Flexible Business Model Is Brazil’s Differential, Says CEO of WeWork LatAm

In an interview with Bloomberg Línea, Claudia Woods cites factors such as contractual flexibility with clients and tenants to prevent operations in the region being affected by the company’s crisis in the US

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Bloomberg Línea — WeWork’s filing for Chapter 11 bankruptcy protection under US law on Monday left doubts about possible impacts on the company’s operations in Brazil. But According to the CEO of WeWork in Latin America, Claudia Woods, the company’s contractual flexibility with clients and tenants is a critical differentiator of its operations in the South American country.

She said in an interview with Bloomberg Línea that the challenges with WeWork’s (WE) receivership in the United States, which has declared debts of almost $19 billion, do not compromise the autonomy and financial health of the company’s Latin American operations.

Woods, who previously headed Uber in Brazil, defended the sustainability of WeWork’s business model, given the conditions for the country and the region and the evolution that has taken place.

“When we talk about a WeWork building, imagine that the model was born when we rented the entire building and signed a 15-year contract in which I committed to the rental value and I took 100% of the risk of monetizing that space,” she told Bloomberg Línea.

According to Woods, the coworking company founded by Adam Neumann and Miguel McKelvey in 2010 has evolved from a long-term rental model to more flexible revenue-sharing strategies with property owners. This adjustment responds to the growing risk aversion of post-pandemic companies, favoring shorter, more adjustable contracts.

“Landlords are also very used to operating 15-year contracts and the real estate market has always worked that way. What happened after the whole pandemic real estate crisis is that no one wants to take on that level of risk anymore,” she said.

“In our portfolio, more than 60% of our clients are large companies. They come to WeWork saying that they no longer want a 15-year commitment because the generations are changing so much, the work model too, and they don’t want that commitment,” she said.

The CEO of WeWork Latin America highlighted how the startup has learned from its growth and improved its choice of locations for its units. Even so, there is a legacy of past contracts, which were those negotiated “very early on, in that first growth boom, when our ability to choose the best locations wasn’t necessarily already developed,” she said.

In Mexico, for example, despite a development described as “healthy”, Woods said that two buildings leased during the pandemic are still trying to reach the desired level of maturity, i.e. achieving an optimized occupancy rate of 80% to 87%.

“This building - launched during the pandemic - has a maturity curve. It will reach 80%, 85%, 87% occupancy, which we consider our optimal occupancy. But there is a timeframe for this. It’s a great example of a market that is healthy for us, but I still need more time to bring the buildings to a point of maturity, as Brazil already is, due to the opening date,” she explained.

According to Woods, when it comes to financial health in the coworking segment, two main levers are the amount of rent paid by WeWork and the value that the company is able to add for members so that they can pay to use the shared office service.

“These two levers need to be in balance. If they’re not in balance, that’s when you’re having a perhaps unbalanced market,” she said, adding that Brazil has its own characteristic, which is the periodic review of the rent, which is part of every relationship between tenant and landlord. “It protects me in my relationship with my landlords.”

Joint venture with SoftBank

Woods described the joint venture structure with SoftBank, which gives WeWork Latin America local governance, capable of responding to the specificities of each Latin American market.

She stressed that, despite WeWork Global’s application for Chapter 11, Latin America remains protected from these complications, maintaining partnerships and negotiations with regional partners.

“The company has made it very clear that the other countries are not impacted. We’re not talking about a solvency problem here. We’re talking about a structural problem, whether it’s the debt dynamics or the relationship with the owners that led the company to this point, that led it to use this mechanism to be able to really maximize its negotiations,” she said.

“The P&L dynamics of each country are different. In fact, even within Latin America, we have different situations between countries. Brazil is one of our healthiest markets. Today it represents more than 30% of the territory of Latin America.”

Occupancy rates

According to Woods, the occupancy rate in Brazil is very close to that of last year, “which was already over 80%”.

WeWork’s occupancy figures in Brazil are released at the end of the year, according to Woods. “The company was actually operating at an extremely healthy occupancy level, with some buildings already at 100% occupancy”.

Also according to the CEO, large companies that occupied a lot of space ended up reducing the amount of space they needed and supplemented it with so-called office vouchers. This was one of the products that WeWork launched in Brazil, which allows employees to work from any of the company’s offices.

“Companies today no longer have the same number of chairs as they used to have employees. More companies are using less space and complementing it with the benefit of the network. In addition, we look at the flow in the building [to measure results],” said Woods, saying that October was the month with record building access flow since 2020.

Break-even point

Woods wouldn’t reveal what the occupancy break-even point is for the viability of the business model, but said that WeWork operates at a dynamic point where 70% occupancy already triggers a “vibrant, community” environment - essential to the brand’s concept.

In a document filed with the US Securities and Exchange Commission in 2018, WeWork cited a ‘community-adjusted EBITDA’. Together with the community-adjusted EBITDA margin, both would be additional supplementary measures of operating performance.

Community-adjusted EBITDA represented adjusted EBITDA before growth investments, additionally adjusted to remove general and administrative expenses and as a percentage of total membership and service revenue and management fee income from consulting services provided to branded locations.

According to Woods, at around 70% occupancy “a lot of things happen”, the building starts to get busy and “it starts to breathe and turn”.

“Normally the tendency is from there on [from 70% occupancy] to get to very high occupancy much more quickly, because there’s even a kind of FOMO [fear of missing out] with everything that’s happening in the building. People want to be part of it,” she said.

She commented on the changes in workspaces in Brazil: places once seen as peripheral, such as neighborhood buildings that housed more freelance professionals, like Oscar Freire and Perdizes, are now in high demand. This reflects a change in the behavior of workers, who now avoid long commutes to the Faria Lima area.

This is evidenced by the increase in the use of meeting rooms and general traffic in the buildings, suggesting a preference for social interaction over isolated work.