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What will a WeWork IPO look like?

Founder and CEO Adam Neumann (Credit: JamelToppin/Forbes)

A change in federal accounting rules that went into effect in January will force WeWork to list the current value of its lease obligations as liabilities on its balance sheet, according to the WSJ. This is expected to draw heavy scrutiny during its highly anticipated IPO process. The co-working giant filed confidentially for an IPO in December. Under the previous rules, only so-called capital leases that ended with the purchase of a building were listed as liabilities.

By the numbers: WeWork had about $34 billion in lease obligations at the end of 2018, up from $18.2 billion a year earlier.

Changing of the guard back to the landlord: WeWork signs leases through special-purpose entities and the parent company guarantees only about 11 percent of its lease obligations. But some big property owners are requiring bigger guarantees. WeWork guaranteed the equivalent to 28 months of rent payments when it leased a Manhattan office building from Columbia Property Trust. The same was true with a recent SL Green lease. Both deals also included a letter of credit, which is considered more ironclad than a corporate guarantee because it is backed by a bank.

Bearish take: WeWork competitor IWG (Regus) was the office darling of the dot-com era. When the downturn came, tenants dried up and the company had no way to pay for its ‘debt-like’ leases. It filed for Chapter 11 bankruptcy protection in the U.S. and retained its U.K. stock-market listing. IWG recovered and currently has a market cap of $2.01 billion. Although WeWork generated 70 percent less revenue than its competitor in 2017, it was valued at $20 billion in its last funding round. (WSJ)

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