Yaron Naymark on $IWG's value case (Episode #152)
Yaron Naymark returns to the podcast to discuss the value case for IWG (London Listed). IWG is best known for their Regus brand, which competes with WeWork in the flex office space. Yaron thinks the market is discounting the operating leverage IWG will realize as they put COVID behind them and begin to accelerate their managed locations offering. You can see Yaron’s presentation at MOI’s 2023 “Best Ideas” conference here.
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Transcript begins below
Andrew Walker: All right. Hello, and welcome to yet another value podcast. I'm your host Andrew Walker and if you like this podcast, it would mean a lot if you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on for the second time, my friend, Yaron Naymark. Yaron is the founder of 1 Main Capital. Yaron, how's it going?
Yaron Naymark: I'm good, man. How are you?
Andrew: I'm doing good. I'm doing good. Let's see. Let's start this podcast the way I do every podcast. Just a quick disclaimer. Remind everyone nothing on this podcast is investing advice. We're going to be talking about an international stock today that obviously carries a little bit of extra risk, kind of different risk than normal. Pretty good company. We're probably going to be talking about we were, which is just a wild company, which has risks in its own right. But anyway, let's just start. The company we want to talk about today, it trades under IWG in London. Most people might know them, we were competitor. They owned the Regus brand, a couple other ones, but I should probably just pause there and turn it over to you. What is IWG and why are they so interesting?
Yaron: Yes. IWG is the market leader in flat civil hybrid workspaces. Like you said, they compete with WeWork and Industrious, but IWG has been around the longest. They've been around since the late '80s I believe or mid '80s when Mark Dixon who's the current founded it. He still owns 30% of the company today. Today, they have 3300 locations, and so they, like I said, third by far the largest. WeWork give you a sense has about 800 locations. Industrious has 150 or 160 locations, and then it tails off pretty sharply from there. I think the end margin is interesting because off the global office market today about 2% is in this flexible hybrid model, and I think that's going to a much higher number over time. I think there's consensus in the industry that it's going to a much higher number. Whether it's going from 2% to 15% or 20%, or 25% or 30% is all up in the air. JLL, CBRE put out their estimates that are in the 20%. The CEO of Industrious has been on a few podcasts where he said he thinks is going to 35% or 40%. But basically, you have this massive tailwind of office transitioning from the legacy model where tenants have to sign these 10-year leases for entire floors in an office building, for as in Flex model where tenants could sign 1-year leases for parts of a floor in an office office building.
And the acceleration is really taking place for a variety of reasons, right now. Obviously, the pandemic pushed people to want to work more remotely closer to home, coming to the office 2 days a week, work from home 2 days a week. So Flex and Hybrid has just kind of push people in that direction. But on top of that, you have Teams and Zoom have really only become mainstream since the pandemic or slightly before the pandemic. Fast internet globally has really only penetrated, right? All the rural markets in a big way over the last decade call it. And so, for the first 20 years of Flex, it was really hard to work away from your team and it's becoming easier now and more accepted. And so I think the market is moving that direction. If you own office space or if you've been following the office market, you know that vacancies are rising and owners of office buildings are having a hard time filling their space. And so if they actually transition their capacity towards Flex, they have an easier time filling that space, and so it benefits them. It also benefits employers because typically if you're signing a dedicated lease for 10 years, you were signing a long-term commitment. If you're signing a Flex lease, it's shorter. If you're signing a dedicated 10-year lease, you also need to think about how big your company is going to be in five years. So, you end up leasing way more space than you need, just so you can grow into it. If you're doing Flex, you literally only least the number of square feet you need for your existing employee count and you can grow as you need to over time. So it's less square footage per employee. It's a shorter term commitment. So those are the benefits to the employer. And then the employees are also demanding this because they want to have that flexibility, of course.
Collaborating is super important and so you maybe need to go into New York City, 2 days a week to meet with your teammates. But the other 3 days a week you want to have the ability to work closer to home. And maybe at home 1 or 2 days and go into your local office 1 or 2 or two days. And so I think employees are happier when they're being given this flexible option and that also goes back to the employers, which it's a very tight labor market. And if you give your employees something that they prefer, it helps you retain them. It helps you recruit them. So, there's a really powerful flywheel going on here, where it's good for landlord, it's good for corporations and business owners, and business operators, and it's good for employees as well. And so, I think you're probably going to go from 2% of the market today to a much higher number, whether it's 10%, 15%, 20% or 25$, it doesn't matter. It's a much higher number over time, and it's really starting to take off. So that's kind of the market overview.
In terms of Regis or IWG specifically, they are also transitioning their business from what they call conventional locations where they sign these long-term leases with landlords and then they build out the space and rent it out on a shorter term basis to their tenants. They're transitioning away from that which is half or most of their 3000 locations today call it 2000 plus are that model where they put maybe a million dollars of capex into these locations each, and now they subdivide them and rent them out. Probably a thousand of their locations maybe a little less are managed today or are partnered with their managing space for building owners or lending out their name to someone else who's managing the space for building owners and they're collecting either a management fee or a royalty. But most of their growth going forward is coming from that part of the business. So they're going to transition the business from a capital heavy business to a capital light business over time where they're just managing real estate for building owners. And so you envision a company and at the end of the decade call it 20-30, where they have multiples of their current location count. So that's how to go from 3000 locations to 10,000 locations. Most of that growth will come from the managed side of the business. So you can envision a company that has 10,000 locations of which 7000 or 8000 are managed where they put up no capital and collect the management fee and 2000 or 3000 are the traditional model where they've owned the locations themselves and rent them out as well. And so you have massive secular growth, you have business transformation which is going to improve the return on capital and financial profile this business and you have a very attractive entry evaluation today in terms of on Run-Rate free cash flow, Run-Rate EBITDA.
And by the way, Run-Rate EBITDA and` free cash flow are very well below normal, right? They're still under earning meaningfully the current based business. Just to give you a sense, they have, like I said over 2000 corporate-owned locations, the Center Level EBITDA margins pre-pandemic we're in the high 20% approaching 30%. They got to the Teams during the pandemic and in 2022, they probably are at 20%. So you're going to go from 20%. Mark Dixon said he expect, who's the CEO, said he expects it to get back the 30% over the next couple of years. And so that's a massive tailwind to the Run-Rate profitability of the business. You also have corporate overhead which de-levered during the pandemic. It went from 10% of revenues up to 13% of revenues. So you have another 3 points of corporate overhead leverage that you will probably get over the next few years. So I think you probably have about 10 points of cyclical upside to the existing margin structure of the business which comes out to about $300 million of additional EBITDA on a current Run-Rate of close to $400 million, so that just gives you a sense. I think you have $300 million on a base of $400 million today of cyclical upside, and you have the secular growth and business transformation all at a really cheap entry multiple on current Run-Rate number. So I think there's a lot of impact there. I'll hand it over to you from there.
Andrew: No. That was great. That was great. I guess just some things I should have... Do I remember correctly that I did a podcast on this about a year ago now with under-covered stocks. And is that where you heard about this for the first time, if I remember that correctly.
Yaron: So I've heard about it from a lot of different places.
Andrew: Come on. You can't even give me that. You're a...
Yaron: No. Listen, I'm a customer of IWG today. I was a customer WeWork 4 years ago and I've been following the space just because I'm interested in WeWork, right? You have app Newman and I just thought he was a really exciting personality. So I've kind of been falling from afar. I really did dig in after listening to your podcast. And that was early 2022. I think I bought my first shares in maybe September of 2022. So maybe 7 months later, and yeah.
Andrew: Yeah. And I do think like it's always tough to do a podcast within a year because some things change. I do you think now is such an interesting time for IWG because as you probably mention it and as you mentioned earlier and as we'll probably talk about like they're doing this transition and Q4 was almost where they were saying, I'm pulling the numbers off my head's, but they had done like I think 120 of the managed locations through the first three quarters of 2022. And they were like, we're going to do another 250 or 300 in Q4. So you know they're going to report results in the next month or so. We're taping this in late February 2023. They'll report results and we'll see, hey this massive acceleration did they actually deliver on it? Did they not? We'll probably start talking to. I know we will at some point we'll talk about the event angle with instant. We'll see if they're actually getting delivered. It's so interesting how we're right at the cusp of either the thesis like really accelerating or maybe us having say, "Oh, you know, maybe there was something different. Maybe management was a little too bullish. This management has been too bullish in the past." But let's just start with, I think the first thing everybody's going to jump to is... The first thing is, probably WeWork. But let's start a little bit by just diving into the office in general. I live in New York City so maybe I'm a little bit to New York Centric. But a lot of the questions when I posted that you were coming on Twitter, a lot of the questions were the office space. The office space sucks. Vacancy is super high right now. Sure, Flexes like kind of the trend and maybe they can help with that. But if New York office space is 60% utilized right now, there's going to be a lot of vacant offices, a lot of competition. How do you think about them in the space of a post covid world where, especially in the major urban markets, we probably are a little bit over built in terms of offices.
Yaron: Yeah. I think high vacancies in an office is the bull case for Flex. I think landlords don't know what to do with their space and they're having a hard time finding tenants who want to take entire floors for 10 years. And so they're either going to have empty buildings and empty floors or they have to hand the keys over to a Flex operator to manage it for them or try to do Flex themselves. But demand is there for Flex and demand is not there for traditional. And so, it's not like you need a bunch of people to go build a bunch of buildings thinking they're going to build them for the Flex market. The capacity is already. It's stranded. It has no other use. And maybe in big cities, that's not as much of the case, right? If you have a Class A property in New York City, you will find tenants for it. But outside of CBD, Central Business District, it is a problem. And if you have a Class B and Class C office in CBDs, it is a problem. And so I do think the world is moving in that direction. I'm not alone. It's not like I came to this conclusion myself.
To your point, IWG has less than a 1000 managed locations today, right? They have some franchise, probably a few hundred. They have high hundreds of managed locations today and they added probably 500 new contracts in 2022 on a base of 700 and something managed today, right? And the Q4 Run-Rate implied based on their annual guidance and the Q3 year to-date is that adding about a thousand annualized on a Q4 Run-Rate. And it sounds like that, that is a continues to accelerate. So they're adding a ton of management contracts still based relative to the size of the existing base. They'll probably be doubling this business every 2 years for the next few years if demand to stay into these levels. And to give you a sense of the profitability on those, the average location does about a million of revenue. Their management fee is around 15% of that. So, $150,000 and they have probably 65% Operating Margins on the $150,000. So probably a little over $100,000 of EBIT per location. So every thousand they add as a hundred million of EBITDA with no capital investment on a base, like I said, around 400 on a Run-Rate basis currently. So every thousand they add, adds 25% occurring Run-Rate EBIT or EBITDA even higher EBIT because there's no depreciation associated with those locations and its really, really taking off.
And just to kind of round out of it, Industrious is a private company. CBRE owns 40% of it. CBRE about 40% of Industrious coming out of the pandemic because they saw how many of their corporate clients. Their Fortune 500 clients were starting to consider Flex and they had no offering for those clients in the Flex page. So they decided they really need to pursue Flex more aggressively. They reached out preemptively to Industrious and said, "Hey we want to partner with you and buy a piece of you because we need something to offer to our clients." So they basically, I heard the Industrious CEO was on a podcast, said that CBRE was kind of pulling their Fortune 500 clients and they went from like 30% something were considering Flex to 80% something that were considering Flex over the next 5 years in the course of the pandemic. So they're seeing a massive inflection, we were guessing a massive inflection. IWG is seeing a massive inflection. I think there's no doubt that all these empty buildings are moving towards Flex to help fill them.
Andrew: You know what, this is a little bit of a strain metaphor, but how I've kind of thought about Flex is like a ton of financial firms especially got hung during the financial crisis with, they signed long-term leases right at the top of the market. They got hung with these giant pieces. But there was no Flex Hybrid offering at that point. In late 2018, like that's when WeWork really starts ramping up, you've got covid and then you've got the Great Tech layoffs that are happening right now, right? So you've got these two events where people really wanted to bail on leases. And Flex is around now. And I do think there's a little bit, like I did a lot of work on the offshore space a couple months ago. And a lot of big, major signed a 10-year lease is right at the top of the oil market in 2014 at huge day rates for offshore things. And today, even though they need offshore [inaudible] we're not getting hung with these long 10-year lease again. And I do think going forward, a lot of business are going to say between covid and the tech layoffs, we're not going to get hung with these great 10-year leases any more, right? Like if we're a tech company, we don't know when we're going to need layoffs or when somebody's going to construct it. If you're not a tech company, we don't know when a tech company is going to come disrupt us. We need to have flexibility. So I do think like the trend just all that is just so much in the favor of Flex people.
Yaron: It's a better product for customers. There's no doubt. They don't need to worry about managing space themselves, providing security for the space, cleaning the space, having garbage taken out, an electric bills, making sure the internet is working. It's really non-core to any business to think about the real estate footprint. And they could just focus on what it takes to make their customers happy, their employees happy and not sign long-term leases are what... That was a good analogy that you made, but the analogy, I really think of is Amazon AWS, right? When, if you listen to the origins of that business, I was basically was like, when we wanted to start our online bookstore we need to buy all these servers and set up data centers and provision them. And it was a massive upfront investment and we needed to have all this excess capacity because it wasn't acceptable to have things not work on the busiest day of the year on Black Friday.
Yaron: So on non-Black Friday days, their utilization was really low and and it would be awesome if you were a tech start-up and you could just provision space, capacity on servers or data centers as you need them and not spend that big upfront cost to set up basic infrastructure, right? And that's what AWS and Azure have become. It's much easier today to be a tech startup because you don't need that upfront investment. You could raise less startup capital and end up owning a bigger chunk of your business as a Founder because you don't need to raise that excess capital to do something its non-core to your base business. And I think this is kind of like that, it's early. And it's only 2% of the market today. But why should businesses have to hold excess capital and manage real estate footprint, its non-core to their business. If they could just kind of buy real estate as a service, why not move in that direction. It makes their employees happier. It makes the CFO happier because they don't need to sign 10-year leases. They don't have all this excess capacity that they need to grow into. It just makes sense. I think it makes sense for everyone.
Andrew: So I think the two other most common questions you get, and they're kind of tied at the hit are, A: Okay, why IWG, all these landlords who have excess office space? Like I do remember Varnado when WeWork was really going crazy in 2017 or 2018. Steve Raw from Varnado, putting this thing, "Hey, if we think Flex is a joke and we think we're going to capture lots of value from it but if it turns out Flex is here to stay, we can just go do Flex ourselves." You want Varnado owns a bunch of office buildings in New York city. So I think people look at, one, why can't the landlord's just do it themselves and then kind of tied at hit to that is, "Hey, okay cool. IWG is the biggest player here. We works the second biggest player." Is there really a mode to being like the largest player in this space? Or it is kind of' "Hey, real estate is a local game. You go. You lease one building maybe it's local mode versus global moat or natural mode or maybe it's just office by office if you can get a good deal on leases". So I want to talk about both moat and why landlords can't do this themselves?
Yaron: Yeah. Look, there's a couple angles here. I think one, there's a little bit of a
network effect. I think if you're a member of one of these, it is nice to have the ability to go to any city you want and know that there is a location within the network that you could use. And maybe not everyone travels, right? Maybe not everyone travels.
Andrew: Yeah. Not interrupt you. I do agree with that, but I remember when I had Be Fit, when I did want the Be Fit, I would be New York City back to Boston and I liked having the gyms I liked having a couple gyms in New York. But with your office, most people just choose one office space and go to that office all the time. Yeah, maybe they travel twice a year. Do they really need? Is that that big of a consideration when you're signing a lease that you're going to think about having multiple spaces?
Yaron: I definitely think it's a consideration for some, maybe it's not a consideration for all, but I do think there is value to the network for people who travel, for people who need to host meetings in different cities, needs to host clients. I think that's a consideration. I also think for Fortune 500 companies, it's nice if you're going to do space as a service to deal with 1 or 2 service providers and not with a ton of service providers in each city. I also think, we talked about how it's 2% of the market going on much bigger number. I think the average owner of office space doesn't own more than a few percent of the office space in the country or in the world. And so, what are they going to do it? You're going to have like thousands of little guys who this is non-core to them, right? Their core business has been to own office space, sign tenure leases, collect rent checks and not really speak to anyone. And now, they need to self-divide the spaces, they need to get ancillary revenue out of this space by selling drinks and printing services at the location. It's really and filling it, right? There's a lot more turn here than there is in their traditional business, which is signing tenure leases and then collecting rent checks. There's a lot more turn because these are one-year commitment.
And so you need to be really good at customer acquisition, which is another thing that scale helps you with, right? Customer acquisition and retaining and having the data to where you're acquiring the customers, how to price your locations. And if you have a bunch of locations in certain areas, you know where their demand is, where you should be growing, how you should be pricing it, what occupancy is in that in that market. So I think there's lots of little things that add up to give you meaningful scale advantages, even building out the locations, right? How should we design them to maximize occupancy, to maximize pricing, to maximize the user experience. And so I think there's a customer acquisition. I think there's customer retention benefits. I think there's a network benefit also to the users, because if they're traveling, if they need to host meeting but also to the companies that are employing the users to deal with less service providers.
I think, someone who's been doing this for 30 years has know how and has earned the trust from landlord. So if landlords are thinking about handing the keys over to their building to let someone else manage it for them, there is value and going to one of the large players like IWG who can say, "Look. Listen. We've been doing this for 30 or 40 years. Here's the data on how much more profitable a location is. If it's Flex managed by us versus if you're just going to get a 10-year lease and a tax dollars per square foot, right Because you end up getting more dollars per square foot because people need to use less square feet per employee". And so they have your data, they have the history, they have the know-how, they have the trust, I think people need, probably like that they get to only the old 1 or 2 service providers instead of a ton of different service providers. And there's lots of little things that add up to a competitive advantage here. And I think again listening to the CEO of Industrious, who like I said has been on a few podcasts himself, he thinks this will consolidate to a 2 or 3 player market over time. He thinks 3 players and he thinks it's basically going to
be IWG, WeWork and Industrious as a Top 3 players. He compares it to have the hotel market really consolidated like Hilton, Marriott and what's the other one, Hyatt.
Andrew: Hilton, Marriott, Hyatt. Yeah.
Andrew: I guess that's 4, but 3 players.
Yaron: Yeah. It's fine. Three or four players were it's like they dominate the market. And I think that's how he's described it. And it makes a lot of sense to me that it will consolidate that way.
Andrew: Yeah. No. Look, I think that was fantastic. Just, I think you've covered all the major points. One of the points I really like you talked about earlier when we're talking why can't the office buildings that do themselves. Look, they're used to go in and they go to a law firm or they go to a bank and they say, "Hey, here's this giant office building. It's 30 floors. Here's the 6th floors. You're going to sign a ten-year lease for it, right?" They're used to doing that once. It reminds me of when all the linear cable channels that were used to, "Hey, we have a cable channel. We sold it to 5 cable providers. We get $2 per month for it, every month, rain, or shine." All of them started going to streaming a lot of people. Very accurately said, "Hey, the streaming game is a completely different business." You've got to handle churn, you've got to handle marketing, you've got to acquire customers. Even if you're putting all the same content on it, it's a completely different business. And I think most of them had proven right, right? Like Netflix had a lot of advantages, but one of the main one was, they were built to handle churn, handle marketing, get customers inside. This is the same thing. IWG for over 20 years has been built to handle churn, get people in. Varnado as much as they want to say, we've got the buildings. They're not going to grow that skill set overnight, right? It takes a long time.
Yaron: But, listen. Even if you say they will grow that skill set, what percent of of the office market do they own? And they're one of the largest buyers? Do they own a few percent? Well, we're talking about going from 2% to 25% of the office market. So, fine. Wipe out a few percent. You're still going after a jump ball in another 15% to 20%, right? Name your number. There's a jump ball in a big part of the market and I think when you have an underpenetrated market like that, I don't think they are all really competing against each other on an existing contracts. They are competing against the other 98% of the market that's in the traditional format, and they are just trying to convert that over. If there's enough jump balls, I think it eliminates the competitive intensity for each specific building, if that makes sense. So, yeah.
Andrew: That transition is really nicely into the other thing people ask about all the time is WeWork. "Hey, IWG versus WeWork". They see the WeWork stock price. They see that we exploded, or we scanned. I can't remember what it was, how much it blew up. So I want to ask you a specific question that relates to that percentage of marketing we talked about and then we'll go. I'm sure you're familiar with, WeWork's file and everything. And WeWork has this really interesting thing where they say, "Hey, WeWork. I'm looking at their Q4 deck. If anybody wants to look, it's there. Q4 earnings deck, its page 20." They say, "Hey, WeWork in Boston, we're 1% of the market stock. In New York, we're 1% of the market stock." But we're 20% to 25% of the square feet that gets least every quarter in that market, right? I look at those... Are you familiar with that slide?
Andrew: I look at that and I wonder, A: it's just a crazy, but B: does WeWork even though IWGs bigger, they've got scale, we can talk about all the reasons we think IWG probably is going to manage than we were. When I look at WeWork leasing 20% of the market, 25% of market with 1% sale, I would just say, is WeWork brand just so good and their name recognition so known that they're going to be kind of the major player here just because of they've got the Google back, right? You want to search, you went go to Google. You want to rent Flexspace, you just go to WeWork.
Yaron: Yeah. I think they definitely have the best brand in the market. They were able to burn free capital to build that brand and they have...
Andrew: They are still burning free capital to build that brand.
Yaron: No. It's not so free anymore. But I think their accumulated losses today is $15 billion to build, like I said, 800 locations of which I think 650 or 700 are corporate owned and the rest are managed by partner. And so they were able to burn $15 billion to build 650 locations, right? IWG has been profitably growing it's business to 3000 locations. And so I think they've probably put into the 3000 locations, 2000 which are fully corporate-owned. They probably invested, I don't know, $2 billion into those locations and they've already gotten their money back, that the gas out of the money they put in. Obviously, that's why Mark Dixon has been able to retain a third of the business because it's grown profitably and efficiently. Its not needed to dilute and raise capital at time to grow because the locations were profitable and they were able to self fund that growth. So WeWork obviously to go from 800 locations to 3000 locations is not going to have the same amount of free capital to burn. And so I think, part of that $15 billion gave them really nice, a really nice foot print and really attractive markets, right?
Central Business District setting, its New York, Boston, Miami, San Francisco and they put a ton of capital into each location. Their future growth will probably be diluted to the brand because they're not going to have another $15 billion to burn on the next 600 locations, right? They're going to have to build them more similar to the way IWG has built its locations or they'll have to manage them for someone and when they manage it for someone, they're going to go to them and say, "Hey, we want you to put X dollars per location", and the building owner is going to be like, "Why IWG is telling me I don't need to put that amount." And so I think they will dilute their brand over time. I also think they're only in big cities. They have these massive locations that are hard for fail. They need to charge more per square foot because they're in these big cities. And like I said, I think there is value in the network and being outside of Central Business Districts and having a ton of locations. And so, I think if you believe that Flex is growing as a percent of the overall office market, you have to believe that's going to be in small town America and small town Europe, not only in New York, Boston, San Francisco, Miami. And I think IWG is better position. They have more experience doing those smaller markets. They don't need to put as much capital, right? It just doesn't make economic sense to that much capital and [inaudible] location in Westport Connecticut, right? It just doesn't.
Andrew: Yeah. Just two points I wanted to add there. And what I meant to mention earlier, you said it, WeWork is 800 to 900 locations globally right now, right? And we talked about how IWG is hitting this acceleration point where they want to add a thousand locations per year-ish going forward, right? I think you forward, they were saying we're going to be at that Run-Rate within the Q4. So we're talking about WeWork, IWG is going to be growing by more than one WeWork in locations per year going forward.
Andrew: Now, these locations are, as you said, some of them might be one floor in a suburb or something. So it's not going to compare to the 20-storey New York building, but they're going to be expanding that network a lot very quickly. And then the other thing which I'll let you expand on, but as you said, we were $15 billion. They were growing quickly. They had unlimited budget. Like I remember when I first got my WeWork, it was $400 or $500 in a month for a dedicated office space and it was unlimited beer, unlimited coffee. It was crazy. If you want to have like 3 beers a day, which that might be aggressive, I don't even drink anymore. But you could say WeWork was paying you to have all the space at that point. IWG doesn't do that. They have all of these other, they charge you for things. They also ran with a culture of a little more frugality versus WeWork which is was just hiring left and right. There were like 16 different leads on my WeWork for. That's a personal perspective.
Andrew: We were just going to have to keep pulling back a lot of the strings. They just laid off another 10%. IWG, they are focused. They are here to grow. So all that just build into it. I'll turn it over to you.
Yaron: Yeah. It was better than just having beer free, you could invite your friends to come visit you in the office and they could have beer for free too.
Andrew: I believe you've been to our WeWork office. There is no free beer there anymore, but you, you've certainly been.
Yaron: Yeah. So I mean, they had free capital that helped their customer acquisition. They had this big personality running it. He's gone. And now you turn it around. They have a ton of debt. They're EBITDA negative. They're burning cash. They're trying to just survive. And it's actually a really nice situation to be IWG right now because if you're a building owner trying to hand over the keys to have someone else manage it, it has to be sitting in the back of your mind like, is WeWork going to go through bankruptcy? Is that going to distract them?
Andrew: Well, Google and everything is we were going bankrupt. WeWork needs SoftBank to guarantee their letter of credit so that the banks will actually respond it. That's going to be top of mind.
Yaron: It's going to be top of mind, so I do think you're in this period where if WeWork is able to dig their way out, it's probably going to be years. And in the meantime, IWG is consolidating their market share and their management contracts. And if they don't survive and they go bankrupt, the bankruptcy process will probably be a year or 2 years. I don't know. There's going to be some complexity around it. So I think either way, you have this window right now. We're all these jump balls are coming to market and IWG I think is in a good position to get its fair share. And like I said, $100,000... And by the way to your point, the market is big, locations just to give you a sense, those 800 locations or whatever that WeWork had, they generate about the same revenue is IWG with 3000 location. So if your point, smaller location, smaller cities, less dollars per square foot. So they generate close to the same revenue. IWG does it on a location of 3300 versus about 800. And now I'm mixing managed versus own them stand against but on the same same revenue based on the location count, that's 4x the size and so that gives you a sense of that. And, yeah.
Andrew: As you said, IWG even with the decrease from post covid growing all the source up profitable versus WeWork is just incinerating money.
Yaron: Yeah. So basically, there was a lag from the pandemic to when these guys suck even see take a hit. Obviously, they still have a 1-year contract with a bunch of their tenants but, so 2021 was the tough year for IWG, a year after the pandemic when a lot of these leases rolled out. And they did $80 million of EBITDA in 2021, right? That was their low point. 2022, they'll do over $300 million of EBITDA, 2023 probably over $400 million of EBITDA and the 2021 $80 million EBITDA. I don't even know what WeWork did but they probably burned, I don't know, a billion dollars, $500 million. I forget the exact number, but they burned a lot. They burned a lot of money every year since they've been around.
Andrew: I've got their earnings right now. So 2021 they burn $1.5 billion in Adjusted EBITDA and then 2022, -$500 million Adjusted EBITDA. And obviously that's adjusted, they are like, I don't know.
Yaron: Yeah. But even then, you look at their investor deck and they show you by cohorts based on occupancy, what the building level margins are, and where they have buildings that have a occupancy between 80% and 100% occupied, they're generating 30% Center Level EBITDA margins which is basically what IWG was generating pre-pandemic, [inaudible] like I spoke about. So when they fill their locations, they're actually generating good Center Level EBITDA margins. They just grew too fast. They didn't have the best locations. They signed corporate guarantees which IWG was not doing, right? So they have to get letters of credit from from South Bank. It was very hard for them to break leases. And the pandemic, when they needed to, they had to take on debt to burn the cash. IWG learn from those mistakes decades ago and hasn't repeated them. Doesn't sign corporate guarantees than most of its leases, doesn't cross-collateralized them, right? So I just think they've navigated the environment better. And by the way, Mark Dixon was out there warning WeWork in public while they were growing saying that he doesn't understand why they're repeating the same mistakes that he so publicly learns, right? He publicly learned these mistakes. He didn't learn that in private. And so if you wanted to go back and study the business, you probably could have learned from some of those mistakes and avoid at some of them. But, I just think it puts them in a better position relative to the number of few competitor.
Andrew: I've got notes from 2016 or 2017 that Dixon is saying the exact same thing. He was like, "Hey, we were doing the exact same thing we did during they were a.com darling, right? We did this during the .com bubble. We almost went bankrupt. We had to restructure because we guaranteed our leases. We don't do any of that. We weren't focusing on getting revenues like you have to do any ancillary revenue. You can't just get all your revenues from leasing. WeWork doesn't do that. Guess what? WeWork is trying to figure that all out.
Yaron: Yeah. I actually did put the US business into bankruptcy coming out of this.
Andrew: Yes. That's right. That's why it's listed in London right now if I remember correctly. And again as you said going forward, IWG they're going to be focused on growing. WeWork is going to be sure they want to grow but they also have to think, "Hey, there's still some leases, we have to do. Hey, there's still some restructuring you have to do." All of that adds up and takes Management's attention away. Let's go to valuation. We've alluded a couple times to the earnings number. And one of the really difficult things here is as you said, 2021 is a terrible number. This is a terrible year for them. This is, terrible number is too aggressive. But this is a business that has a lot of operating leverage, right? Like rough Math is, if you're running a location at 60% occupancy, it's lightning money on fire, 70% occupancy it's break even, 80% occupancy it's quite profitable, right? So this can swing really quickly because you're flexing 2019 they do over $400 million in EBITDA. By 2021, as you said, it's $180 million. So let's just talk overall valuation, how they're trading today, how you see this going forward, how you kind of look at value here.
Yaron: Yeah. So I think the current valuation is single-digit EBITDA multiple and close to a single-digit free cash flow multiple depending on what EBITDA assumption you want to use.
Andrew: If I can... So as we're talking, it's late February 2023, the stock price is 180p per share, I think that is. I've got that, and you can correct me if I'm wrong, about £2.7 billion enterprise value, about a £2 billion market cap number. Can correct, feel free to push back, but if you just want to bring out the EBITDA numbers and everything
Yaron: You want Pound or dollars?
Andrew: That's a Pound, I'm sorry.
Yaron: Okay. Yeah. So a £1.8 billion market app with about £700 million of net debt.
Yaron: So, yeah. £2.5 billion enterprise value in pounds. I think on the Q3 call, they said that September was £30 million a month of EBITDA for the whole business. So if you annualize that that's 360 coming out of Q3 right on a Run-Rate basis, exiting Q3 is £360 million of EBITDA, you know occupancy can continue to increase because they've spoken about that and because WeWork reported, right?
Andrew: I was going to say WeWork said January and February we're accelerating when they reported.
Yaron: Yeah. So WeWork Q3 occupancy was low 70s, Q4 for occupancy was mid 70s. So they probably saw 400, 500 basis points of increasing occupancy from Q3 to Q4. And so, if you just apply that to IWG, the September was $30 million of EBITDA and October, November, December continued occupancy gains, so some number higher than 30%. Maybe it's 40%, maybe it's 35%, but that gets you close to a $400 million EBITDA Run-Rate just on that. Just on the transition Q3 to Q4 occupancy. WeWork also set on their call that occupancy continue to tick up, or not occupancy, but
demand. I think there's like a seasonal slow down in December, January. And they basically said demand was a strongest in the company's history to see our 2023 and so you probably think occupancy keep sticking up into the mid-80s at some point in 2023. Either we use in the mid-70s in Q3.
So there's a big difference between being mid 70s and mid-80s. The operating leverage is massive. And also, there's been a lot of inflation. I don't know if you've heard a lot of inflation in the world over the last year or so, but you don't really have a lot of pricing power when occupancy is in the 70s as you just want to fill the space because of the operating leverage. You really get pricing power when occupancy goes into the 80s. So then obviously if you take price, the operating leverage on that is a 100%, right? You take price out by a $1 square foot that follows right to the bottom line. And so you're going to get the operating leverage from occupancy increases and from price increases, which will obviously take longer to roll through because you have won your contract. But it's not hard to envision a scenario where you do get back to the high 20% or 30% Center Level EBITDA margins. And you will obviously leverage corporate overhead.
And so, there's a scenario where you make 10% higher margins, EBITDA margins for the entire business on a revenue base of £3 billion, which will give you another £300 million of EBITDA and that's good for layering on these new management contract. Right now, the whole business is doing 400, like I said, on a Run-Rate basis. And I obviously, the 400 you know really you need to look at it X maintenance capex which brings you down to 300 of EBITDA less maintenance capex. When you add another 300 of EBITDA, you're not adding any more maintenance capex. So really, you're adding 300 of EBITDA less maintenance capex, you're adding 300 to an EBITDA less maintenance capex of 300. So you're doubling the the pre-tax profitability of, and then obviously you leverage interest expense to, so you're more than doubling your net income, your maintenance, free cash flow or whatever metric you want to look at over time. I think you're more than doubling it just based on getting your locations back to normalize levels of profitability. And you're buying it for a single digit or maybe 10 times current Run-Rate maintenance free cash flow, which is a low multiple for a business that is inflicting in terms of opening new locations and is transforming itself into a better business with better returns on capital, lower capital intensity because most of the growth is coming from these management contracts, like we said.
So it's just a cheap business that's about to accelerate growth and transform itself into a higher quality business. And by the way, these management contracts, they're 10 years with 5-year renewal options. So when you're signing a thousand a year, it's not like those guys can leave you in a year to like if things go well they'll be with you basically for your whole period on this thing. If you're thinking 5, 10 years out, 15 years out, and they'll probably renew if things are going well. And IWG is delivering the promise. I think even after their 15% management fee that they're taking, I think building owners are better off assuming they could fill the space because they get more per square foot like we spoke about. So if you're building owner and you see that you're getting more even after the management fee than you were getting before, I don't know why you wouldn't renew it, but you have 10, 15 years to figure it out anyway. So I think the dynamics are really interesting here. I think you're hitting an inflection for the overall time penetration, the business is transforming to become a higher quality business. There's a lot of cyclical outside and you have a low entry valuation. So it's not that hard to envision a scenario where free cash flow triples in the multiple doubles and you make six times your money. It's not over some 3, 4, 5-year period. I just think the upside skew is really interesting here which is why I'm so excited about it.
Andrew: Just on your one point on the franchise, I guess franchisees or whoever's getting the thing manage signed a long-term contracts. I love your point earlier, comparing it to the hotel's, right? If you just looked and you said, "Hey, hotel owner across the street. Why are you paying Marriott 10% of room rates in night to be on their platform? It's the assets the same no matter what." It's like, "No, it's not the same. You get the Marriott brand." Obviously merits probably little stronger because they have the relation with Expedia and people going to Marriot and you get the rewards program and everything.
Yaron: Yeah. They will eventually have rewards also. I think IWG, WeWork and Industrious. I think they write their going to learn from the airline industry. They are going to learn from the hotel industry. I think they will eventually have their reward programs.
Andrew: People might see me laughing because I'm just imagining the IWG branded credit card and Consultants when they're grown up talking about, "Hey, we got to book our Flexspace. Are you and IWG customer or an Industrious customer? Who do you get your rewards points from?" I'm just, I'm laughing but that's [inaudible].
Yaron: And by the way, your cheese and crackers snacks that you could buy in a JetBlue flight for $12, why can't they sell those in IWG location one day as well for $12? And I'm just joking but not really, the better example is when you go to a hotel and you see $8 bottle of water, that's really not there for you. And I think it's there for you but it's really for the people who don't care about what that water costs.
Yaron: And a lot of those people are corporate clients or extremely wealthy people but you're if you're on a business trip and you're expensing, you really don't care if you're paying $8 for a water bottle. And everyone who comes in IWG is there on a business trip. And so they could sell a $1 water there for the meeting, right? There's just lots of ancillary revenue opportunities that they still haven't fully optimized. The credit cards, the point rewards programs. I don't know. But there's, I think you we're early days in the penetration of office space and once you get later days, as when you start thinking about how do I monetize the space better and do better, and I think you could probably do both at once. But I still think, for now the exciting part to me is just simply go outside which adds 300 on a base of 300 of EBITDA less capex, every thousand new locations as another hundred. So if you add 3000 locations over the next two or three years, that adds another 300, right? So now we're tripling our EBITDA less maintenance capex over a few years.
And a big chunk of that tripling is coming with higher returns, right? A high return on capital, or no capital intensity business at all. Just a management contracts. And if you look at the hotel franchise owners, Hilton, Marriott, or property management companies, right? First Service, Corp that's listed in Canada. They traded really high multiples because people really like the inflation protection element. You've got a royalty on a hard asset but you don't really have the cyclicality because you're collecting a management fee or royalty. And so those things straight up massive multiple. So over time as, I know you already fast forward, Mark Dixon there's a slide from 2 years ago where he showed that they're going to go from 3000 locations to, it should be like either 20,000 or 50,000 on the low end and high end of the slide. Like how they were going to go based on the market penetration. Who cares if they get the 20,000 or 50,000 or 10,000. I think it's going to be much higher number but just envision a world where you get to 10,000 or 20,000 and 2000 of the locations are the traditional model and 18,000 of the locations are managed. And that world this could trade a 20x EBITDA, and 25 or 30 times earnings in your bank, right? So there's a room for multiple expansion. There's room for a lot of earnings growth and it's a low entrepreneur.
Andrew: You can even imagine them starting to do some Financial Engineering, right? Hey, they spin out the legacy IWG business, which actually operates the operates the Flexspaces. They send that under new country company Allah what Hilton did where they spun out Park hotels, and then you have the gist IWG, the brand, and the franchisor or in the management and they're there to charge you management. So you could imagine all that.
Yaron: Yeah. I think one of the knocks on it over the last few years has been that they prompt, they pursued this re-franchising model where they were going to move tap light through the divestment of their convention on the locations. And they actually had a little success in '18 and '19. And they sold their Japan asset for like $400 million and they still collect the royalty on it, obviously. I think they were getting close to selling their North America and start collecting the royalty on it but I think the pandemic just threw a wrench in everything. I think it take some time to sort through. They put that on hold. They didn't really formally say they put it on hold. They say they're still considering it and pursuing it, but clearly there's nothing imminent happening or doesn't sound like there is on that side of the business. And people who got involved with the hope of re-franchising in the quick transition from a cap Heavy Tech halfway model have been disappointed and shaking out of the stock.
But I don't know why you would sell this asset. An EBITDA that's super depressed, like we spoke about, right? Center Level margins used to be close to 30. They are now 20. A buyer is not going to pay you for that 30 until they see you get back there. And so I don't know why you would sell them based off EBITDA that's super depressed. I think you wait. And to your point, you can spin them off down the line. You could sell them down the line with our financial engineering things you could do to take advantage of it if they exist. And if not, I think, they generate cash. Why would you sell them for less than the present value of the cash they could generate over time just to transform yourself quickly into a [inaudible] business. I don't think that's the economic thing to do. Now, you could argue if you sell them now, you could use all the proceeds to buy back stock before it re rates. But now you're just, you're guessing that you could buy back all that stock because you might not be able to. If you announce a sale, the stock my gap up, there's not any right volume, might dry up and then if you try buying it back, you might not actually get the shares. And so you would have sold an asset for less than what it's worth and not had the opportunity to buy back your own stock for less than what it's worth. And that would just be a shame. So I don't blame them for slowing it down, or put it on pause. But there is a scenario where they go back down that route at some point in the future.
Andrew: So just I think we've laid out a really nice full case. We've covered a lot of things. There is a interesting event angle here but I'll kind of save that cherry on top for the end. I do want to talk beer case real quick. And I can think of two in particular. Everybody can talk about office recession. I think we've addressed a lot of them, but I do want to ask you to particular before I just any other beer case. The first one was you just talked about they sold their Japanese business in 2018 or 2019 for a really nice multiple. I think that included another piece in Asia. And earlier this year, kind of quietly, I believe the person, the franchisee, they sold that business to a different person and sold another piece of the business back to IWG, right? And I think they took up, it was a back to IWG?
Yaron: No, they sold the largest real estate firm in Japan.
Andrew: Okay. I thought IWG bought it. But either way, people are going to look at that re-trade and say, "Oh, the people who franchise this is now, it was before covid but they're going to look and say oh it wasn't super successful. All the franchisee are struggling."
Yaron: Yeah. So if you go to YouTube and pull up the earnings call, it was a publicly listed Japanese company that...
Andrew: It's CKP something if I remember it correctly.
Yaron: Yeah. It's CKP, I think that's right. They have their Earnings Call on YouTube and you can turn on the captions on the bottom and read what they're saying. They don't speak English but you can obviously have the translator on the bottom. And if you get to the part where they're talking about the sale, they really talk about how they took on a lot of leverage to buy this asset from IWG in the pandemic, they got uncomfortable, right? We know Japanese companies are really uncomfortable with high amounts of leverage. They like having very clean Balance Sheets. But they did take on leverage to do this. I think they got nervous and then they were like, we don't want to be to lever it anymore coming out of the pandemic. And so, the nice thing is they found an even larger real estate player to buy this asset and they've clipped that, what is it Mitsubishi, I think?
Andrew: It was Mitsubishi, yeah.
Yaron: Mitsubishi has committed to continuing growing this asset aggressively and they paid a pretty full price, right? They took, I think CKP took a little bit of a write-down, but not a massive write-down given that occupancy fell so much during the pandemic in 2021. You would expect them to take a massive write-down, but they took a little bit of a write-down and they basically said, this is a de-levering transaction, not that they don't believe in this asset anymore. And they found a buyer to pay real value for it and continue growing it. So, I think if anything, that's a testament to the fact that the platform has value. Not part of the beer case.
Andrew: What about I... Yeah. So they sold Taiwan back to IWG group is what they did. But what about, I think another beer case we will look at is, Mark Dixon owns 30% of it . But I think people look at it and they almost sold the company in 2019 f or what seemed like a big premium and then that got pulled away. They raised a bunch of capital at pretty good prices in hindsight in 2000, late 2020 early 2021 saying they were going to go do some big deals. I think a lot of people thought WeWork was going to file and they were going to buy a lot of assets from WeWork or something. But you know they raise capital and they didn't really do anything with it. I think just look at and say, is the value ever going to accrue to shareholders? Because they're not really buying back stock anymore. I don't know. Maybe it's just because I followed for so long, but a lot of people I talk to it feel a little bit like it's just not going to happen, if that makes sense.
Yaron: What? Selling about the business outright?
Andrew: Selling the business outright, the cash flow really coming through. They do look at and say, there's been a pot of gold at the end of the rainbow for 5 or 6 years and yes, covid happened. But is there ever really going to be... Is that pot of gold ever really going to materialize?
Yaron: Yeah. I think if you're looking at the last five years, it's gone nowhere and you can paint a case that this is a value trap or a trading sardine. But if you zoom out further, Mark was able to retain 30% of this company while growing it from zero locations to 3300 locations over a few decades. If a business does not generate cash, you cannot grow it without diluting yourself for taking on too much debt.
Andrew: Brian Roberts over at Comcast, his dad, founded the Comcast business. Guess what, cable was really capital-intensive. Brian Roberts owns, I think he owns less than 2% of the stock despite being the son of the founder and getting paid pretty nicely like 30%. Yeah.
Yaron: In order to grow a business, the $3 billion in revenue and 3000 locations, you either need to have profitable locations that can fund your growth, or you need to issue lots of debt and equity. And if you issue lots of debt and equity, you either have an over-leveraged Balance Sheet or you don't own a big chunk of the business anymore. So if you just zoom out and think about it from that perspective, this has been a really efficient capital machine over time. That is fueled growth. I think you did have a period where you did have some pressures in the UK market in terms of pricing and occupancy and then you have a pandemic and to your point they didn't have to, but they chose to raise capital at some point and late 2020. It seemed like they were going to do some [inaudible]. They actually lent some company money that I think was going to get [inaudible] and then they got paid back that money. So the deal, it seems like the deal fell through and then they ended up doing this instant acquisition this year for £300 million something.
So they did end up spending that money on something else that I think is going to end up creating a lot of value. We can touch on that a little bit. But over a very long period of time, this business has created a lot of value. I think there are shareholders that have been frustrated by the lack of value creation over the last 5 years, but it's been a very tough 5 years for the industry and look at what WeWork is gone through, right? If you compare it to what we were gone through, these guys have done an amazing job in an environment where we were competing with them. Right? We work had free capital. They want an open on these locations with free capital. They were able to underprice the location because they didn't care about making money. And so that dynamic is getting better. The pandemic is now going to be behind us. We have these long-term leases of which 2/3 of our leases are 2% or 3% a year, pick your number. And when inflation is 6, we can raise our prices every year at 6 once we get occupancy back into what I was talking about and so we can get even more margin expansion, right? Because we could price our stuff annually. While our landlords reprice is once every 10 years in a meaningful way. There's just like, I get the last 5 years were challenging but it you zoom out for a long period of time, it's been an amazing run for this company. If you look at what's happening under the surface right now, I think the next 5 and 10 years are going to be amazing for this company. Clearly, even the best companies have periods where they need to grow into their valuation, right? Microsoft from 1999 or 2000 until 2012 was flat or something like that, right? Or at 2013 it was flat. So that's if they have to grow into their valuation over a 13-year period. But the nice thing is, once you get to a really low entry valuation and once the fundamental is in flat, I think the odds become in your favor. So I think, that's where we are here.
Andrew: And I almost felt silly asking it. I completely read it. It's just like you know after 5 or 6 years and they almost sold themselves to, I think it was Bam and CVC were begging for themselves in 2018 and the covid and it seemed like they were coming back real fast and the stocks way down. It's almost feel silly like yeah, of course. Covid reset the whole thing but you can see where it's going out.
Yaron: Yeah. I think there's lots of frustrated, medium-term shareholders.
Andrew: The only place I would push back on you, as you said, sometimes you need to grow into the valuation. It's like looking 2018, 2019, $400 million of EBITDA to $250 to $300 million of free cashflow after maintenance capex and everything. They were at the valuation. They were at a fine valuation, just covid just wrecked them. There is, before I turn to the last kind of event piece with instant, I just want to, is there anything else that of keeps you up at night I think we mentioned most of the overall risk, the company specific risk. But any other risk here that keep you up at night?
Yaron: Yeah. Broader macro is number one. I do think in an ordinary course recession, I think the shift towards Flex would overwhelm that the demand destruction for office space, but in a really severe recession I think the demand destruction for overall office-based wouldn't probably overwhelm the shift towards flats from traditional. And so that's obviously something that it's very hard to have as strong point of view on. If they had a better Balance Sheet, I would probably wouldn't keep me up at night. And I think their Balance Sheet isn't bad. But they do have some near-term maturities on a bridge facility, they took out to do Instant. And they're probably one and a half times elaborate on a Run-Rate basis if you exclude the operating lease liabilities, which I do. I don't consider those debt. Like I said, they're non-recourse to the parent for the most part, big company they can get out of them and it navigated out well. But around one and a half times whatever. But a big chunk of that, probably half of that comes due within the next year and change or maybe even less than that. Maybe the next 6 months or something like that. And so I think they don't have a doubt in their mind if they could refinance that and push that out. But if the economy does crack really hard, conditions in capital markets could obviously change very quickly and that's something that, if you're asking me what keeps me up at night, that's probably it. But I don't think it's a real issue. It's just if that were to happen with the economy, went into a severe recession very quickly and capital markets shut down, and then the debt came due, obviously, that would not be a great situation to be in.
Andrew: Speaking of debt coming due, there is one other way they could pay it off, right? First, they could refi it. The second way is they could pay it off with just cash.
Andrew: And one way they could pay it off with cash, as you mentioned, they bought instant group for I think they put in $300 million into it in early 2022.
Andrew: In November rumors come out that CBC has been £1.5 billion for just Instant Group. IWGs on which, I don't think they own a 100%. I think management put £50 million in.
Yaron: So it was a little bit of a complex transaction. So Instant was basically trying to form a Marketplace for the Flex office space market where you can list your Flex locations and help find tenants for those Flex locations and Instant would just like to take a cut. Like Airbnb does for apartments. They were trying to build for the Flex office market. Like you said, they bought it for £300 million, £330 I think was the price but management put in 30% or 40% of it. So they put in around 300 for the company and so they didn't own a 100% of it. But after they bought it, they've contributed a bunch of IWG assets into it, which is growing the EBITDA of that business and it's bought up their ownership stake back up. In the '90s, and I think once they're done contributing all their assets, they should own around 95% of it. So they're basically took this business from £30 million of EBITDA to it'll probably exit 2023 at around £100 million of EBITDA and some of that comes through organic growth, right? This business used to grow 20%, 25$ organically before they bought it. So some of that move from 30% to 35% or 40% will have come through organic growth, but the rest of it is going to come from contributions of IWG assets came to that business which will buy out their ownership stake. And they will eventually I think at some point this year either sell that
asset or announce an IPO, or a spin-off. So we will have more clarity on that one way or the other this year. And that, like you said, is obviously going to help them with the bridge facility. And so, I think that's why they're not refinancing it. I just think they don't want to pay points to refi facility that they think they're going to get rid of this year anyway through a sale or has been offering IPO. But yeah, that's the plan for that.
Andrew: But if you just do the math, you've got a $100 million in, I don't know if it's quite that big, but it's a pretty chunky change of Run-Rate EBITDA as they exit the year from all the assets they contributed. We know CBC bid £1.5 billion . We just mentioned, "Hey this is, it's a £2.5, £2.7 billion Enterprise value company right now." If they sell Instant, all of a sudden this is about $1 billion enterprise value company and all the math we were kind of talking about with, "Hey, in 2019, they $400 million in EBITDA. Hey, you know, we think they're Run-Rate as they exit 2023 and all the managed contracts are going up $400, $500, $600 million." All that really didn't include Instant, right? So you're talking you're like, "Oh, this is a really banty ankle, right?" You've got an owner operator who owns 30% of the shares. They've got this little business that they've grown that they said. When they merged that, I was actually a little skeptical when I saw it. I was like, you're buying a Airbnb for a Flex office space. Like, come on. But they said when they bought it, "Hey, we're going to hit scale real quick as we contribute assets. We'll IPO it. Maybe they're going to sell it as the exit." But sounds like there's going to be a value realization in the near term and if you look at kind of the remain code if you value instant anywhere close to CBC, it gets you excited, really preparing [inaudible].
Yaron: It was multiple inbound approaches from multiple private equity firm. CVC was just the only one mentioned. And I think, yeah. To your point, they get anywhere near $1.5 million that buys down your enterprise value to a billion. I think excluding instant by 2026, 2027 when you roll on some of these new management contracts and normalize the existing owned corporate locations to the margins, they should earn, it will probably do on a $700, $750 million of EBITDA in Instant and so if you would be creating this thing for like one and a half times EBITDA in 2026, 2027 numbers, if they're able to sell Instant for that valuation. And there would be some tax leakage. I think it, I've asked them, they said there were ways to mitigate it. So it sounds like it won't be that big of a number, but I'm sure there will be some tax leakage. So let's say, $1.5 million turns into $1.4 million, $1.3 million, you're still creating this thing at 1.2X that and you're buying $700 million of EBITDA that's still going to be growing very fast. Because if you're adding a thousand locations that's adding $100 million. Those new locations take 18 months or so to ramp up. So once you sign them, 18 months later or 20 months later, they're generating $100,000 per location. So you sign a thousand that adds a $100 million of EBITDA and you're going to assign multiple of thousands. And so, once those roll on, I don't know, you're creating this thing for 1, 1 1/2 times EBITDA on the business will be way less capital intensive at that point.
Andrew: You know what kind of gets me excited as I'm just thinking about in spitballing with you, like CBC and all these other guys made the £1.5 billion offer in November, markets are way up since November. Credit markets have improved since November. But even more than that, overall macro financing backdrop. We saw WeWork, I've read WeWork's Q4 earnings this morning and prep for the product podcast and WeWork said, January and February were I think they said the strongest months in our history. Right?
Andrew: So you've got this. Instant play that people did $1.5 billion in November when things were worse and we've had the strongest months in history since then like maybe instance worth $1.8 million now. Maybe it's worth $2 million or maybe it's just worth $1.5 million and everybody. But you know, I could see a scenario where actually I'm running these models and saying, "Oh you know if I give instant $1 billion of value after tax and leakage and everything, maybe I'm too low on it just based on all of that fundamental stuff." And, IWG, it's got this great story. It's got the manages coming on. It doesn't seem like anybody's giving them any credit for. WeWork just said, this is the hottest Flex market we've ever seen [inaudible] this.
Yaron: Yeah. And by the way, like the instant asset, I spoke about the marketplace, Airbnb competitor, one of the assets they contributed in there picking the process of contributing into instant is also their virtual office assistant and virtual office space business which, if you think about this asset they will do way better as an independent asset and as part of IWG because it opens up Instant to using any Flex office space provider for the virtual business. And today on Instant, WeWork and Industrious and a lot of players list their spaces on Instant. But you have to imagine there's some skepticism around sharing too much information with Instant, which is owned by IWG and once it's unleashed from IWG, I think it could really accelerate the growth on that business. So if you do believe the market is going from 2% Flex to 10% or 15% or 20% Flex, this is a really awesome asset you want to own. So I don't think $1.5 billion is so crazy if you're getting it with $100 million of EBITDA that can accelerate once it's out of the hands of IWG, I think it makes a lot of sense.
Andrew: I love that point, right? If you're WeWork is listing on Instant and Instant is owned by IWG, you're giving IWG information, right? You're saying, "Oh, the downtown market in New York, we're listening and we're putting premium prices because it's so hot. There's so much demand. Uptown Market there's no demand. So, we're listing really low price. We're just desperate, like you're giving them information on how they should be pricing and leasing and looking for new assets. Once it's out of IWG's hand, you've got this energies when it's owned by a IWG. So hopefully, IWG can contribute their assets, spin it up a little further by putting their assets and using it. And then once they separate it, they actually create a lot of value.
Yaron: Yeah. Also, look if I'm looking for a Virtual Office Solution and I reach out to the Instant which is now going to be managing the virtual offices by IWG. They're really only want to use IWG locations for my Virtual Office business. So that kind of limits me on my offering as a customer of which locations I could use for that. Once it's independent, it could use, WeWork locations, it can use Industrious locations, it could use independent regional players. And so I do think the business it just will have way more way better growth potential, standing on its own. And, I think for that reason they've committed to making this independent asset one way or the other either through selling it off to private equity or by [inaudible] it and eventually spending it off to listing holders. And I think, my sense is that Mark Dixon has very high aspirations but it's at set and wouldn't mind like he owns 30% of IWG if it's ends up getting spun off to us as shareholders of IWG, he would end up owning close to a third of it of that business as well. And I think, he's not going to fire sell this asset just to pay down some debt because I do think he has high aspirations for it. So if someone wants to pay full price, I think he would entertain it and accept it. If for whatever reason a buyer isn't willing to pay full price, I think he's very willing to disown it himself because there's a lot of tailwinds in this market, right? The market is going from to a much larger number.
Andrew: The only other thing I'll add here and then I'll give you final thoughts is, they are London listed and they used to, they've gotten a little better about it but, they used to give, "Hey, here's one EBITDA number and another EBITDA number and here's the group operating profit. And here's the overall operating profit. And here's four different forms of capex." I do look forward to, it's probably not this year because they're consolidating Instant and they've got, but I do look forward to maybe 2024 once they've gotten rid of Instant and you can see a nice clean, hey covid's in the background. Here's the nice clean earnings number for the overall company. So I think they can do themselves some favors by hitting that.
Yaron: Yeah. They've shifted to this High FRS16 accounting. And so they have one EBITDA which is kind of the way us, American got investor leasing even down and they have IRS version which taste the ad back. The least liabilities basically on the EBITDA [inaudible] interest expense, and then you have to deduct that. And so there's all these bridges in their financial statements and it's very, it really is very difficult to follow their financial statements and annual reports. I've probably spent 100 hours in their annual reports. I'm not even kidding. I've maybe even more than that trying to bridge everything, understanding everything and I think I finally have a handle on everything after spending that amount of time, but it's not the easiest name for investors to get up to speed on because you all a sudden, you look at the Balance Sheet, thus lease is clap is categorized as bad. It looks levered, you see all these numbers that are hard to reconcile and bridge to and the map. This isn't like an industry that has a ton of specialist following it already. You would have to get up to speed on this one industry and that time you have to spend on it on this one name to then maybe make it into your portfolio. Maybe not. And if it does make its way into your portfolio. If you're not concentrating investor or might not even move the needle anyway.
So why you going to spell is time for potential 1% or 2% position if you're like a diversified mutual fund company. So I do think there's a lot to be desired for the reporting here. Only 15% of Revenue comes from the UK, and then pound. And when I spoke to the CFO and I asked about the reporting, he's like, one of the things I think about which I'm not committing to do anything about it, but why do we have to report in pound, right? First of all, when the UK sold off last year's are always worried about UK list of businesses. This sold off because it's listed in London and denominated in pounds but 15% of revenue comes out of the UK. The biggest market is North America. So that's one of the things I think about, why do we have to report and pound and IFRS accounting. So maybe they realistic in the US one day and start recording in dollars which is their biggest currency. Maybe they find another solution for it. I also think there's segment reporting. You have to back into a lot of numbers based on different things that they tell you. And I think they could do a better job breaking out the franchise, revenue and profitability, managed revenue and profitability. And I think that's something as that business scales and becomes more meaningful part of profitability. They will break out for you and so I think it will make it easier to analyze the business and come to a conclusion on what you think it's worth. Now, I think that business needs to get some scale first before they do it and maybe they'll two step it and break out revenue first and then rate breakout profitability once it scales. Maybe they'll do all once. I do think they're going to do a capital markets this year at some point. Hopefully in the first half, but maybe it slips into the second half. And we'll see what they do with the reporting at that point. But I think there's a lot of potential Catalyst here in terms of the business inflecting, right? Margins, revenue, occupancy pricing. So business inflecting, the business transformation starting to take hold as they start reporting these quarters and half and years whether adding 500 or 1000 new management contracts on a base that's much smaller than that amount today. So, cyclical upside, that's 1. Business transformation towards management, that's 2. Potential sale of Instant, that's 3. Addressing the maturities which probably comes with Instant, that's 4, which I don't think... I'm really not...
Andrew: I don't know anybody who's too concerned about the maturities.
Yaron: Yeah. They're generating cash again, right? If you just scream for companies that are profitable in generating cash like this one over the last 2 years hasn't really looked bad, exciting. And we're about to inflict on profitability. So it's about to start looking optically cheap again on actual reported numbers and I think they had to cancel a dividends and buy backs for the pandemic. They probably turn both of those back on in the next year or so. So it's also dividend investors can come back maybe a re-list this thing, maybe eventually he decides to sell this thing. He's getting older he's not super super old but like maybe one day he does decide to sell this thing. But the nice thing is I like getting involved in situations where I don't think you need to sell it at a 40% premium to be excited about it. I think if I just painted a case for you where you can make six times your money potentially. If this plays out over some handful of years, like the bar for selling it is pretty high because it's very hard to find a new position to put into your portfolio that has that kind of convexity.
Andrew: Two most exciting things to me are... This one is Legacy just floating around in my mind, like the last time in 2018-ish or whatever when they look to sold, there were two big serious private equity companies. [inaudible] knows real estate very well and both of them were apparently...
Yaron: Recap flat.
Andrew: Say again?
Yaron: Recap flat.
Andrew: But they know it well and both of them were bidding for IWG pretty aggressively what I said. And Mark Dixon, I believe he just said, "Hey, they didn't hit my price expectations so I'm gonna walk." But that's like kind of a validation now. That's pretty covid. So, forget it, whatever. But the thing that makes me most excited about IWG right now, is the sale of Instant for half of the enterprise value. That alone would be an interesting Catalyst. The fact that hopefully 2023 is the year where you really see the inflection and we started getting back to the free 2020, $400 million in EBITDA, $300 million in free cash flow numbers, that alone would be an exciting inflection point and you've kind of got both of them potentially in the same year. That is really interesting. And we didn't even talk about what we've talked about in this podcast. But in that you didn't even talk about that, "Hey, you're having to manage revenues ramp really ramp up, and it could be $50 million, $100 million, 200 million of extra earnings on top all that. Anyway, Yaron his has been awesome. We've been running really long but I really appreciate you making your second appearance and looking forward to. I think I'm going to see you next week, but looking forward to having you again on for the third one.
Yaron: Yeah. Thanks for having me on and just a reminder nothing on here as investment advice. Do your own research and all the typical stuff. But yeah, it was fun. It was fun coming on. Thanks for having me.
Andrew: Perfect. Glad to see you, man.