WeWork's 'entirely new, nonsense' way of evaluating its profits is eerily similar to the tech bubble

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WeWork reportedly invented a unique way to evaluate itself: "community-adjusted EBITDA."
That emerged last week in documents prepared for investors ahead of its $702 million high-yield bond offering.
Community-adjusted EBITDA, and the bond's slide in its first week of trading, is reminiscent of the last tech bubble and crash, according to Albert Edwards, a strategist at Société Générale.

Albert Edwards, the ever-bearish markets strategist at Société Générale, has some thoughts on WeWork, the office-leasing startup.

In documents for a bond offering seen by Bloomberg and the Financial Times, one unusual performance metric stood out. It was "community-adjusted EBITDA," which Edwards described as "an entirely new, nonsense valuation metric."

Normally, companies subtract only interest, taxes, depreciation, and amortization to derive EBITDA, an alternative gauge of their performance that strips out the effects of tax and accounting decisions.

WeWork, however, also excluded elemental expenses like admin and marketing costs to derive a community-adjusted EBITDA of $233 million last year, even though its losses doubled to $933 million and its revenue also doubled to $866 million, according to The Wall Street Journal.

"For those with long memories this is surely be [sic] reminiscent of that series of spurious valuation metric such as price/eyeballs ratios that we saw at the peak of the 2000 tech bubble," Edwards said.

Other metrics in WeWork's reported documents were eyebrow-raising for investors. With more than 14 million square feet of office space, the company owes $18 billion in rent, although it has the option of closing locations if it can't pay the bills. Cash burn is high; expenses doubled last year, to $1.81 billion, and net losses totaled $934 million, though revenue from memberships more than doubled, to $822 million.

Last week WeWork issued a $702 million high-yield bond that, at first, received huge orders from investors. The bond's price tumbled in its first week of trading from April 25, as investors who were initially enthusiastic about taking some risk became more averse, Bloomberg reported.

For Edwards, this was a sign that investors are waking up to danger in the corporate-debt market. Netflix, Uber, and other companies have recently tapped the high-yield market for capital from investors who are hunting for higher returns than what's available from other assets.

"It was market indigestion such as this, with examples of the March 2000 flotation of lastminute.com, that marked the start of the tech crash," Edwards said in a note on Thursday. "Maybe investors will wake up and reappraise the grotesque corporate debt that has accumulated over the past decade."

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