May 29, 2018
Community Adjusted EBITDA
Client (C) to Advisor: What’s a Community-Adjusted EBITDA?
Advisor (A) to Client: Why?
C: I just signed up for shared workspace at WeWork. They’re fantastic. I get free pizza.
A: With pepperoni?
C: Anyway, I was reading in Bloomberg online (April 25th) that WeWork sold $702m in bonds to accredited investors.
A: That’s true.
C: What's an accredited investor?
A: Someone who makes more than $200,000 or has a net worth or more than $1m. You’re an accredited investor.
C: I know, I have the net worth. And I paid $1.1m in cash for my Manhattan parking space.
A: You paid $1.1m for a parking space?
C: Yes, at 180 square feet, it cost me only $6,111 per square foot.
A: That’s ridiculous.
C: Oh really? Someone bought Sting’s apartment for $10,337 per square foot. No parking space included.
C: Okay, how about this bond offering?
A: Last year, WeWork had $882m in revenue.
C: Big number.
A: Yes, but they had $934m in losses.
C: That’s piss poor.
A: They had $1,816m in expenses.
A: However, they had a $233m profit when they excluded $1,683m in expenses.
A: Yes, they used a made-up financial measure called Community-Adjusted EBITDA.
C: What’s that?
A: It’s where they take out almost all their expenses to show a profit.
C: I’ll bet I know what WeWork did with all those expenses.
A: I can’t wait to hear this.
C: They flushed them down the toilet.
A: I’m not surprised you would say that.
C: So what expenses did they leave in?
C: For dribbling? Yes! Ha Ha.
A: Can I ask you a question?
C: What’s with all these allusions to body fluids?
A: I have no idea what you’re talking about.
C: Never mind.
A: WeWork doesn’t show a cash-flow statement.
C: Why not?
A: Because they are a privately held company and they don’t have to.
C: Because they’re yellow?
A: No, because they don’t have to.
C: Bloomberg estimates that in 2017 they had negative free cash flow of $775m.
C: That’s a real piss-pot
A: Can you please stop?
A: So if they sell $702m in bonds and they have $775m in negative free cash flow, they might not have enough money to pay back that debt.
C: That will happen?
A: It could.
C: So if I’m an accredited investor, which means I have more money, which presumably means I’m more financially savvy, why would I buy a bond in a company that might not be able to pay me back?
A: You probably wouldn’t.
C: So why do other people?
A: Because there’s a sucker born every minute.
C: Did you just make that up?
A: No, some investment banker, I mean circus guy, coined that.
C: Very funny.
A: I have one piece of advice for you.
A: Before WeWork runs out of money…
A: Get the pepperoni.
C: Great idea.