WeWork Inc. Class A

Good morning. My name is Chantelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the WeWork Q1 2022 earnings call. As a reminder, today's conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Thank you. Chandler Salisbury, Vice President of Investor Relations, you may begin your conference.

Good morning, and welcome to our first quarter 2022 earnings call. I'm Chandler Salisbury, VP of Investor Relations. With me today is Sandeep Mathrani, our CEO, and Ben Dunham, our CFO. During today's presentation, we will refer to our earnings release and supplemental presentations. which have been filed with the SEC and can be accessed at investors.wework.com. Today's presentation includes forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. We will also discuss certain non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. Additional disclosures regarding these non-GAAP measures, including a GAAP to non-GAAP reconciliation, are included in our quarterly report and supplemental presentation. With that, let me turn it over to Sandeep.

Thanks, Chandler. Kicking off 2022, I'm pleased to share that our first quarter results reflect the position of strength that WeWork has been working to achieve over the last two years. Underpinned by a strong business model and diverse range of offerings, WeWork remains exceptionally well-positioned to capture renewed demand for office and continues to lead the flexible-based market. While we have seen new workplace models and trends emerge from the pandemic, we are beginning to see these strategies shift from short-term COVID solutions to the future of work. We see the shift in tenant demand towards high-quality and amenitized spaces. Today we see companies looking for space that is well-designed, engaging, and amenitized. In short, a place where their employees want to spend time. Flexible space within a building, allowing tenants to optimize their footprint by providing expansion space and shared conference facilities is an important amenity. A recent headline from Wired said, everything is a WeWork now. While there has been much talk about the great resignation for WeWork, it has presented as the great hiring as companies turn to us to house their new hires, most of whom are coming into the office for the first time and need a place to collaborate and productively engage with one another. Our turnkey spaces in central business districts and gateway cities put WeWork at an advantage to solve for their immediate space needs. Nearly 5.4 million applicants were filed to form new businesses in the United States in 2021, the most of any year on record based on the latest data from the Census Bureau Business Formation Statistics. WeWork has always been a home for entrepreneurs and startups, as our pre-built Turkey spaces and member-first hospitality provide entrepreneurs and small businesses with the resources they need from day one. As companies form and grow, WeWork's flexible terms allow companies to choose a real estate solution that works for them right now and adjust their footprint as it makes sense for them. WeWork's portfolio and business model are well positioned in the current macro environment, as inflation and supply chain delays have created more uncertainty and volatility in the world. Companies that grew in the pandemic need space now. Between construction and procurement delays, a traditional tenant could spend 18 to 24 months sourcing and building out a space that may not be the best solution for their company and strategy once the project is ready. With WeWork, members are able to take immediate occupancy as nearly 80% of our members move in within two months of executing an agreement. Aside from the prolonged build-out period that tenants are experiencing, The inflationary environment has also created a material increase for the cost to build out turnkey space. Throughout 2021, we have seen the need for flexibility driving demand for the WeWork product suite, so much so that our members have been willing to pay a premium for that flexibility. Now, as tenants evaluate the cost of traditional real estate solutions, between rent and tenancy, the amortized build-out costs, the cost of other amenities and services that are included in our turnkey solution, they're seeing that WeWork is competitive price versus traditional alternatives. From a business perspective, our inflation-linked leases represent less than 20% of our total portfolio and are primarily located in Latin America and EMEA. This case, in our assumptions, was a 3% increase in inflation. For every 1% increase in inflation above the base case, our annual rent expense would increase by $3 million. In Latin America, almost all of our membership agreements provide for inflation indexing, thereby functioning as offsets to any inflation-linked adjustments to rent. As for other building-level expenses, consumables, which are the operating expenses most impacted by inflation, represents less than 1% of direct location operating expenses, so even a 25% increase in consumables would impact building margin by less than a quarter of a percentage point based on our Q1 financials. Similarly, utilities, which may be impacted by oil prices, represents 2% of our direct location operating expenses, So a 25% increase in utility expenses would impact building margin by just half a percentage point. In this way, our costs between rent and tenancy and direct location OPEX are resilient to inflation and many of the macro challenges the world is facing today, creating a tailwind for our business model as our cost structure gives us a competitive advantage. Finally, as it relates to current foreign exchange rate environment, our business is naturally hedged as we generally collect revenue and pay expenses in the same currency. Therefore, while revenue may be impacted by exchange rate volatility, the impact on EBITDA will be more muted. With that, I'll turn to our Q1 results. Our first quarter performance reaffirms the transformation of the traditional office market landscape and reworks value propositions. Looking at our space of the service business, our first quarter results continued the positive momentum that we saw in 2021. On a system-wide basis, we ended the quarter with 916,000 workstations across 765 locations and 626,000 physical memberships. Our consolidated operations accounted for 746,000 workstations across 633 locations, and 501,000 physical memberships as of March. This membership growth represents 7% quarter-over-quarter increase and 30% year-over-year increase. System-wide gross debt sales, which includes new debt sales as well as renewals, were 211,000 in the first quarter, or the equivalent of 12.7 million square feet sold. On a consolidated basis, gross debt sales were the highest sales reported since Q1 2020 with 166,000 deaths, or the equivalent of 10 million square feet sold in the first quarter. System-wide new sales were 106,000 in the first quarter, and consolidated new sales were 83,000 in the first quarter, equating to 6.3 million and 5 million square feet sold, respectively. Similar to 2021, We will continue to represent an outsized share of market demand in the first quarter. In Q1, WeWork represented approximately half a percent of all commercial office space in both the U.S. and European markets, yet sold the equivalent of 9% and 10%, respectively, of total square feet leased in the quarter. At the market level, WeWork's Q1 2022 gross sales in Manhattan and San Francisco were equivalent to 17% of the traditional office market leasing on a square foot basis, while WeWork's portfolios of 5 million square feet in New York and 2 million square feet in San Francisco account for approximately 1% of total office stock in the two cities. WeWork's leasing activity represented 25% of Boston's take-up, 8% of Miami's, despite representing 2% or less of the total office stock in each of those markets. While Miami leasing also represent an outsized portion of demand in the quarter, our 92% occupancy levels create natural leasing limits, giving low inventory available to be sold. WeWork's gross sales equate to 39% of London's traditional office leasing, a market that is leading the shift to flex. 13% of Dublin's leasing 8% of Paris' leasing, and 15% of Berlin's leasing, despite representing approximately 1% or less of the total office stock in each of those markets. The average commitment term for small and medium businesses was 14 months in the first quarter, and the average commitment term for enterprise was 26 months. Across all physical memberships, our average commitment length was 20 months. Monthly churn continued to decrease for the third consecutive quarter, reaching 3% in the first quarter versus 3.5% in the prior quarter. Physical occupancy was 67% at the end of the quarter, a 4 percentage point increase from Q4, driven by the strength in our international markets, especially across Europe. If we include the incremental 19,000 net memberships that were already contracted to move in, our physical occupancy, including signed but not occupied memberships, was 70% as of the end of the quarter. Turning to pricing, our physical memberships ARPM for the first quarter held steady at $484 unchanged in the prior quarter. Pricing for new contracts signed in the quarter, a leading indicator of future ARPM as prior commitments roll off, increased by mid to high single digits on a consolidated basis quarter over quarter and also increase in each of our four regions, the United States and Canada, international, Latin America, and Japan. We also saw a similar increase in renewal prices versus prior contract levels across both the United States and Canada and international regions. This increase will be reflected in the ARPM in the next quarter or two. Our WeWork access offerings continue to find traction both as a highly flexible stand-alone solution and as a complement to members' dedicated office space. Companies use all access in a variety of ways to provide greater flexibility in order to attract and retain talent, to be able to use models by providing a productive location proximate to