WeWork launches Ark
As we discussed in the previous article, WeWork’s current model leads to the certainty of future lease payments. Last week, the company announced Ark, a subsidiary created to own and expand the real estate holdings of its parent. Ark will be fueled by $2.9 billion in initial capital to own properties.
Ark will take over the existing $1.8 billion property portfolio of WeWork Property Advisors. Ark will also buy CEO Adam Neumann’s properties leased to WeWork.
Ark will have $2.9 billion to invest in properties. A Canadian real estate company, Ivanhoe Capital, is investing $1 billion in Ark.
Profit at the cost of leverage?
WeWork’s current model is asset light and heavy on operating costs. Owning properties means WeWork won’t have to pay a lease that directly affects its income statement. Not paying a lease will reduce its costs, helping it reduce its losses or even turn profitable. However, its balance sheet may be hampered by its shifting of its business model to own-and-operate.
With equity funding drying up with SoftBank’s cutback, the company may have to resort to further debt to own properties. Its bonds are already trading in junk territory, and adding more debt will worsen the situation. Moreover, the existing 500+ properties will continue to add to the operating costs.
WeWork’s expertise so far has been in turning real estate into attractive offices and managing its community of members. However, with Ark, it’s getting into active real estate portfolio investing, which could dilute the company’s focus on its core area.