By Lauren Feiner for CNBC
WeWork announced Wednesday it is creating a fund with $2.9-billion of total equity capital to buy stakes in buildings it rents from.
The company has previously been criticized for CEO Adam Neumann’s stake in buildings he rented to the company.
The fund, called ARK, will serve as WeWork’s “global real estate acquisition and management platform,” according to a press release.
WeWork has become a business with a multi-billion valuation by being a prolific tenant. Now, it is starting a nearly $3 billion fund to become a landlord, too.
WeWork, which recently renamed itself to The We Company, is creating ARK, a “global real estate acquisition and management platform,” to buy stakes in buildings in which it plans to lease a lot of space, the company announced Wednesday. It will begin with $2.9 billion of total equity capital.
“ARK will focus on acquiring, developing, and managing real estate assets in global gateway cities and high-growth secondary markets that will benefit from WeWork’s occupancy,” according to the release. It will use WeWork’s own technology and relationships to access real estate opportunities and will “immediately stabilise assets by executing a proven pre-packaged business plan and will apply The We Company’s holistic solutions for real estate owners, based on The We Company’s established capabilities in sourcing, building, filling, and operating properties.”
The fund could further complicate questions about WeWork’s allegiances, which were illuminated by a Wall Street Journal report in January that revealed CEO Adam Neumann has profited by leasing buildings he owns to WeWork. Under the new plan, Neumann will actually transfer some of his real estate holdings into the ARK fund, Bloomberg Businessweek reported.
While this may provide better optics for the company, since ARK will be run independently from WeWork’s main business, ARK will still be under The We Company’s umbrella, according to Businessweek. A WeWork spokesperson declined to confirm or comment on the transfer of Neumann’s real estate holdings to CNBC.
But ARK also may provide a level of stability for WeWork and its investors, which is a key step as it prepares for a public offering. WeWork, like other recent tech IPOs, is still unprofitable. The company said it had a net loss of $1.9 billion on $1.8 billion in revenue in 2018, and a net loss of $933 million on $886 million in revenue in 2017, according to a presentation shared with CNBC in March. Lyft and Uber, which both recently debuted with losses, have fallen short of expectations in their brief tenures on the public market so far due to concern about their ability to close their margins in the future.
By Glenda Williamns for Fin Week
Edcon’s current restructuring process includes significant space rationalisation.
JSE-listed real estate investment trust (REIT) Attacq, owner of Mall of Africa, announced that Edcon exposure, (25 499sqm at 31 December 2018, down from 29 262sqm at 30 June 2018) will settle at 22 945sqm of primary gross lettable area (PGLA) by 1 October 2019 for an estimated 3% of the REIT’s effective PGLA. Contractual gross monthly rental at this time will be R3.2m, down from R4.1m at 30 June 2018.
Owner of Sandton City, Liberty Two Degrees’ (L2D), says Edcon currently occupies 5.3% of its current portfolio, which is expected to reduce to 4.3% of gross lettable area (GLA) by 31 December 2019.
Redefine Properties, SA’s second-largest REIT and owner of Centurion Mall, has a hefty retail portfolio that at 31 August 2018 comprised 1.4m sqm of GLA.
The REIT is a significant landlord to Edcon with GLA exposure of 78 760sqm (down from 122 856sqm at August 2018) housing the Edgars and Jet brands.
Redefine’s equity contribution will amount to R54.6m, the REIT says. As a consequence, Redefine will receive 100% of its rental due from Edcon on 56 788sqm representing in force leases for profitable Edcon stores.
Redefine has also agreed to rental reductions up to a maximum amount of R13.8m over a two-year period in respect of leases totaling 21 972sqm.
Other major players in the listed property sector have yet to make their formal announcements on the recapitalisation process.
Some like Hyprop Investments Limited, owner of super-regional mall Canal Walk, have significant exposure to Edcon.
At 31 December 2018 that amounts to 9.4% of GLA (66 781sqm) and 7.6% of gross income.
Speaking at Hyprop’s interim financial results for the six months to December 2018, newly-appointed CEO Morné Wilken says that almost 7 600sqm of Edcon’s total 67 000sqm floorspace has already been taken back and mostly re-tenanted.
Hyprop has, in principle, agreed to support the Edcon restructuring proposal with a reduction in rentals, compensated for by equity participation in Edcon, says Wilken.
“While that will impact distributable earnings in the 2019 and 2020 financial years by 0.8% and 2.3% respectively, it is considered an acceptable limitation of the risk,” he says.
Others like top-performing SA REIT and low-LSM focused Fairvest Property Holdings have insignificant Edcon exposure.
In Fairvest’s case that’s a mere 0.8% and exposure is only to the still well-trading Jet Stores. “That,” CEO Darren Wilder tells finweek “was not by chance, but by strategy.”
According to a report by Netwerk24, Discovery is paying approximately R280-million a year – or R23-million a month – to rent its new offices in Sandton.
By 2022, Discovery anticipates paying R400-million a year, and R600-million in 2028. After 15 years the building will not be transferred to Discovery, and a new rental agreement has to be drawn up. Growthpoint is the majority shareholder in the building.
Business Insider reports that Discovery has entered into a 15-year rental contract with property group Growthpoint, which developed 1 Discovery Place for more than R3-billion. The building has a roof-top running track and a gymnasium that can accommodate up to 3 000 members.
This comes after Discovery clients were hit with a weighted 9.2% increase across medical plans for 2019. In addition, Discovery Vitality plans were increased by between 8.4% and 12.5%.
According to Business Tech, Discovery has 2.8-million beneficiaries, and with an open medical scheme market share of approximately 56%.
Image credit: Discovery
South African companies are following the global trend of leasing office furniture rather than buying it in an effort to be more capital efficient and improve cash flows – a move consistent with the “rent, don’t buy” economy.
Richard Andrews, MD of Inspiration Office, an Africa-wide office space and furniture consultancy with head offices in Johannesburg, said that since Inspiration Office pioneered furniture leasing in South Africa in 2013 through its financing arm, the company has seen a 30% spike in South African business leasing rather than owning office furniture.
“We expect this trend to continue as the economy remains sluggish. It’s very efficient to pay a small monthly amount for a few years rather than have a large cash outflow for furniture that is often quickly out of date.
“Furniture leasing is an operating expense rather than a capital expense thereby improving cash flow. For example a chair worth R4 000 can be leased for around R3 a day for a five-year period.”
Andrews notes that in the US, often a leading indicator of international offices trends, office furniture leasing has now superseded sales over the past three years and is growing at a rate of nearly 20% a year. And the total value of the furniture leased in the US in the past 20 years has now topped $1,5-billion.
“We’ve noticed a similar trend in Europe as well as small but growing demand for leasing in other African countries too.”
Andrews also said that office spaces are getting smaller and more efficient as business embrace the mobile working trend and workers share space by hot-desking.
“Because employees are now working remotely – or on gadgets like the iPads and very small laptops,offices need smaller furniture. And leasing it enables business to be nimble about downscaling large, bulky furniture, freeing up office space and saving money.
“Ironically desks in many companies haven’t changed in size for the past 30 years since the days of deep monitor computer screens and paper file storage. We have smart cars, smart devices but offices in the main have remained ‘stupid’.”
Andrews added that the shift towards leasing furniture over buying, is consistent with societal trends of renting rather than owing.
“People lease their cars, or in some instances have gotten rid of their cars altogether to only use Uber. Some people rent their homes, companies ‘rent’ people by using freelancers or hire people for short term projects. The trend towards renting over owning is one that can be seen everywhere.”
Furniture lease periods in South Africa are typically for three, four or five years. At the end of the term, businesses can buy the furniture, lease new furniture, or opt to have it recycled ensuring green disposal of unwanted desks, chairs and storage units – the most popular items leased.
Andrews concluded that many of South African’s top companies have taken to leasing and he expects the trend to continue.