Motley Fool Money - WeWork Goes Bankrupt

Episode Date: November 7, 2023

The fond expectancy of venture capital has turned into the hard facts of private equity.  (00:21) Ricky Mulvey and Bill Mann discuss: -Uber's focus on adjusted earnings. -WeWork filing Chapter 11 bankruptcy, and the knock on effects. -Economic takeaways from Bill's trip to Africa. Plus, (13:51) Robert Brokamp and Alison Southwick check in on how Americans are saving. Companies discussed: UBER, WE Hosts: Ricky Mulvey, Alison Southwick Guests: Bill Mann, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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pour out of kombucha, we work has gone bankrupt. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill, man, Bill, good to see you. I'm glad to be back, Ricky. How you doing? Doing pretty well. I mean, I got less adventures to talk about. You just had a John around Africa.

Yeah, we did a lap. A lap. A lap. Yeah, so we were in Mozambique and the country formerly known as Swaziland, then Namibia and South Africa. And it was a, hey, no more kids are in the house. Let's go somewhere adventure. And my wife and I had a blast. We were talking earlier about turning our work brain off on a longer trip. It is difficult to turn the investing brain off, I would imagine. Notice anything interesting about the economies?

Maybe some investing takeaways? So, I noticed the last time I was in South Africa was pre-COVID, and that was, so, 2017. And I've actually noticed quite a degradation in what I sense to be the economic conditions in the country. I may well be wrong. It is a country that is largely defined by commodity prices. And as we know, commodities have been white hot in the last year. year. So I actually saw some really interesting things in terms of how young these countries are skewing and how much economic potential there is throughout Southern Africa.

Let's move on to Uber's earnings. Uber reported this morning. Last time we talked, the company made an operating profit for the first time in company history. Give yourself a pat on the back. And by gum, Bill, man, they've done it again. The twist. though. Yeah, is. The what? It's. They've done it, ish.

They've done it, ish. We'll get to that. But for now, for now we're handing out trophies. Last quarter, investors were told to really pay attention to the operating profit, that gap number, revenue, and expenses. This quarter, the shift is really to the adjusted EBITDA number. Hey, pay attention. We've got record adjusted EBITDA.

This seems like a, this seems like, this seems like, Byzantine, but is this shift meaningful? Well done spelling out and pronouncing shift. Thank you. Because Charlie Munger, who is Warren Buffett's right-hand man, calls EBITDA a word that sounds an awful lot like shift. Yes. So when you have an adjusted EBITDA number, I would say maybe be even more careful.

because this is not an accounting number that exists under generally accepted principles. So you can make whatever adjustments you want. So they're not lying, but they are using a number that is not an accounting number to show performance in a certain light. And so it's not unmeaningful. I don't want to be so cynical about it, but always beware when you hear, the word adjusted, always beware when you hear the word EBITDA and triple both when you hear adjusted EBITDA.

Yeah, you like to see maybe one-time expenses getting taken out in the case of Uber. They like to take out, what is it, lawsuits, regulatory stuff. And one would think that for a company like Uber that is operating taxis, or not even operating taxis, but operating cars, mobility, delivery all around the world, that might be something that's a little bit more than one time. Recurring one-time expenses. There you go. Some highlights from this quarter, they had 25% more trips, took 9.3 billion, which is just

Uber's slice of the total $35 billion in gross bookings. They did about $400 million in operating income for the quarter, but they also did about $500 million in stock-based compensation. I can make a guess, but what stands out to you? You're not going to believe it, but it was those last two. Yes. I mean, at the end of the day, and it was a great quarter for Uber. And Uber is a company that I find to be confounding because it's the best quarter ever.

And from an economic standpoint, still not particularly economically meaningful for shareholders, although the share price has doubled since the beginning of this year. So the market has sniffed out that things were probably going to be pretty good for Uber. On the other hand, you have to be careful with companies that pay out that much in terms of stock-based compensation, not because it's a cash number. In some ways, it's even worse. A share of stock is a perpetual claim on earnings. It is dilutive. And so if that is what a company is using, if they are going to be much more profitable in the future, and that is absolutely the guess and the hope for Uber, They're going to be doing so over a higher and higher number of shares.

And that means that every shareholder is running with a weighted vest. So Uber might tell you, and they break out where the stock-based comp goes in their earnings release, they might tell you, hey, we're using this to retain top talent. We're taking moonshots like autonomous delivery and driverless semi-trucks. Most of that stock-based comp goes to R&D. Right now, the listeners can't see it, but you're shaking your head. Well, it seems a little disappointed. No, it's just that it seems a little backwards to me to pay a lot for California talent in order to order taxis in Mozambique. It's a little bit backwards. And maybe

it is top talent and I'm not going to really, you know, I'm not going to pass judgment on the talent. But at some point, the company's got to be profitable. And if all that talent is soaking up all of those economic earnings, what actual good is it to shareholders? Fair enough, but I don't want to be totally negative here. I don't either. What are we doing? Because stock-based comp isn't necessarily, I don't think it's inherently, it is a thing, and there are trade-offs. So, are there any companies that you think use this in a way that you're more of a fan of?

Yeah, I think that it's, I think that share-based compensation is a very valuable tool. It is especially valuable for companies that are not yet at the point in which they are generating huge amounts of cash. It is when share-based compensation continues to expand as the same speed as the business over time when a business becomes more mature. That's when you really need to worry, because at some point, dilution on top of dilution becomes a problem for shareholders. And ultimately, we are shareholders speaking on behalf of other shareholders. I don't think what Uber is doing with stock-based compensation is illegal, immoral, or fattening. It is just something that you should not allow them to sweep under the rug by using something

like adjusted EBITDA, which ignores stock-based compensation. Fair enough. Let's move on to a more positive note. We work is bankrupt last week. It is positively bankrupt. That is correct. Last week, I promise, we're going to have a happier, we're going to have a cheerier conversation at some point. I'm sorry to bring you back from vacation like this. Last week, Dylan and Asset talked about how WeWork was likely going bankrupt. Now it's actually happened. They got the Chapter 11 bankruptcy.

That's the reorg kind. WeWork has the most square footage in the United States. So I think that the interesting thing is the knock-on effects. What are you watching for those? For the lenders, maybe the second buyers of these leases? In most cases, what WeWork was doing, which always struck me as being a bizarre business, is that they were releasing space. So they were going out and basically paying market rates for huge amounts of space and then

slicing it up and then releasing it. There have been a lot of people who believe that this is a sign, or it's going to create additional pressure upon commercial real estate. commercial real estate, by and large, is comprised of institutional investors who put buildings into funds, and those funds are then sold to other investors. In the same way that you might go out and buy a mutual fund that owns stocks, institutional investors own funds that own pieces of buildings like the Empire State Building. So, when you look at WeWork, it is obviously a sign of the continued.

malaise. I don't think that it's good for any landlord to have a financially at-risk dominant tenant, but it's been bad in this business for a while. And so I think that you're going to see some knock-on effects, some additional funds, but not necessarily the promoters of those funds going bankrupt as well. Okay. So it's a punch, but not a knockout blow, maybe. No, it's not a knockout blow. One of the really interesting, things about the commercial real estate market is that they are widely held assets in the same way that publicly traded companies are.

Yes, but I think the key, I think one thing about this story, though, is that what is it? The fond expectancy of venture capital has turned to the hard facts of private equity. And now what a lot of observers are watching is who's going to take, who's going to sweep up these leases because they're probably going to get a pretty sweet deal, where in the Chapter 11 bankruptcy, you can get maybe some really nice office space for 60 cents on the dollar, where they've already put in a ton of money to make these places nice and in good areas, and then you can buy it at a bottom dollar per price and then sell it out for whatever the market rate is.

One of the big stories that I've seen over the last couple of weeks is a look into the return to downtown, as they call it. It's in places like Nashville and in Manhattan, in a lot of cities around the U.S. and especially around the world, work is much more going back to being driven by the office, maybe not in the same way that it was pre-pandemic, but you are seeing a rebound. All of those things create ancillary revenue streams and ancillary demand for office space. So what I think that you're going to see ended up happening. And one of the nice things that you could say about WeWork is that they did tend to go and put their offices in high demand areas. I think that although it's not going to be

immediate, you're going to see a lot of that office space be soaked back up through future demand. I think it's also an interesting economic canary. I know that the WeWork story isn't necessarily over. It's reorganizing. But it followed the booms and busts of venture capital, SPACs, tech darlings. When you look back on this, you think maybe three to five years from now, what are you going to remember about this story? We've talked about this in the past. To me, WeWork was the weirdest of all of the stories in commerce that were happening in 2018, 2019, 2020. I, from a financial standpoint, could not understand how this company was being valued at 16.

$39 billion and higher. I didn't understand really what the secret sauce was, or what was the sustainability factor, or what was the factor that was going to make this a hardened business against the realities of the vagaries and the ebbs and flows in the commercial property markets? And I guess it turned out, I was right. I think you have to give almost everyone a bit of an incomplete because it's not like we, any of us had COVID on our bingo cards. But it really does once again make me remind myself that you really have to be careful with White Hot stories. It's, it is very rare that they work out the way that you seem to think and the market seems to think that they will when they are that popular. Oh, man. We're going to have you back

tomorrow with Dylan. We're so excited to have you back from vacation, but it's good to have you back on Motley Full Money. Thanks for joining us. Hey, thanks, Ricky. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly why I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin. They work directly with safe, ethical factories and cut off the middlemen so you aren't paying for brand markups or fancy stores, just quality clothing. Everything they make is built to hold up season after season and is consistently

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Go to Q-I-N-C-E.com slash Motley for free shipping and 365-day returns. Quince.com slash Motley. We've got a mailbag coming up. So if you've got a question about saving or personal finance for Robert Brokamp and Allison Southwick, shoot us an email at Podcasts at Fool.com. It's also a good spot if you've got a stock pitch or, just general feedback on the podcast. That is Podcasts with an S at Fool.com. All right. How are Americans doing with their finances? Allison and Bro, check in on the

averages and pull out some takeaways. Is it healthy to compare yourself to your proverbial neighbor? No, not at all. Do we all do it? Yes. And the Federal Reserve is here to help. The Fed just dropped their changes in U.S. Family Finances Report. And it looks at how family net worth, income, assets, debt, and financial vulnerability, and more, have changed from 2019 to 2022, which was, of course, a very exciting time in the world. Yeah, it was literally the best of times or the worst of times. The worst part, of course, was the pandemic that killed 7 million people worldwide, according to the World Health Organization, including more than a million Americans. The economy shut down. Uncle Sam dispensed

trillions of dollars to support for both individuals and businesses, but despite that, according to the Federal Reserve, 200,000 businesses permanently failed as a result. But also, the stock market went nuts. Just contemplate these returns from the NASDAQ over this period. So, 2019, the beginning of this Fed study right before the pandemic, NASDAQ returned 39%. The year of the pandemic, 49%, 2021, 27%, but then came 2022. And then NASDAQ lost a third of its value, was actually its third worst year ever. And then during this time, the prices of houses, also grew, reaching double-digit year-over-year price increases for the first time since 2013. So, despite all the upheaval and tragedy over the past three years, most people are actually

better off financially. Well, because nothing is more exciting than the methodology of consumer financial reporting, how about you lay the table for us, bro, before we get into these numbers? Yeah, we're going to talk a lot about numbers here. We're going to talk about income and net worth, and all this was compiled by the Federal Reserve between the spring of 2022 and the spring of 2023. And when they did the interviews, they asked for 2021 figures for income. So, anytime we talk about income, we're talking about 2021.

But net worth and that type of stuff was as of the time of the interview. And this span of when these interviews were conducted, the stock market went down and then went back up. So just keep that in mind as you hear these numbers. And with all that said, let's dig into the data so you can see how you compare to your fellow American. All right. Well, let's start with income. The Fed looked at before tax income and found that median income rose a relatively modest 3% from $67,900 in 2018 to $70,300 in 2021. Meanwhile, the mean income, aka the average, increased an impressive 15%. This was one of the largest three-year changes in mean income from $123,400 in 2018 to $141,900 in 2021.

Yeah, let's start with a brief flashback to our statistics classes. So the median is the number right in the middle of a series of numbers. So they're around 130 million households in the U.S. So if you line them all up according to income, household number 65 million would be the median. Now, the mean is just the average. you take the total of all the income in the U.S. and divide by all the households. The fact that the average income rose much more than the median indicates that income disparity grew over this period. In other words, the average was brought up by a relatively small number

of people who make a lot of money. Because the median is more reflective, I think, of what's going on with a typical household, that is probably the most meaningful figure. Now, digging into the numbers, we see that all the growth in income between 2018, in 2021, took place in households with college degrees. Those with a high school degree or some college, basically the income was flat, and those without a college degree or a high school degree lost ground. So, you know, stay in school kids. Of course, where you live matters, Americans who live in metropolitan areas had a median income of 71,000, whereas those who lived in more rural areas had median income of 50,000. Income peaks in the age range of 45 to 54.

according to this report. And those folks had a median income of 92,000. And then it gradually declines, reaching 49,000 for households age 75 and older. And why is this important? Well, I've mentioned on a few recent episodes how income and expenses decline as we get older and you enter retirement. So you may not actually need as much for retirement as you think you do. Now, what does it take to be in the top 20% for income? That's a median income of 189. And to be in the top 10%, it's an income of 378,000. And finally, homeowners had more than twice the income of renters, 94,000 to 42,000. All right. Let's move on to net worth. So net worth is your assets. Think stuff you own along with

savings, retirement accounts, etc. minus your liabilities like loans or credit card debt. Between 2019 and 2022, real, by which we mean inflation adjustin, media net, net worth surged 37% to $192,900, and real mean net worth increased 23% to $1,063,700. Yeah, in this case, the median grew more than the mean, which indicates that the wealth gap narrowed a bit. In fact, this was the largest three-year increase in median net worth over the history of this Fed survey, which began in 1989. more than double the next largest one on record. The age group that had the largest median net worth was $65 to $74,000 or $400,000. Seems like a lot of money, although, of course, most of these people are retired. So I don't know, I think that actually may not be a whole

lot of money. We'll see. Again, college degree seems to pay off. Those folks with the college degree had a net worth of close to a half a million dollars, whereas it was just about $100,000 for those with a high school diploma. Living in the city helps, of course, to Those who lived in metropolitan areas had net worth of about 200,000 versus about 146 for those out in the country. To be in the top 20% of net worth, you had to own $747,000. And to be in the top 10%, you needed a net worth of $2.5 million. And owning a home was really important, which brings us to our next topic. Yes, let's talk housing, because as we've mentioned already, it correlates to a lot of other good things.

So, the home ownership rate increased slightly to 66.1%. The median net housing value, which is the value of a home minus the home secured debt, rose from $139,100 in 2019 to $201,000 in 2022. Yeah, the difference between homeowners and non-homeowners is quite stark. So between 2019 and 2022, the median net worth of renters or other non-other-nest, non-home owners grew 43% to $10,400. So the amount of growth was impressive, but the amount actually is on a dollar basis is quite stark.

Homeowners, on the other hand, Southern median net worths grow 34% to around $400,000. And according to the Fed report, the balance sheet of families in the middle of the net worth distribution is dominated by housing. And as such, increases in their wealth between surveys tend to reflect the extent to which growth in house prices

surpass inflation. In other words, home ownership is a big component of growing wealth from Middle America. Now, those who are renters might be thinking, well, I should be getting in on this homeowning thing. Unfortunately, it's not very easy these days. According to this Fed report, housing affordability has fallen to historic lows, as the median home was worth more than 4.6 times the median family income in 2022. And I'm sure it's just gotten worse since home prices have just kept climbing and mortgage rates. rates are now well over 7%. All right.

And the last thing we're going to look at is financial assets. You may be like what we just talked about net worth. Well, net worth is all fine and good, but it includes home equity, which isn't the most liquid of assets. So let's talk about how much money the average American is sitting on to cover things like retirement, college, and other cash-hungry goals. Yeah, net worth is an important number. It's fun to track and all that stuff.

But it's difficult to spend. So in some ways, the amount of a family's financial assets is a more significant figure, because that's money that can be used to pay for your goals. The good news is that 99% of families in 2022 owned at least one financial asset, and that includes checking accounts, CDs, bonds, stocks, mutual funds, retirement accounts, cash value, life insurance, stuff like that. The median value of all financial assets held by families rose 31% to $39,000 in 2022. So again, the amount of growth was impressive, but still that the median American family has financial assets of less than $40,000 to be is pretty sobering.

The one goal that is shared by most Americans is retirement, right? Few people want to work forever. Yet, according to this report, only 54% of families have a retirement account like an IRA or 401K. And the median value of retirement accounts was 86,900. So probably not enough to pay for the retirements most people envision. To be in the top 10% of retirement savers, you needed $913,000 in your accounts. And then finally, on the topic of financial assets, let's end with. some good news. Direct ownership of stocks increased notably between 2019 and 2022, from 15%

of families to 21%. And that is the largest change on record. All right, bro. So that was a lot of numbers we just threw at everyone. So how about you just sum it up, though? What's your big takeaway from this report? Or just, you know what? You're just your big takeaway period. Yeah. Honestly, my big takeaways, you probably should ignore most of what we just talked about, right? Because we have no. I mean, because we like to compare ourselves to those around us, and right now, you might be feeling pretty good or you may not. The psychologists tell us that comparing ourselves to others is a surefire recipe for discontent,

because there will always be someone who's doing better than you are. Whether you have more or less money than your neighbor really isn't important. What's important is whether your finances are in good shape. Uncle Sands Consumer Financial Protection Bureau has suggested four characteristics of financial well-being that I think actually make a lot of sense. And they are having control over day-to-day month-to-month finances, having the capability to absorb a financial shock, being on track to meet your financial goals, and having the financial freedom to make the choices that allow you to enjoy life. If you have those four, or really even the first three, you're likely doing pretty well.

Typical bro to say that enjoying life is optional. you got the first three on track, then you can enjoy yourself a little bit. You can be miserable. That's fine. As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against. So don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.