New WeWork financials show growing debt in its international unit

wework

We took a deep dive into WeWork International, the British arm of The We Company.
WeWork's UK business piled on debt as some of its individual buildings began running at a profit, according to new financial statements filed in London.
Revenues at WeWork International rose 90% for the most recent period recorded. But losses increased by 1,000%.
WeWork International spends £2 to generate £1 in revenues.
However, WeWork offered granular data on individual buildings, which are profitable. They have also reduced the debt load carried by those properties.
Overall, WeWork's ever-changing accounting methods have made the company more difficult to understand.

A new set of financials published by WeWork on October 10 show the company's "international" unit — focused on the UK — is piling on more debt as individual WeWork buildings are becoming more profitable.

The UK accounts are significant because they give more granular detail on WeWork's business than its pre-IPO filings with the SEC in the US.

The previous set of UK filings demonstrated, for instance, that WeWork generated cashflow by writing the full cost of its long-term leases onto its income statements, thus producing a huge loss on paper. At the same time, because payments on those leases were not due for years, WeWork kept the cash it owed and ploughed it back into the business. The management of cashflow from unpaid liabilities is a major factor in WeWork's UK business model.

Here's a deep dive into "WeWork International," the unit of The We Company than runs WeWork in the UK. Be warned: You're going to encounter some in-depth accounting detail in this story! But the major takeaways are these:

WeWork's internal accounting is very complicated;
it obscures what's going on inside the company;
the company carries a lot of debt;
but there are signs of hope at buildings that have grown into mature businesses.

Let's jump in ...

Losses increased 1,000%

At the WeWork International company, revenues rose 90% from £18.7 million in 2017 to £35.7 million in 2018, the most recent period reported. (£1.00 is worth about $1.29.) But losses increased too, by 10 times, from £7.6 million in 2017 to £75.9 million in 2018.

Put another way, WeWork International spends about £2 to generate £1 in revenue. This chart shows WeWork International's revenues plotted against its losses:

WeWork

£300 million in debts

The new financials also show a huge increase in WeWork International's long-term "borrowings." The UK company owed £300 million in debts payable after more than a year, at the end of 2018, up from £111 million the year before.

Long-term receivables — money owed to the company — also increased, from £93 million to £180 million.

This chart shows its long-term borrowings plotted against its long-term receivables:

WeWork

WeWork has again changed its accounting method

The new financials show that WeWork has changed the way it reports it accounts for a second time in its short history, making it more difficult to figure out what exactly is going on inside WeWork's UK business. The changes mean WeWork International has not published a "company" income statement for 2016.

A WeWork official told Business Insider that its new accounting method excludes the "consolidated" results it published for the UK in the previous two years. And, the company says, WeWork International is merely a "service" business for the dozens of buildings it runs in London, making it unrepresentative of the company.

Moreover, the company says, individual WeWork buildings have grown so large that their accounts are now published separately, as if they were standalone companies. That leaves the WeWork International "company" as an entity with smaller revenues than before. And because most WeWork buildings fall below the threshold for reporting as separate businesses, the revenue they generate is now completely unrecorded, WeWork says. (The company's total revenue is, of course, fully recognized in its SEC filings.)

In the new UK accounts, WeWork claims its UK company booked only £35.8 million in revenue in the UK in 2018.

That is sharply down from the numbers it published last year for 2017, when WeWork International reported £118 million ($152 million) in revenue and had borrowings of £120 million. (On a like-for-like basis, 2017 revenue was £18.7 million vs. £35.8 million in 2018.)

The difference is an accounting effect because WeWork separately reported revenue for three individual buildings it leases in London.

Three profitable buildings

Those properties generated between £16 million and £26 million in revenue apiece. All three are profitable. And all three have reduced their debt, which came mainly from WeWork, their 100% owner. Two of the buildings reduced their borrowings to zero:

2 Eastbourne
2018
Revenue: £17.1 million
Profit (loss): £3 million
Non-current liabilities: £20 million (includes debt of £7.2 million)
2017
Revenue: £16.5 million
Profit (loss): (£3.2 million)
Non-current liabilities: £30 million (includes debt of £20.4 million)
3 Warehouse Square
2018
Revenue: £15.9 million
Profit (loss): £3.7 million
Non-current liabilities: £14.8 million (includes debt of zero)
2017
Revenue: £12.7 million
Profit (loss): £1.4 million
Non-current liabilities: £24.2 million (includes debt of £7.5 million)
Moor Place
2018
Revenue: £26.3 million
Profit (loss): £3.7 million
Non-current liabilities: £30.5 million (includes debt of zero)
2017
Revenue £25.2 million
Profit (loss): £1.6 million
Non-current liabilities: £39.9 million (includes debt of £9.4 million)

The debt is eclipsing the growth

An optimist would suggest that the new numbers show WeWork can still grow revenues, and that its more mature buildings can be profitable.

But a skeptic might note that even as debt is reduced on individual buildings, it is increased at the WeWork International parent. A WeWork spokesperson said the buildings paid off their own debt and that the International debt increased separately, offset by an increase in receivables. Also, the debt is internal funding which the company lends itself to fund early-stage growth.

The new accounts make it unclear whether WeWork is growing or shrinking in the UK.

The 2018 revenues for the three standalone buildings added to the revenues for the International unit total up to about £95 million. That's less than the company reported in its "consolidated" accounts for 2017, £118 million. WeWork no longer reports the "consolidated totals" now that it is no longer required to because of the IPO filing in the US.

The £95 million total doesn't include revenue from WeWork's buildings that are not recognized by either the International unit or as standalone businesses. Previously, WeWork reported robustly growing revenues in the UK. Under the new accounting, we just don't know anymore.

No matter which way you read the new numbers, one thing is clear: The long-term debt far eclipses the size of WeWork's UK business.

A change in accounting methods has made the company more difficult to understand

The company told Business Insider that the new numbers were not an indication of the fundamental health of the company. "WeWork International Limited is a services holding company that primarily exists to hold centralized set-up costs for UK and European operations, and receives revenues only as a small percentage of building profits, collected as a management fee. Its financial performance is therefore not a representation of the health and profitability of the overall UK business," a spokesperson said.

 To explain why WeWork had changed its accounting, the spokesperson said, "We are no longer required to file consolidated accounts for WeWork International Limited because we have filed the parent company accounts" with the SEC.

When WeWork first opened in London in 2014, it filed a single set of simple "consolidated" accounts for the entire company. For the years 2016 and 2017, however, it published two sets of parallel statements: The "consolidated" accounts for the whole company and "company" accounts for WeWork International, the corporate parent that services individual buildings.

The new accounts have dropped the "consolidated" numbers, added individual statements for larger buildings, and kept the "company" accounts that show dealings through the parent that answers up to corporate HQ in the US. The "company" numbers, however, have been restated for 2017 to discount money recognized at the building level.

Confused? You have every right to be.

While the new detail on WeWork's individual buildings is useful — it suggests that at least some parts of the company can become profitable businesses — the total effect of the new accounts is to render WeWork more opaque and complicated than ever.

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