge workers, but that also presents barriers to entry with limited inventory, high cost and hold on build out period. Our flexible spaces focus on high-quality enterprise revenue spaces at scale. With an average of 70,000 square feet of location nearly 400 locations with over 50,000 square feet and 130 with over 100,000 square feet we believe we are the only player who is able to serve enterprise clients at scale. While remaining focus on our core workplace businesses, we have leveraged the technology we built to further monetize our existing footprint. Through our WeWork Access, we have created a product that provides access to the entire WeWork network for our members by serving as an additional monetization opportunity for our existing footprint. I'll now turn to our Q4 and fiscal year numbers. The key metrics that we use to measure our business are occupancy, average revenue per membership of month or ARPM, All Access memberships, building margin, adjusted EBITDA and free cash flow. Occupancy is a function of gross desk sales, new desk sales, churn and capacity. ARPM is our price per seat membership. All Access memberships is a driver of All Access revenue. Building margin is how we measure the full EBITDA of our open locations. Adjusted EBITDA is how we measure the profitability of our business. And finally free cash flow net of capital expenditures is a measure of cash generated by our existing business operations. Space-as-a-Service is our core business comprised of co-working space for SME members and flexible solutions for enterprise companies. Regardless of the size or stage of the company, we offer everything from a single dedicated desk to an office suite, full floor build-out full building app or collaboration hubs. Our fourth quarter results continued the positive momentum that we saw in the third quarter. System-wide gross desk sales which includes new desk sales as well as renewals were 217,000 in the fourth quarter or 13 million square feet. System-wide new sales were 113,000 in the fourth quarter. On a consolidated basis, gross desk sales of 164,000 in the fourth quarter which equates to approximately 9.9 million square feet sold. And new desk sales were 87,000. For the full year 2021, consolidated gross desk sales were 593,000 or returned to 35.6 million square feet which represented an increase of 40% compared to the full year 2020. As we have said in the past few quarters flex office and WeWork in particular has taken an outsized share of the market demand. In 2021, WeWork represented approximately 0.5% of all commercial states in the United States yet made up the equivalent of 9% of the square feet leased in the year. At the market level, WeWork 2021 gross sales in Manhattan were equivalent to 16% of the traditional office market leasing on a square foot basis while WeWork's portfolio of 5 million square feet accounts for approximately 1% of the total office stock. WeWork leasing activity represented 17% of Boston’s t take up, 13% of San Francisco, 14% of Miami, despite representing 2% or less of the total office stock in each of those markets. The same is true internationally. WeWork represented approximately 0.5% of commercial office space in our European market yet solely equivalent of 8% of the total square feet leased in 2021. WeWork's gross sales equated to 39% of London's traditional office leasing market that is the leading shift to flex, 34% to Dublin, 8% of Paris and 6% on Berlin. Our commitment land for SMB clients has been 14 months in the fourth quarter and the average commitment term for enterprise was 27 months. Across SMB and enterprise clients, our average lease of land was 20 months. Churn was 3.4% in the fourth quarter below our pre-pandemic churn levels of around 4.5%. On a systemwide basis, we ended the fourth quarter with 912,000 workstations across 756 locations and 590,000 physical members. On a consolidated basis, we accounted for 746,000 workstations, across 624 locations and 469,000 physical members as of December, a quarter-over-quarter increase of 9% and a year-over-year increase of 21%. Physical occupancy was 63% at the end of the quarter, a seven percentage point increase in Q3. If we include the 21,000 net memberships that were already contracted to move in, our physical occupancy including signed but not occupied members would increase to 66% as of the year-end 2021. The other side of the revenue equation is pricing. Regarding physical memberships are from by taking memberships and service revenues on the income statement and removing revenue attributable to All Access and on-demand memberships and management fees of our unconsolidated joint ventures. This is then divided by the sum of the ending memberships in each of the three months of the quarter. In the fourth quarter, revenue from physical membership was $665 million and average physical memberships were 458,000, translating to a membership ARPM of $484. Once again an average physical membership over the three-year period was 458, which the year-end was 469,000. As of Q4 2021, our ARPM in the US and Canada was 538 and ARPM across international operations was 536. In the US and Canada, ARPM increased 5% in the year and across international ARPM increased 2% in the year. These two regions combined represent 94% of our revenues on an ownership weighted basis. Our ARPM in Japan and LatAm was $737 and $199 respectively. The increase in physical membership and All Access revenue and stabilization of ARPM resulted in a total revenue of $718 million in the fourth quarter, up 9% from $666 million in the third quarter. Looking forward to 2022, it's important to call out the expected embedded growth in our ARPM. As discounted membership agreements we signed during the pandemic come up to renewal, we have been able to mark those to renewing rates to market creating a revenue tailwind in our existing membership base. Of the member agreements that was signed in 2021, approximately 140,000 memberships are up for renewal in the US and international regions in 2022. We started approximately to $40 million of embedded additional annual revenue at a 5.5% higher than our Q4 physical membership ARPM of $484. On a base of 469,000 members a $10 increase in ARPM translates to an increase in annual revenues of about $56 million all else equal. Similarly each additional percentage point of occupancy equates to a $44 million increase in annual revenue. Given our pre-pandemic Q4 2019 ARPM of $542 and our mature buildings operated at 88% typical occupancy levels in 2019, we believe there's ample room to materially increase pricing and occupancy from current levels. As we've said before, we have spent the past two years rationalizing our cost structure and have now cut our expenses by over $2.6 billion on an annualized basis since Q4 2019. We reduced annualized rent and tenancy expenses by about $500 million by exiting over 210 buildings and renegotiating an additional 430 leases. We have also saved $600 million in annual location operating expenses by reviewing building operations, energy management systems, and like and have reduced SG&A by over $1.5 million from fourth quarter 2019. We wanted to provide an update on building margins which we see as a major stepping stone to profitability and activation of the meaningful progress we've made. Building margin's how we measure the full EBITDA of our open locations. We calculate building margin by taking consolidated membership and service revenue excluding the management fees and then surprising these stocks which are rent tenant fees cost or rent tenant taxes in the US and direct location operating expenses which are consumables, cleaning, and include our on-site staff. Building margin was negative $9 million in the fourth quarter a $94 million improvement quarter-over-quarter and $174 million improvement year-over-year. We continue to see sequential improvements in our building margins and we were building margin positive in the month of December for the first time since the start of the pandemic. Because of the inherent operating leverage in the business, we expect building cost to improve with increased physical occupancy and pricing as we tightly manage our largely fixed direct location operating expenses. I'll also say this point at the end of the fourth quarter, 33 markets were greater than 70% occupied up from 21 in the third quarter and six in the first quarter of 2021. The average occupancy of these 33 markets is 82% and their average building margin is 28%. Some of the markets in this steering are Silicon Valley, Miami, Vancouver and Singapore. Of the 33 markets we had seven markets that had greater than 90% occupancy including cities such as Miami, Milan, Nashville and Munich. These seven markets had an average occupancy of 94% and a building margin of 41%. What gives us confidence in our cost to breakeven is the group of markets that are in the 60% to 70% occupancy rate that are poised to grow over 70% in the first half of this year. There are 16 markets in this tier including some of our largest markets such as New York, London, Paris and San Francisco. Looking at the total center market at 60% occupancy or greater these markets represent 63% of our total desk capacity, up from 43% in the third quarter and 72% of our membership and service revenue in the fourth quarter. Our WeWork All Access offering, which is used both monthly subscription All Access and pay as you go on-demand products, continue to see demand as companies turn to WeWork Access to create a global office solution. We launched the Access product during the pandemic as another way to enhance our existing product to better meet the needs of our customers. The product is similar to a gym membership model where we are able to sell a larger number of passes with the best capacities in our spaces. In this way the product set is another way to monetize our physical footprint at high margin, while also providing a complementary and synergistic product to existing dedicated space users. Access memberships also drive additional ancillary service revenues such as [indiscernible]. All Access memberships have grown to 45,000 members as of December 2021, an increase of 41% quarter-over-quarter. As of the fourth quarter, All Access ARPM was approximately $230 per month and we have achieved a run rate revenue of approximately $120 million. All Access represent an additional six percentage points of occupancy, including physical members -- memberships signed but not occupied members and Access memberships with a total occupancy to 72% at year-end 2021. Finally, we remain excited about the opportunity we have with our WeWork Workplace Management software, which leverages the proprietary software we build to power WeWork global portfolio. We continue to hear from members stating they lack a universal platform that serves their hybrid growth environment. WeWork Workplace is answer to this need. WeWork Workplace makes highly what possible by enabling employees of both desk, meeting rooms and other collaboration hub across a single platform that is owner and operator-agnostic. By empowering employees the choice, control and an optimized work experience workplace can drive employee productivity, collaboration, engagement and ultimately retention. Workplace also supports employers in managing their space and optimizing their portfolios through data and analytical insights, so they can make tactical choices regarding the location, type and size of office they need, thereby, closing the feedback loop. In the second half of 2021, we announced partnership with landlords and operators like Ivanhoé Cambridge to power their own flexible space solutions. At the end of the year, we signed our first WeWork Workplace enterprise client with Organon, a global healthcare company to action their boundaryless workplace strategy across locations in 34 cities that make sure WeWork locations, own locations and non-WeWork locations. Finally, I want to spend a minute talking about the transaction we recently announced with Common Desk and Upflex, both of which fall within our strategy of selectively consolidating within the flex space, where we see accretive and asset-light opportunities with good operators with whom we have both a product and cultural fit. In early 2020, we completed a strategic acquisition of Common Desk, a Dallas-based co-working operator. Founding in 2012, Common Desk operates 23 locations in Texas and North Carolina, 19 of which are asset-light management agreements with landlords. The total deal consideration was $26 million, comprised of 50% cash and 50% stock at a $10 per share price. The transaction is accretive from day one and we welcome Nick Clark to the WeWork family and his colleagues. Upflex. In February, we completed a $5 million strategic investment and partnership with Upflex, a platform that aggregates over 4,800 co-working locations around the world. Through our partnership, WeWork will have the exclusive ability to resell Upflex inventory of third-party spaces and offer our Access customers an expanded number of workplace options by offering bookings access to Upflex. Looking to the future, we see this partnership as a benefit that provides more optionality in location choices and as a technology integration that will allow us to develop and sell new premium-price products that leverage Upflex's expanded scale across this network. We will continue to look opportunistically at acquisitions and transactions like this to scale the business in a cost-effective and asset-light manner. Now I'd like to turn it over to Ben to walk you through our fourth quarter financial results.

Ben Dunham: Thanks, Sandeep. Fourth quarter revenue of $718 million increased $57 million or 9% quarter-over-quarter, driven by a 9% increase in physical memberships and a 44% increase in Access revenue. Adjusted location operating expenses, which includes both lease costs and other location operating expenses, was $729 million in the fourth quarter, representing a decrease of $23 million versus the prior quarter, driven by lower lease costs. It was also a decrease of $84 million or 11% compared to Q4, 2020. Lease costs, effectively our rent and tenancy costs for open locations, was $587 million in the fourth quarter and other location operating expenses were $146 million. As a reminder, location operating expenses include the impact of non-cash straight-line lease cost and tenant improvement allowances in accordance with US GAAP. Adjusted building margin was negative $9 million in the fourth quarter, a $94 million improvement quarter-over-quarter and a $174 million improvement year-over-year. As Sandeep mentioned, we are pleased to report that building margin crossed the positive territory in December for the first time since the pandemic. You can find further information regarding building margin in our supplemental presentation on the Investor Relations section of our website. Excluding stock-based compensation and certain nonrecurring expenses, SG&A was $230 million in the fourth quarter, slightly higher relative to the third quarter due to one-time stock-related compensation. Adjusted EBITDA showed further improvement in the fourth quarter, driven by our sequential increase in revenue and continued focus on managing our cost structure. Adjusted EBITDA loss was $283 million, which is a $73 million improvement relative to the prior quarter, and a $189 million improvement relative to Q4, 2020. Net loss was $803 million in the quarter, which was an improvement relative to the prior quarter and the fourth quarter of 2020. The key component to bridging from adjusted EBITDA to net loss in the fourth quarter includes $195 million of net restructuring and impairment expense related to the write-off of lease right-of-use assets associated with our portfolio rationalization activities, $174 million of depreciation and amortization, $103 million in interest and other expenses and $48 million in stock-based compensation associated with the closing of the business combination with BowX in the fourth quarter. We reported free cash flow of negative $467 million. Operating cash flow was negative $373 million and gross CapEx expenditures were $94 million for the fourth quarter of 2021. Net CapEx was a $3 million inflow in the fourth quarter when you account for the $98 million of tenant allowances that we received in the fourth quarter. I'll now discuss our balance sheet and liquidity. We ended the year with approximately $2 billion in cash and unfunded cash commitments. This includes approximately $924 million of available cash on hand, $550 million available on our senior secured note facility and an additional $500 million of letter of credit facility capacity. I'll now turn it back over to Sandeep for some comments, before we open the line for Q&A.

Sandeep Mathrani: Thanks, Ben. Looking forward, we expect first quarter revenue to be between $740 million and $760 million at a midpoint of $750 million. As approximately, 20% of the desk sold moving within one month of the contracting signed and 60% moving between 30 to 60 days after the sale, we also have a high level of visibility into our second quarter revenue. We expect second quarter revenue to be between $775 million and $825 million at a midpoint of $800 million. Over 90% of our second quarter revenue is committed to date, which gives us a high level of confidence to achieve these numbers. For the full year, we expect to achieve $3.8 billion to $4 billion of system-wide revenue and $3.35 billion to $3.5 billion of consolidated revenue for the full year. Taking the midpoint of our consolidated range that gets you to between $900 million to $1 billion of revenue in Q3 and Q4 each, which is a range we become adjusted EBITDA positive at a revenue level that we have enjoyed in Q4 2019 and Q1 2020. We also have high level of visibility to the back half of the year, as our commitment lands for both SMB and enterprise is an average of 20 months. So today, we have nearly 60% of the revenue committed for Q3 and Q4. Over the course of the year, we anticipate spending approximately $100 million of net growth CapEx to bring an additional 15000 to 35000 desks online in 2022. We expect ending the year with 760,000 to 780,000 desks. In addition, we expect to spend about $100 million in maintenance CapEx this year. Our 2022 beginning cash balance and available liquidity of $1.974 billion adjusted for the midpoint of our adjusted EBITDA guidance of $450 million negative, $240 million of interest and $200 million of net CapEx will give us total liquidity of approximately $1.1 billion at the end of 2022. I am confident that our current revenue visibility, cost structure and right team in place, we are well positioned to meet our targets. Shifting topics, I'm excited to expand on some of WeWork's ESG efforts. Our environmental efforts focus on key areas including energy efficiency, achieving carbon neutrality minimizing waste, reducing water consumption, and improving the supply chain. Our aim is to use 100% renewable energy. We are reducing the energy we use to light keep cool and power our spaces and source green electricity. We are reducing our carbon footprint by minimizing waste, increasing our recycling and capacity rates and reducing consumption of water. Overall, these efforts continue to point us in the right direction as a sustainable business. I'd be remiss if I did not end by thanking Marcelo Claure who recently stepped down from his role at SoftBank and subsequently from his position as Chairman of WeWork's Board. I personally am grateful for his relentless support, partnership, and leadership over the last two years. WeWork wouldn't be where it is today if it was not for his efforts. I wish him the best of luck in his next chapter. With that, operator, please open up the line to questions.

Operator: [Operator Instructions] And your first question comes from the line of Karru Martinson from Jefferies. Your line is open.

Karru Martinson: Good morning. When you look at the year, how much do you feel that the Omicron variant for COVID pushed back your outlook for 2022?

Sandeep Mathrani: I think if you -- both Delta and Omicron, it pushed it back a quarter or two.

Karru Martinson: Okay. And then when you look at the $100 million of growth CapEx planned, is that going to flow through those seven markets like Miami where you're running north of 90%, or is that broadly spread out across the platform?

Sandeep Mathrani: No, it's actually spread out in the market that we are 70% or better occupied. So, it is in those markets where we have high occupancy and demand. You appreciate that when we close a whole lot of locations in this process there were many locations that were not built. And so we gave those back. We only kept the ones where we had a high degree of either occupancy or we had pre-committed commitments from enterprise clients. So, these assets will come online fairly well leased.

Karru Martinson: Okay. And then when we look at the roughly $1 billion EBITDA improvement here for 2022, what are we assuming in the guidance for average revenue per member?

Sandeep Mathrani: So, it's $484 plus 3% so close to $500 ARPM.

Karru Martinson: Okay. And then just switching gears here to the liquidity, what's the cash needed for you guys to kind of run your business? What do you need to keep on the balance sheet? And how should we think about those secured notes or the lines of credit as we go forward through the year?

Sandeep Mathrani: The working capital needs we look at about $250 million.

Karru Martinson: Okay. And then just in terms of tapping the lines of credit for you guys?

Sandeep Mathrani: I think it's a timing issue again. So, we do have almost $2 billion of liquidity and we do account for the $450 million of negative EBITDA for the year, interest, and CapEx, we get to $1.1 billion. So, it's really a timing issue. We may or may not have it.

Karru Martinson: Okay. Thank you very guys. Appreciate it.

Sandeep Mathrani: Thank you.

Operator: [Operator Instructions] Your next question comes from the line of Sam McGovern from Credit Suisse. Your line is open.

Sam McGovern: Hey guys, good morning. Just following up on Karru's question around the Omicron impact. Obviously that's impacting 2022 guidance. How should we think about 2024 guidance? Is that still relevant?

Sandeep Mathrani: 2024, is that correct?

Sam McGovern: Yeah, that's right.

Sandeep Mathrani: Yeah. I would mean again the smile on my face I would expect that the guidance reverts back by 2023 to a normalized rate, because we do get to the end of the year with a $1 billion run rate that we shouldn't -- we haven't -- we're not providing guidance for 2023. But we should start to get back to the normal run rate.

Sam McGovern: Okay, got it. And then can you remind us at what level of EBITDA you expect to get to a free cash flow breakeven level?

Sandeep Mathrani: It's really -- we do not expand because we don't intend to do anything but asset-light deals going forward. We do have in our pipeline about another 50,000 desks that were lease to sign that we want to keep -- they were leased to sign in 2018 and 2019. So we will need a little bit of CapEx for that in 2023. So we do think we get to free cash flow you need to be about $4.5 million of revenue.

Sam McGovern: Okay, got it. That's helpful. And then you posted last week that you're not currently looking at an equity offering at this time. How do you think about your preference for additional debt versus equity to bolster your liquidity as you get to that future profitability? And how much additional debt capacity do you guys believe you have under the current docs?

Sandeep Mathrani: So effectively you're right, we have no intent to issue equity. We were never in the market to have a broader equity issuance. And so I want to reaffirm that. There was a strategic who approached us to make a $100 million investment at a substantial premium through the closing part of Thursday. So we were never in the market. And unfortunately during the trading day, we were prevented from responding to market rumors. So I want to clear the air. Again, we would only issue equity at a premium to where the PIPE investors came in and we've only issued if there was a use for equity. We don't intend to increase the indebtedness of the company between the LC facility and the senior secured; it's about $1.50 billion. If anything we may replace the LC capacity with senior secured but it will be more of a mix than anything else. And per our documents, we have the ability to put up $1 billion of senior secured, which we haven't tapped yet.

Sam McGovern: Got it, okay. Great. Thanks so much. I’ll pass along.

Operator: And there are no further questions at this time. I'd like to turn the call back over to Mr. Sandeep for some closing remarks.

Sandeep Mathrani: In closing, I want to express how pleased I am with our performance and all we have accomplished in 2021. Looking at the market at the macro level in a world with much uncertainty, our product becomes even more valuable. Our rents are based, which is beneficial to WeWork in an inflationary market, where real estate rates typically rise. And our current rates are at at/or below market. Our spaces are pre-built, which prevents clients from experiencing supply chain issues or inflated construction and build-out expenses. And our product includes on-site staffing and consumables. We are a turnkey solution for immediate occupancy. Our progress-to-date would not have been possible without the tremendous work of our employees and the support of our global community. Thank you to everyone for joining today. Be safe and be human and be kind to one another. Thank you.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.