WeWork Inc. Class A

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the WeWork Third Quarter 2022 Earnings Conference Call. 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 would like to ask a question during this time, simply press star and the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Kevin Berry. Senior Vice President of Investor Relations. Please go ahead.

Thank you, Dennis. Good morning and welcome to WeWork's third quarter 2022 earnings conference call. During this call, we will refer to our earnings release and investor presentation, which have been furnished with the SEC and can be accessed at investors.wework.com. This discussion will include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Additional information concerning factors that could cause actual results to differ materially is contained in our latest annual and subsequent quarterly and periodic reports filed with the SEC. 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 earnings press release and supplemental presentation and will also be included in our quarterly report. I'd like to introduce Sandeep Mathrani, Chairman and CEO of WeWork, and Andre Fernandez, Chief Financial Officer. With that, let me turn it over to Sandy.

Thanks, Kevin, and thank you all for joining our call this morning. WeWork beat consensus by $3 million. Consensus was in budget foreign exchange. Consensus was $865 million. Our revenue came in at $868 million. Throughout the third quarter, we have been able to demonstrate continued momentum and growth across revenue, memberships, occupancy, our all-access products, and our newest software solution, WeWork Workplace. We are consistently working to strengthen our business model and meet the growing demand for more flexible office solutions for a new world of work. At a macro level, this falls in line with the ongoing trend we've seen with FlexSpace taking increased market share from the traditional office sector. Our third quarter revenue increased 24% year-over-year and was up 33% using budget foreign exchange rates. In New York City and London, we occupy approximately 1% of the office stock and sold the equivalent of 15% and 35% of the traditional square feet sold in the quarter, respectively. Consolidated physical occupancy continues to grow, up 200 basis points from the last quarter to 72% for our mature buildings. Over the past year, we have spoken about how our transforming and differentiated business model has enabled us to capitalize on the headwinds across the traditional office sector. In the face of an evolving and uncertain macro environment, we have proved our flexibility is a key lever to best weather challenging and evolving conditions. Let me turn to our capital structure. I want to start with our continued focus on the balance sheet. We ended the third quarter with $460 million of cash and cash equivalents, 500 million of unissued senior secured notes fully available to us, and at least 500 million of secured debt carbon and capacity. The commitment for, and if drawn, the maturity debt of senior secured notes have been extended from February 2024 to March 2025, and the commitment amount was updated to 500 million, subject to certain terms and conditions. Turning to our 1.25 billion senior secured letter of credit tranche, I'd like to provide some historical perspective on how this has evolved since early 2020. When I joined in February of 2020, this tranche was $1.75 billion, serving as collateral for our lease obligations. As a result of a steady burndown of our lease obligations and not putting up new letters of credit, we reduced that tranche to $1.25 billion earlier this year, a reduction of $500 million. This will further be reduced by an incremental $200 million by February of 2023. We recently launched the formal process with our participating banks to extend the maturity to March 2025. By then, an incremental burndown of $250 million will occur for an aggregate reduction from early 2020 to March 2025 of $950 million. At close, an affiliate of South Bank Group will continue to provide credit support for the amended letter of credit tranche. We are very pleased with our progress to date and are grateful for the continued support of WeWork by affiliates of the South Bank Group. Turning to our portfolio, our strategy is to continually improve the quality of the portfolio by opening new locations and exiting underperforming locations. Our portfolio strategy is similar to a retailer's approach to their store fleet. whereby investments are made into high-performing stores and lower-performing stores are pruned from the portfolio. We have continued our ongoing efforts to optimize and enhance our global real estate portfolio by executing new deals and exiting others. System-wide, we entered into management and revenue share agreements as well as traditional leases for over 20 new locations globally, comprising of approximately 18,000 workstations this year. As you know, we significantly pruned the portfolio after I joined in early 2020, and we've continued these efforts in earnest with a planned exit of approximately 40 locations. These locations comprising approximately 41,000 workstations are all in the United States and are those that don't meet our design criteria, have obsolescence, or there's an oversupply in the market. Our members in these locations have all been notified and most have already been relocated to higher quality WeWork assets. These planned exits are expected to reduce top line revenue, however, are expected to also reduce the rent, tenancy, and building operating expenses, and once fully implemented, are expected to contribute approximately $140 million of annual adjusted EBITDA. Most of these locations will be exited by the end of November of this year. A couple will straggle into December and into January. In connection with these planned exits, we will pay early termination payments to our landlords. Since we expect to make the majority of these payments over time, we don't expect these payments to materially impact our 2022 or 2023 liquidity outlook since they essentially represent future rental obligations that do not affect our cash forecast. The overall effect on our portfolio from these exits is expected to be positive. Taking into account these exits as if they occurred at the end of the quarter, occupancy for mature buildings would be 76% versus 72% as reported. The WeWork consolidated portfolio will be 608 locations and comprised of 714,000 workstations. With a streamlined and higher quality portfolio, we further aligned our corporate expenses to even more efficiently support our business plan. During our first quarter call, we estimated our SG&A run rate would be 750 to 800 million by the fourth quarter of this year. Our revised annual run rate is now closer to approximately 725 million and believe we have a path to operate even more efficiently. Turning to our third quarter results, revenue for the quarter was in line with our expectation but was impacted by the strong quarter. As reported on a GAAP basis, revenue was $817 million, an increase of 24% year-over-year. At our budget foreign exchange rates, revenue would be $868 million this quarter, up 33% year-over-year, versus consensus of $865 million. Adjusted EBITDA for the quarter was negative 105 million in line with our expectations, 29 million better than the second quarter, and a 251 million improvement year over year. Consolidated financial results include non-controlling interest stakes primarily in Japan and Latin America, and excludes unconsolidated investments primarily in India and China. Accounting for our ownership stake, adjusted EBITDA attributable to WeWork was negative 86 million in the quarter or 19 million better than is reported. Consolidated physical occupancy increased to 71% at quarter end and taking into account the plan exits would have been 75%. Occupancy for mature building, a metric we've asked for by some investors, was 72% and taking into account the planned exits would have been 76%. Approximately 8,000 physical memberships and 7,000 workstations were added during the quarter. Mature occupancy in the U.S. and Canada continued to improve. Take into account the planned exits reached 75% with New York now at 81% and San Francisco at 83%. in this region is steadily growing. Turning to the United Kingdom, Ireland, EMEA, and the Pacific regions, occupancy for mature buildings reached 82%, with London at 79%, Paris at 81%, Seoul at 91%, Singapore at 90%, Sydney at 70%, Dublin at 81%, and Berlin at 88%. Footfall in this region has actually reached pre-pandemic levels And in certain markets like Paris and Milan, it's actually above pre-pandemic levels. ARPA was 477 in the third quarter and trending as we expected, but impacted by the very strong dollar. On budget effects, ARPA would be $508, an increase of 6% year-over-year, and above our original expectations for the year. System-wide workstation sales were 205,000, which is equivalent to 12.3 million square feet in the quarter. Consolidated workstations was 162,000 or 9.7 million square feet in the quarter. The average commitment term remained flat. Moving on to our all-access and on-demand products, memberships grew to 67,000 in the third quarter and revenue was 47 million. We plan to end the year with approximately 70,000 all-access memberships and we expect to generate approximately 185 to 195 million of annual revenue. We launched our all-access product in 2020, and it has become an established and growing business. Now let me turn to WeWork Workplace. Turning to our Workplace solution that we launched in late July of this year, we have actually signed over 100 companies that are using the product with over 15,000 licenses to manage and optimize their use of office space within WeWork locations and within their own locations. Turning to guidance, we expect fourth quarter revenue to be 870 million to 890 million, adjusted EBITDA to be negative 65 million to negative 85 million, and adjusted EBITDA accounting for our ownership stakes of consolidated and unconsolidated operations which is defined as adjusted EBITDA attributable to WeWork to be negative 55 million to negative 75 million. We expect full year revenue to be between 3.35 billion to 3.37 billion, adjusted EBITDA to be negative 515 million to negative 535 million, and adjusted EBITDA attributable to WeWork to be negative 435 million to negative 455 million. The guidance of revenue the impact of fluctuations in foreign currency exchange from our original budget rate. However, our guidance for adjusted EBITDA is based on spot foreign exchange currency rates. Our fourth quarter guidance was impacted primarily by slower than expected growth in our operations in the United States and Japan regions, the impact of planned exits and fluctuations in foreign exchange. Andre will provide further financial results.