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Landmark Links October 1st – Down for the Count

Lead Story: Life comes at you fast.  I first posted about WeWork back in July of 2016 when the co-working giant had just been valued at a whopping (at the time) $16 billion. It stuck me as odd that a venture that had little to do with technology and with few barriers to entry could achieve that sort of valuation while piling up operating losses.  Since then, I’ve written about WeWork several times, including a feature article in April of 2018 after the company raised $702MM in bond proceeds based at least in part upon some crazy-ass made up financial metrics where I took an in depth look at its massive asset to liability mismatch.  I suppose that you could say that my suspicion of the multi-cycle viability of WeWork’s business plan has run deep for several years.  The company was clearly over-valued and, over time it became clear that there was more than a little self dealing going on.  That being said, I didn’t initially think that there was anything fraudulent doing on – merely a high dosage of private market over-exuberance fed by startup hopium and a heavy dose of bullshit.  It’s looking increasingly obvious that I overestimated the situation substantially.

By now you’ve heard the story (or at least parts of it) over the past week.  Softbank continued to pump money in – eventually resulting in an absurd $47 billion valuation until its investors pushed back, necessitating an IPO in order to keep WeWork from running out of cash.  The company filed an S-1 and prepared to go public, only to be faced with an avalanche of negative sentiment from investors.  Once that happened, the collapse happened with almost blinding speed.  First the valuation was cut in half, then by 75% and finally the offering was shelved altogether at the behest of SoftBank and others.  Then the stories about nepotism, sexual harassment and pay discrimination started streaming out.  Finally the revelation that Neumann was more eccentric kook / slimy salesman than visionary were enough to get the CEO banished from the company that he had built from the ground up, using a combination of chutzpah and snake oil.

Now that the onion is being peeled back, revelations are coming with increasing speed.  Professor Scott Galloway has pointed out several times that WeWork is a fraudalent operation, not all that much different from Theranos and has called out the board of directors for being asleep at the wheel while Neumann looted the company for $700mm – arguably more than the entire business is worth today in its current state.  The ordeal has caused investors to take a closer look at SoftBank and question how it values its investments, now that one of its largest has collapsed.  Galloway went so far as to predict that WeWork’s fall – coupled with the disastrous Uber IPO will spell the end of SoftBank.  He’s been correct on pretty much everything so far so I have no reason to doubt him here.

When the board fired Neumann, it elevated two WeWork veterans, Artie Minson and Sebastian Gunningham to clean up the mess that he left behind.  Their first step was to put the company’s Gulfstream jet that had largely been utilized by the Neumann family to travel the world on non-WeWork business up for sale.  Their next task is to figure out how to staunch the bleeding since, without new capital the company will run out of capital in early 2020 on its current trajectory, according to analysts.  Despite all of the happy talk about elevating the world’s consciousness, the reality of running a business that does nothing but lose money is that its no longer in business once the funding dries up.

Back in September of last year I speculated that WeWork’s endgame was to become too big to fail and position itself in such a way that landlords who didn’t re-negotiate leases with them would get dragged down with WeWork in a recession.  I want to wrap this up with a quote from Neumann himself, tucked away at the end of a Vanity Fair article about the company’s downfall:

“In the major cities in the world, WeWork is propping up the office market,” he told a real estate executive. “If I say ‘pencils down’ to my people, the value of buildings will plunge and I can go in and buy them on the cheap.”

WeWork/Neumann’s endgame was to raise enough cheap capital to screw landlords (who were overexposed to them) by buying up their properties after defaulting on lease agreements in order to tank the market value.  That’s about as predatory as it gets.  In other words, this could have gone much, much worse had the IPO gone through at a high valuation.  Good riddance.

Economy

Backfire: Tariffs have hurt US steel makers who are suffering from job losses and falling stock prices.

Topping Out? The US shale boom is slowing due to operational issues just when the world needs oil the most.

Bumpy Ride: After years of calm, the NY Fed needs to show that it can tamp down unexpected turbulence in the repo market.

Commercial

Hungry for More: Blackstone continues to gobble up warehouse space.

Residential

Out of Reach: For over 20 years, House Hunters has been a reliable reality TV franchise but for millennials, it feels more like a fantasy.

Exodus: Millennials continue to leave big cities for less expensive suburbs as they start families and continue to get priced out.

Purpose Built: Some new condo developers are so open to short term rentals that they are having buildings licensed as hotels in order to get around restrictive local ordinances.

Profiles

Suit of Armor: How the puffy vest became a symbol of power.

Ripe Target: High fees and equally high investor demand make private equity an attractive target for Vanguard-Style disruption.

Shots Fired: California has passed a bill that will allow college athletes to profit from endorsements despite warnings from the NCAA.

Chart of the Day

WeWork’s bond yield chart: This is what happened when the expected bigger idiot (this case the public market) vanishes without a trace.

Wework debt

WTF

Long Strange Trip: A man who took LSD and fell in a lake in Disneyland Paris was found naked and confused hours later.  I guess that this is why they call it the happiest place on earth.

Extra Kick: An Oregon grocery worker was arrested for spiking bean dip with methamphetamine which she then shared with co-workers.

Its Always the Ones You Most Suspect: A man who legally changed his name to ‘Sexy Vegan’ and had it tattooed on his face was arrested for sexually assaulting his pet pitbull and posting the act on social media because vegans.  Also because drugs.

Happy Oktoberfest: A German court ruled that hangovers are an illness, opening up the doors to a lot of sick days over the next month or so.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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