WeWork (NYSE: WE) stock is up 87%. Given that many had given WE stock up for dead that’s a bit of a surprise. But there is a logic to it. If they can succeed in shafting the landlords on their leases then WeWork is indeed worth very much more. It might still be a dog of a business idea and it might not be. But A WeWork that can vary its cost base downwards by gaining access to lower rents on its leases is indeed worth very much more than one that cannot.
We’ve talked before of WeWork: “Wework (NYSE: WE) stock has had something of a disappointing time on the public markets. 98% down and more than than if we measure from the peak. And that’s a great deal better than the total return from back when it was one of those unicorn stocks in the Softbank portfolio. It’s, perhaps, vaguely possible to think that the idea had some legs at one time. But then again any close analysis of the base economic model being employed showed that it was always a very weak - if not destined for disaster - proposition.” That base idea being that if you took out long term leases on commercial space and then sublet then you could capture the premium available for the flexibility of the short let over the long.
That premium does exist. Well, for most of the time it does. It will also depend upon occupancy rates. But then there will come - will note - a time when rents in general are falling. At which point the game falls apart. We know this too, for we’ve seen it happen to another company in the space, Regus.
WeWork’s IPO has been followed by the reverse stock split and even that didn’t work in Boosting WE’s stock price. But something is now, so what is it?
WeWork stock price from Google Finance
As multiple reports have it WeWork is settling down to try and screw the landlords. Sure, it’s called “renegotiate the leases” which is perhaps more polite. But the basic idea is that they’ve got all these contracts on commercial space. Which they are now going to demand price reductions upon. They’ve not legal ability to do this - nothing contractual. But they can say, well, if you don’t lower the price then we’ll go bust and you’ll get nothing.As there’s a good chance that’s true then they’ve got some power there but it is financial hardball.
If WeWork can renegotiate down all of its leases then it is indeed possible that there’s still a viable business in there. And thus the rise in the WE stock price when the tactic is threatened. After all, it has worked in the past for others in this space.