Yet Another Value Podcast - Yaron Naymark on IWG's value case

Episode Date: February 27, 2023

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.    Chapters  0:00 Intro  2:10 IWG overview  12:05 How does the current high vacancy office space impact flex  17:00 Why COVID and tech layoffs could be a tailwind for flex office demand  20:05 Why office owners can't do flex themselves  28:30 Discussing WeWork's brand versus IWG  39:15 IWG's operating leverage and current valuation 52:35 Why is it taking IWG so long to accelerate their franchise business / refranchise corporate locations  55:50 Is pitching value creation / operating leverage just a Waiting for Godot story?  1:05:00 Looking at a potential Instant sale  1:12:30 The complexities of IWG's financial reporting

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wherever you're watching or listening to it to it. With me today, I'm happy to have on for the second time, my friend, your own name, Mark. Your Own is the founder of One Main Capital. Your own, how's it going? Good, Matt. How are you? 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 big company. We're probably going to be talking about WeWork, 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. They're kind of a WeWork competitor. They own the Regis 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? So, IG is the market leader in flexible hybrid workspaces. Like you said, they compete with we work, 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 CEO, founded it. He still owns 30% of the company today. They have 3,300 locations. And so they, like I said, they're by far the largest. We Work, give you a sense, has about 800 locations. Industrious has like 150 or 160 locations. And then it hails off pretty sharply from there. I think the end market is interesting because,

You know, of 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. You know, JLL, CBRE have put out their estimates that are in the 20s. The CEO of Industrius has been on a few podcasts where he said he thinks is going to 35 or 40%. But basically, you have this massive tailwind, you know, office transitioning from, you know, the legacy model where tenants have to sign these 10-year leases for entire floors in an office building towards this flex model where tenants could sign one-year leases for parts of a floor in an office building. And the acceleration is really taking place for a variety of reasons right now.

you know, obviously the pandemic pushed people to want to work more remotely, closer to home, coming to the office two days a week, work from home two days a week. So flex and hybrid has just, you know, kind of push people in that direction. But on top of that, you have, you know, teams and Zoom 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, you know, 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. You know, if you own office space or if you've been following the office market, you know that vacancies are rising, and owners, this 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, you know, typically if you're signing a dedicated lease for 10 years, you're 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 lease the number of square feet you need for your, existing employee count, and you can kind of, you know, 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 maybe you need to go into New York City two days a week to meet with your teammates. But the other three days a week, you want to have the

ability to work closer to home. And, you know, maybe at home one or two days and go into your local office, one 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 landlords. 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, you know, 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 that's kind of the market in terms of Regis or IWG specifically. They are also transitioning their business from, you know, 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 how, you know, most of their 3,000 locations today,

call it 2,000-plus, are that model where they put, you know, maybe a million dollars of CAPEX into these locations each, and now they subdivide them and rent them. out, you know, probably a thousand of their locations, maybe a little less, are managed today where they're managing the 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 a light business over time where they're just managing real estate for building owners. And so you envision a company at the end of the decade, call it 2030, where they have multiples of their current location count. So let's say they go from 3,000 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, which seven or 8,000 are managed, where they put up no capital and collect a management fee, and two or three thousand are the traditional model where they own 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 of this business. And you have a very attractive entry valuation today in terms of run rate free cash flow, run rate EBITDA. And by the way, and by the way, run rate, EBITAN 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, you know, they have, like I said, over 2,000 corporate-owned locations, the center-level EBITDA margins pre-pandemic were in the high 20s, approaching 30%.

They got to the teams during the pandemic. In 2022, they probably are at 20%. So you're going to go from 20%. You know, Mark Dixon said he expect, who's the CEO, said he expects it to get back to 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 revenue. So you have another three points of corporate overhead leverage, which 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 the 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 today of cyclical upside. And you have the secular growth and business transformation, all at a really cheap entry multiple on current run numbers. So I think there's a lot to unpack there. I'll hand it over to you from that. No, that was great.

That was great. I guess just some things that should have opened. Do I remember correctly that I did a podcast on this about a year ago now with undercovered stocks? And is that where you heard about this for the first time? Am I remembered that correctly? I've heard about it from a lot of different places. Come on. You can't even give me that.

You're a... Listen, listen, I am a customer of UWG today. I was a customer. We were four years ago. and I've been following the space just because I'm interested in WeWork, right? You had Newman. I just thought he was a really exciting personality.

So I've kind of been following from afar. I really did dig in after listening to your podcast. And, you know, that was early 2022. You know, I think I bought my first shares in maybe September, 22, so maybe seven months later. And, yeah. And I do think, like, it's always tough to do a podcast, you know, within a year because some things change.

I do think now is such an interesting time for IWG because as we'll probably mentioned 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 heads, 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, 2003, they'll report results, and we'll see, hey, you know, 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 to the leverage. Like, it's so interesting how we're right at the cost of either the thesis, like, really accelerating, or maybe us having to 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, you know, let's just start. with I think the first thing everybody's going to jump to is the first thing is probably we work, but let's start a little bit by just diving into the office sector in general. You know, I live in New York City, so maybe I'm a little bit too New York-centric.

But a lot of the questions, when I posted that you were coming on on Twitter, a lot of the questions were the office space sucks. Vacancy is super high right now. Sure, Flex is like kind of the trend, and maybe they can help with that. But, you know, if New York office space is 60% utilized right now, there's going to be a lot of vacant offices, a lot of competition. Like, how do you kind of think about them in the space of a post-COVID world where, you know, especially in the major urban markets, we probably are a little bit overbuilt in terms of offices? Yeah, I think high vacancies in office is the bulk 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 Florida.

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 you know, demand is there for flex and demand is not there for traditional. And so, you know, 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 there. It's stranded. It has no other use. And, you know, maybe in big cities, that's not as, you know, much of the case, right? If you have a place A property in New York City, you will find tenants for it.

But outside of CBD, central business districts, it is a problem. And if you have Class B and Class C office in CBDs, it is a problem. And so I do think the world is moving in that direction. You know, I'm not alone. It's not like I came to this conclusion myself. to your point, IWG has less than 1,000 managed locations today, right? They have some franchise, probably a few hundred. They have, you know, 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 in the Q3 year to date is adding about a thousand annualized, the Q4 run rate. And it sounds like that as it continues to accelerate. So they're adding a ton of management contracts to a base, you know, relative to the size of the existing base, they'll probably be doubling this business every two years for the next few years if demand to stay into these levels. And to give you a sense of the profitability on those, you know, the average location does about a million of revenue. Their

management fee is around 15% of that, so 150 grand. And they have probably 65,000. percent operating margins on that 150 grand. So, you know, probably a little over 100,000 EBIT per location. So every thousand they add, there's a hundred million EBITA with no capital investment based, like I said, around 400 on 400 basis currently. So every thousand they add has 25 percent the current run rate EBIT and EBITDA, even higher to EBIT because there's no depreciation associated with those locations. And it's really, really tough. taking off. And just to kind of round out of it, I mean, industrious, you know, is a private company. CBRE owns 40% of it. CBRE bought 40% of industrious the pandemic because they saw

how many of their corporate clients, their, you know, their fortune 500 clients were starting to consider flex. And they had no offering for those clients in the flex space. 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 our clients. So they basically, you know, I heard the industrious CEO who was on a podcast said that CBRA was kind of pulling their Fortune 500 clients. It went from like 30 something percent we're considering flex to 80 something percent we're considering flex over the next five years in the course of the pandemic. So, you know, they're seeing a massive inflection. We work is seeing 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. 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, you know, they signed long-term leases right at the top of the market. They got hung with these giant leases. But there was no flex hybrid offering at that point. In late 2018, 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 10 year leases right at the top of the oil market in 2014 at huge day rates for offshore things. And today, even though they need offshore, they're like, we're not getting hung with these long 10-year leases again. And I do think going forward, a lot of business are going to say, between COVID and the tech layoffs, like, we're not going to get hung with these great 10-year leases anymore, 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 come disrupt us. If we'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 of that is just so much in the favor of flex people. product for customers. There's no doubt. They don't need to worry about managing the space themselves, providing security for the space, cleaning the space, having garbage taken out, paying electric bills, making sure the internet's working. It's really non-core to any business to be 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. 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, Bezos basically was like,

when we wanted to start our online bookstore, we needed 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, you know, things not work on the busiest day of the year on Black Friday. Yep. So on non-wide Friday days, their utilization was really low, and it would be awesome if you were a startup, and you could just provision capacity on its 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 thousand. because you don't need to raise that excess capital to do something that's non-core to your base business. And I think this is kind of like that. It's early innings. It's only 2% of the market today. But why should businesses have to hold excess capital to manage real estate footprint that's 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 releases.

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. 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, you know, all these landlords who have excess office space? Like I do remember Vernado when we work was really going crazy in kind of 2017 or 2018. Steve Roth from Vernado putting his 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 as you on. Verdonato owns a bunch of office buildings in New York City. So I think people look at one, why can't the landlords just do it themselves? And then kind of tied at the hit to that is, hey, okay, cool, IWG is the biggest player here? We works the second biggest player. Is there really a moat to being like the largest player in this space? or is it kind of, hey, you know, real estate is a local game.

You go, you lease one building. Maybe it's local moat versus global mode or national mode. Or maybe it's just, you know, 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. 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 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 everyone travels, right? Maybe not everyone travels. Yeah, not to interrupt you. I do agree with that. But I remember, like, when I had B-Fit for when I did one on B-Fit, I, you know, I would be New York City back to Boston and I liked having the gyms. I liked having a couple of gyms in New York. But with your office, most people just choose one office space and go to that office all the time.

You know, yeah, maybe they travel twice a year. Do they really need a, like, is that that big of a, a consideration when you're signing a lease that you're going to think about having multiple spaces? 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, need to host clients. I think that that's a consideration. I also think for Fortune 500 companies, it's kind of nice if you're going to do space as a service to deal with one or two service providers and I have to deal with a ton of service providers in each

city. I also think, you know, we talked about how it's 2% of the market going on a much bigger number. I think the average owner, space, doesn't own more than a few percent of the office space in the country or in the world. And so, like, what are they going to do? You're going to have, like, thousands of little guys who this is non-core of them. Like, their, right, their core business has been to own office space, sign 10-year leases, collect rent checks, and not really speak to anyone. And now they need to subdivide these spaces. They need to get ancillary revenue out of this space by selling, you know, drinks and printing services at the location. It's really an end filling, right? There's a lot more churn here than there is in their traditional business, which is

signing 10-year leases and then collecting rent checks. There's a lot more churn because these are one-year commitments. 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, having the data to where you're acquiring the customers, how to price your locations. And, you know, if you have a bunch of locations in certain areas, you know, where the demand is, where you should be growing, how you should be pricing it, what occupancy is 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 Coup and Cee to maximize pricing, to maximize, you know, the user

experience. And so I think there's customer acquisition. I think there's customer retention benefits. I think there's a network benefit also to the users because they like if they're traveling, if they need to host meeting, but also to the, you know, companies that are employing the users to deal with less service providers. I think, you know, someone who's doing this for 30 years has no-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 in 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 dollars per square foot, right? Because you end up getting more dollars per square foot. because people need to use less square feet for employee. And so they have the data, they have the history, they have the know-how, they have the trust. I think people, you know, probably like that they have to only deal with one or two service providers instead of a ton of different service providers. And there's lots of little things that have a competitive advantage here.

And, you know, I think, again, listening to the CEO of Industrius, who, like I said, has been on a few podcasts himself. He thinks this will consolidate to a two or three player market over time. He thinks three players, and he thinks it's basically going to be IWG, we work and industrious. That's the top three players.

So, you know, he compares it to how the hotel market really consolidated or, you know, you have Hilton, Marriott. And what's the third one, Hyatt? Hilton, Marriott. Yeah, yeah. Yeah, so.

And I actually, she's separate? I guess that's four, but three. Yeah, that's fine. three or four players where it's like they dominate the market. And, you know, I think that's how he's described it. And it kind of makes a lot of sense to me that it will consolidate that way. Yeah. No, look, I think that was fantastic. Just I think you covered all the major points. One of the points I really liked you talked about earlier when we're talking, why can't the office buildings that do themselves is, look, they're used to going 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 six floors. You're going to sign a 10-year lease for it, right? They're used to. 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 sell it to five 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 have 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. Vernado, 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. Listen, even if you say they will grow that skill set, what percentage of the office market do they own? And they're one of the largest players. 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, 20, right? Name your number. Like, 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're all really competing against each other on existing contracts. They're competing against the other 98% of the market that's in the traditional format, and they're just trying to convert that over, if there's enough, if there are enough jump balls, I think it kind of eliminates the competitive intensity for each specific building, if that makes sense. So, yeah, I mean, that transitions really nicely into the other thing people ask about

all the time is we work. Hey, IWG versus WeWork. They see the WeWork stock price. They see the we, we exploded or we scanned, I can't remember what it was, you know, just how much it blew up. So I want to ask a specific question that relates to that percentage of market thing we talked about. And then we'll go, I'm sure you're familiar with WeWorks filing everything. And WeWorks has this really interesting thing where they say, hey, we work. I'm looking at their Q4 deck. If anybody wants to go look, it's their Q4 earnings deck. It's page 20. They say, hey, we work 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, percent of the square feet that gets leased every quarter in that market, right?

If you look at those, are you familiar with that slide? Yeah. I look at that and I wonder, A, it's just a crazy stat. But B, like, does WeWork, even though IWG is bigger, they've got scale, you know, we can talk about all the reasons we think IWG probably is better managed than we work. When I look at WeWork leasing 20% of the market, 25% of the market with 1% scale, I just say, is WeWork's 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 effect, right? You want to search, you go to Google, you want to rent flex space, you just go to Wework. Yeah, I think they definitely have the best brand in the market. You know, they were able to burn free capital to build that brand. And they have. They're still burning free capital to build that brand kind of. It's not so free anymore. But. You know, I think their accumulated losses to date are around $15 billion to build, like I said, 800 locations of which I think $650 or $700 are corporate owned and the rest of that nature partner.

And so they were able to burn $15 billion to build 650 locations, right? IWG has been profitably growing its business to 3,000 locations. And so I think they've probably put into the 3,000 locations, you know, 2,000 of which are fully corporate owned. They've probably invested, I don't know, $2 billion into those locations, and they've already gotten their money back. You know, I guess that's the money they put in. And obviously that's why, you know, Mark Dixon has been able to retain a third of the

business because it's grown profitably and efficiently. It's not needed to dilute and raise capital at a time to grow because the locations were profitable and they were able to self-fund that growth. So we worked obviously to go from 800 locations to 3,000 locations is not going to have the same amount of free capital to burn. And so I think, you know, part of that $15 billion gave them really nice footprint and really into attractive markets, right? Central business districts, I think it's New York, Boston, Miami, San Fray, and they put a ton of capital into each location.

Their future growth will probably be dilutive to the brand because they're not going to have another $15 billion to burn at 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. If 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, I WG is telling me I don't need to put that in that.

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 to fill. They need to charge more for square folks 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-pound Europe, not only in New York, Boston, Sanford, and Miami. And I think I believe you is a 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 put that much capital into a location in Westport, Connecticut, right? It's just that same. Yeah, just two points I wanted to add there. And one I meant to mention earlier, you said it. We work 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 for, right?

Like I think Q4, they were saying we're going to be at that run rate by the end of Q4. So we're talking about we work, IWG is going to be growing by more than one we work in locations per year. forward if 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 it to the 20 you know 20 story new york building but they're going to be expanding that network a lot very quickly and then the other thing which i'll i'll let you expand on but as you said we were blue 15 billion dollars they were growing quickly they had unlimited budget like i remember when i first got my we work it was like four or five hundred dollars in month for a dedicated office space and it was unlimited beer, unlimited coffee. Like, it was crazy. It didn't have like

three beers a day, which, you know, that might be aggressive. I don't even drink anymore. But you could kind of say, WeWork was paying you to have the office space at that point. IWG doesn't do that. They have all of these other, you know, they charge you for things. They also ran with a culture of a little more frugality versus WeWork, which was just hiring left and right. There were like 16 different weeds on my WeWork floor. That's a person. You know, like, WeWorks going to have to keep pulling back a lot to the strings. They just laid off another 10%. IWG, they're focused. They're here to grow. So all that just like kind of builds into it. I'll turn over to you. Yeah. I mean, it was better than just having beer free. You could invite your friends to come visit you in the

office and they can have beer for free too. I believe you've been to our WeWork Office. There's no free be there anymore, but you've certainly been. Yeah. So, I mean, they had free capital that helped their customer acquisition. They had, you know, there's big personality running it. He's gone. and now you turn it around they have a ton of debt they're beat with that negative they're burning cash they're trying to just survive and it's actually you know it's kind of 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

you know it has to be sitting in the back of your mind like we were going to go through bankruptcy is that going to distract that Go Google on everything is we work going bankrupt. We work needs soft bank to guarantee their letter of credit so that the banks will actually refund it. Like that's going to be top of mind. It's going to be top of mind. So I do think during this period where like if WeWork is able to dig their way out,

it's probably going to be years. And, you know, 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 two 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 where all these jump balls are coming to market. In IWG, I think is in a good position to get its fair share. And like I said, you know, 100,000. And by the way, to your point, you know, them having these big, you know, locations,

just to give you a sense, those 800 locations or whatever that we work has, they generate about the same revenue as iwg with 3 000 locations so to your point smaller locations smaller cities less dollars per square foot so they generate close to the same revenue iwg does it on a location count of 3300 versus about 800 and now i'm i'm mixing managed versus own but i'm but on the same on same revenue base on the location count that's you know four times the size and and so that gives you a sense of that and Yeah. And as you said, IWG, even with the decrease from post-COVID, growing all this sort of stuff profitable versus we work is just incinerating money. Yeah. So in 20, so basically there was a lag from the pandemic to when these guys saw, even if they take a hit, obviously, because they still have one-year contracts with a bunch of their tenants.

So 2021 was the tough year for IWG, you know, a year after the pandemic when a lot of these leases rolled off. 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. But 2021, 80 million of EBITDA. I don't even know what we've ever did, but they probably burned 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. I've got their earnings right now. So 2021, they burn $1.5 billion in adjusted EBITDA. And then 2022, negative 500 million and adjusted EBITDA. So they are, and obviously that's adjusted, they are lighting money on fire. Yeah. But even then, like you look at their investor debt and they show you by cohorts based on occupancy, what the building level margins are.

And where they have buildings that have occupancy between 80 and 100% occupied, they're generating 30% central level EBITDA margin, which is basically what IWG was generating pre-pandemic, right, high 20s like I spoke about. So when they fill their locations, they're actually generating good center-level epithal 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 had to get letters of credit from SoftBank. It was very hard for them to break leases in the pandemic when they needed to. They had to take on debt to burn the cash. Like IWG learned from those mistakes decades ago and

hasn't repeated them, doesn't sign corporate guarantees on most of its lease. doesn't cross-plateralize them, right? So I just think they've navigated the environment better. By the way, Mark Dixon was out there warning, we were in public while they were growing, saying that he doesn't understand why they're repeating the same mistakes that he so publicly learned, right? He publicly learned these mistakes.

He didn't learn them 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 avoided some of them. But, you know, I just think it puts them in a better position relative. to the number two competitor right now. I've got notes from 2016 or 2017 that Dixon is saying the exact same thing. He was like, hey, we works doing the exact same thing we did during, they were a dot-com

darling, right? We did this during the dot-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 ancillary revenues. You can't just get all your revenues from leasing. WeWorks doesn't do that.

Guess what? We works trying to figure that all out. So they definitely had actually. I actually think he did put the U.S. business into bankruptcy coming out of it. 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. WeWorks 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 we have to do.

All 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 might be too aggressive, but this is a business that has a lot of operating leverage, right? Like a rough math is, if you're running a location at 60% occupancy, it's lighting 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. In 2019, they do over 400 million in EBITDA by 2021. As you said, it's under 80 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. Yeah. So I think, you know, the current valuation is single digit, EBITDA multiple and close to single digit free cash flow multiple depending on, you know, what EBITDA assumption you want to use. If I can just, so as we're talking, it's late February 2023. The stock price is 180 pence 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. Correct. Feel free to push back, but if you just wanted to lay out the EBIT on numbers and everything.

$1,500. That's a pound, I'm sorry, pounds. So a $1.8 billion market cap with about $700 million net debt. So, yeah, $2.5 billion. I think, you know, 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 continued to increase because they've spoken about that and because we work reported. I was going to say we worked at January and February.

We're accelerating when they report it. So we work, Q3 occupancy was low. 70s. Q4 occupancy was mid-70s, so they probably saw 4,500 basis points of increase in occupancy from Q3 to Q4. And so if you just apply that to IWG, right, September was 30 million EBITDA, and October, November, December saw continued occupancy gains. So some number higher than 30, you know, maybe it's 40, maybe it's 35, but, you know, that gets you close to a 400 million dollar EBITDA run rate just on that, just on the transition from Q3 to Q4 occupancy. We work also set on their call, the occupancy continued to tick up, or not occupancy,

but demand, right. I think there's like a seasonal slowdown in like December, January. But then they basically said demand was the strongest in the company's history to start 2020. And so you probably think occupancy keeps ticking up into the mid-80s at some point in 2023, you know, I believe you was 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, it's been a lot of inflation. I don't know if you very 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 because 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, you know, is 100%, right? If you take price out by a dollar square foot, that felled right to the bottom line. And so you're going to get the operating leverage from occupancy increases and price increases, which will obviously take longer to roll through because you have one-year contracts. But it's not hard to envision a scenario where you do get that to the high 30s 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 would give you another $300 million of EBITDA, and that's before layering on these new management contracts. Right now, the whole business is doing $400, like we said, on a run rate basis. And obviously, the 400, you know, really you need to look at it, X maintenance, CAFX, which brings you down to 300, of EBITDA less maintenance capax.

When you add another 300 of EBITDA, you're not adding any more maintenance cabax. So really you're adding 300 of EBITDA less maintenance cap. You're adding 300 to an EBITDA less maintenance capax of 300. So you're doubling the free tax profitability. And then obviously you leverage interest expense too. 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 getting your locations back to normalized levels of profitability. And you're buying it for a single digit or maybe 10 times run rate maintenance, free cash flow, which is a low multiple for a business that is inflecting 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. Like we said. So it's just cheap business that's about to accelerate growth and transform itself into higher quality business. And by the way, these management contracts, they're 10 years with five-year renewal options. So when you're signing a thousand a year, it's not like those guys can leave you in a year or two. Like if things go well, they'll be with you basically, you know, for your whole period on this thing. If you're thinking five, 10 years out, 15 years out, and they'll probably renew. If things are going well, and IWG is delivering the promise of, of, you know, You know, 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 a building owner and you see that you're getting more,

even after the management fee than you were getting before, 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, right, for the overall TAM, penetration. The business is transforming to become a higher quality business. There's a lot of cyclical upside and you have a low entry valuation. So it's not, it's not that hard to envision a scenario where, you know, free cash flow triples and the multiple doubles and you make six times your money. It's not, right, over some, you know, three, four, five year period.

I just think the upside skew is really interesting here, which is why I'm so excited that. Just on your one point on the franchisee or whoever's getting the thing managed to sign long-term contracts, I love your point earlier comparing it to the hotels, right? If you just looked and you said, hey, hotel owner across the street, why are you paying Marriott 10% of room rates a night to be on their platform? Like, it's the assets the same no matter what. It's like, no, it's not the same. You get the Marriott brand. Obviously, you know, Marriott's probably a little stronger because they have the relationship with Expedia and people, going to Marriott and you get the rewards program and everything.

They'll eventually do rewards also. I think IWG, we work and industrious. I think they're going to learn from the airline industry. They're going to learn from the hotel industry. I think they will eventually have our awards program. People might see me laughing because I'm just imagining the IWG branded credit card or consultants when they're growing up talking about, hey, we got to book our flex space.

Like, are you an IWG customer or an industrious customer? Who do you get your rewards points from? I'm just unlocking. But look, that's a big picture. Your cheese and fracker snacks that you could buy on a Jeff Blue Flight for like $12. Like, why can't they sell those at an IWG location one day as well for $12? And I'm just, I'm kind of 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, you know, there for you, Andrew. I know you think it's there for you, but it's really for the people who don't care about what that water costs. Yep. And a lot of those people are corporate clients or, you know, extremely wealthy people. But like, if you're, if you're on a business trip and you're expensing and you really don't care if you're paying $8 for a water bottle. And everyone who comes into an IWG is there on a business trip. And so they could sell $8 water there for the

meeting, right? There's just lots of ancillary revenue opportunities that they still haven't fully optimized. The credit cards, Tierra point awards programs. Like, I don't know, but there's, yeah, I think you, like, we're early days in the penetration of this space. And once you get later days is 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 the cyclical upside, which adds 300 on a base of 300 of EBITLS CAPX. You know, every thousand new locations adds another 100. So if you add 3,000 locations over the next two or three years, that adds another 300, right?

So now we're tripling our EBITLS less maintenance cap X over a few years. and a big chunk of that tripling is coming with higher returns right a higher return on capital or no capital intensity business at all just the management contracts and if you look at the hotel franchisors kilton marriott or property management companies right for service corps that's listed in Canada they traded really high multiples because people really like the inflation protection element you get a royalty on you know on a hard asset but you don't really have the cyclicality because you're you're, you know, you're collecting a management fee or royalty. And so those things trade at massive multiples. So over time, as I do you, you're right, you fast forward, Mark Dixon, there's a slide, you know, from two years ago where he showed that they're going to go from 3,000 locations to show 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 a much higher number, but just envision a world where, like, you get to 10,000 or 20,000, and 2,000 of the locations are the traditional model, and 18,000 of the locations are managed. And in that world, this could trade a 20 times EBITDA, right, and 25 or 30 times earnings, and you're buying here.

So there's room for multiple expansion. There's room for a lot of earnings growth, and it's a low entry, you know, low entry. You could even imagine them starting to do some financial engineering, right? Hey, they spin out the legacy IWG business, which actually operates the, operates the flex spaces. They spend that under the company a la what Hilton did where they spun out park hotels. And then you have the just IWG, the brand and the franchisor and the management. And they're their charging management. So you could imagine all that. Yeah.

I think one of the knots, one of the knots on it over the last few years has been that they pursued this re-franchise. model where they were going to move cap light through the divestment of their conventional owned locations. And they, you know, they actually had a little success in 18 and 19 and they sold their Japan asset for like $400 million. They still collect the royalty on it, obviously. I think they were getting close to selling their North America asset and then collecting the royalty on it. But I think the pandemic just threw a wrench and everything. I think it's going to 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, like,

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 refranchising in the quick transition from a cap-heavy to a capital-way model have been disappointed and shaking out of the stock. But I don't know why you would sell this asset on EBITDA that's super depressed like we spoke about, right? Center-level margins used to be close to 30. They're 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 could spin them off down the line. You could sell them down the line. But there are 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 more quickly into a catholic 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 might gap up. It's not, you know, right, the 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 me down or for the appos. But there is a scenario where they go back down that route at some point in the future. So just I think we've laid out a really nice bowlcase. We've covered a lot of the 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 bear case real quick. And I can think of two in particular. I mean, you know, everybody can talk about office recession. I think we've addressed a lot of them. But I do want to ask you two in particular before I just opened up to any other bear 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 it to, sold that business to a different person and sold another piece of the business back to IWG, right? And I think they took a, it wasn't back to IWG? No, they sold the largest real estate firm in Japan. Okay, I thought IWG bought a piece. But either way, I mean, people are going to look at that re-trade and say, oh, the people who franchises now it was before COVID, but they're going to look and say, oh, it wasn't

super successful. Are the franchisees struggling? Yeah, so if you go to YouTube and pull up the earnings call, it was a publicly listed Japanese company. Like, KP or something, if I remember correctly. Yeah, KP, I think. That's right. They have their earnings call on YouTube, and you could put, you could turn on the captions on the bottom and kind of 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 were talking about the sale, they really talked 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 uncomfortable with high amounts of leverage like they like having very clean balance sheets but they they did take on leverage to do this I think they got nervous and then they were like we don't want to be as levered 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 couldn't that what is it it's Mitsubishi I think

it was Mitsubishi yep it's um Mitsubishi has committed to continue in growing this asset aggressively, and they paid a pretty full price, right? They took, I think TKP took a little bit of a write down, but not a massive write down, given that you can see Phelps so much during the pandemic, like we spoke about 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,

you know, the platform has value, not part of the bare case. What about I? Yeah, so they sold Taiwan back to IWG Group is the is what they did. But what about I think another bear case we'll look at is Mark Dixon owns 30% of it. But I think people look at it and kind of, they almost sold the company in 2019 for 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 like 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 raised capital and they didn't really do anything with it. I think people just look at it and say, is the value ever kind of 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 it 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 uh what selling the business outright selling the business outright the cash flow really coming through they all they kind of look at and say

there's been a pot of gold at the end of the rainbow for five or six years and yes COVID happened but is there ever really going to be is that pot of gold ever really going to mysterious if if you're if you're looking at the last five years it's kind of gone nowhere and you can kind of in case that this is a value trap 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 3,300 locations over a few decades. If a business does not generate cash, you cannot grow it without diluting yourself or taking on too much debt. 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, this guy, 30%. You grow a business to $3 billion in revenue and 3,000 locations. You either need to have profitable locations that can fund your growth or you need to issue lots of debt in equity.

And if you issue lots of debt and equity, you either have an over-leveraged balance sheet or you don't have a big chunk of the business anymore. So like, 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 had the pandemic.

And to your point, they did have, they didn't have to, but they chose to raise capital at some point in late 2020. It seemed like they were going to do some M&A. They actually lent some company money that I think was going to be, was going to get equitized in M&A. 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-something million pounds. 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, you know, shareholders that have been frustrated by the lack of value creation over the last five years. But it's been a very tough five years for the industry and look at what we work has gone through, right? If you compare it to what we work has gone through, like these guys, have done an amazing job in an environment where we were was competing with them right we work had free capital they went and opened all these locations with free capital they were able to underpriced the location because they didn't care about making money and so like that dynamic is getting better the pandemic is now going to be behind us we have these long-term leases of which two-thirds of our

leases are you know two or three percent a year pick your number and when inflation is six we can raise our prices every year at six once we get occupancy back into the 80s. like we spoke about. And so we can get even more margin expansion, right? Because we could price our stuff annually while our landlords repriced us once every 10 years in a meaningful way. There's just like I get the last five years we're challenging. And if 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 service right now, I think the next five and 10 years are going to be amazing for this company. Clearly, you know, even the best companies have periods where they need to grow into their evaluation, right? Microsoft from 1999 or 2000 until 2012 was flat or something like that, right? 2013 was flat. So they had 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 fundamentals in flat, I think the odd become in your favor. And so I think that's where we are here. And I almost felt silly asking it. I completely read it. It's just like, you know, after five or six years and they all

sold themselves to, I think it was BAM and CBC were bidding for themselves in 2018 and, you know, the COVID and it seemed like they were coming back real fast and the stocks way down. It's, it almost feels silly. Like, yeah, of course, COVID reset the whole thing, but you can kind of see where it's going. I think there's lots of frustrated medium term shareholders. Yeah. The only place I would push back on you is you said, sometimes you need to grow into the valuation. It's like, look, in 2018, 2019, $400 million of EBDA, 2 to 250 to 300 million of free cash flow after maintenance capex and everything. Like, 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 ask, is there anything else that kind of keeps you up at night with we with IWG? I think we mentioned most of the overall risk, the company specific risk, but any other risk here that you kind of be up at night? Yeah, broader macro is number one, right? Like, I do think in an ordinary course recession, I think the shift towards flex would overwhelm the demand destruction for office space, but in a really severe recession, I think the demand destruction for overall office space would probably overwhelm the shift towards flats from traditional. And so that's obviously it's something that it's very hard to have a strong point of view on. If they had a better balance sheet, they probably wouldn't, you know, keep me up

in 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, you know, they're probably one and a half times levered on a run rate basis. If you exclude the operating lease liabilities, which I do, I don't consider those as debt. Like I said, they're non-recourse to the parent for the most part. the company can get out of them and it's navigated though as well but around one and a half times levered but a big chunk of that probably half of that comes due within the next year and

change maybe even less than that maybe the next six months or something like that and so um i think they don't have a doubt in their mind that 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, you know, if you're asking, well, keeps me up and that's probably it. But I don't think it's a real issue. It's just if that were to happen where 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 at the end. Well, speaking of debt coming due, the, 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. 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. Yeah. In November, rumors come out that CBC has been 1.5 billion pounds for Instant Group, just Instant Group, IWG's arm, which I don't think they own 100% of. I think management put $50 million in.

So it was a little bit of a complex transaction. So Instant. you know, 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 take a cut, kind of like Airbnb does for apartments. They were trying to build for the flex office market. Like you said, they bought it for 300-something million pound. 330, I think, was the price, but management put in, you know, 30 or 40.

of it. So they put in around 300 for the company. And so they didn't own 100% of it. But after they bought it, they've contributed a bunch of IWG assets into it, which has grown the EBITDA of that business. And it's bought up their ownership state back in the 90s. And I think once they're done contributing all their assets, they should own around 95% of it. So they basically took this business from like 30 million of EBITDA to it'll probably exit 2023 at around 100 million of 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, you know, call it 35 or 40 will have come through organic growth.

But the rest of it is going to come from contributions of IWG assets into that business, which will buy off their ownership state. And they will eventually, I think at some point this year, either sell that asset or announce an IPO or a space. enough. 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. So I think that's why they're not refinancing it because I just think they don't want to pay points to refi a facility that they think they're going to get rid of this year anyway through a sale or a spinoff or an IPO. But yeah, that's the plan for that. I mean, if you just do the math, right, like you've got $100 million. in, I don't know if it's quite that, but a pretty chunky change of run rate EBDA

as they exit the year from all the assets they contributed. We know CBC bid 1.5 billion pounds. We just mentioned, hey, this is, you know, it's a 2.5, 2.7 billion pound enterprise value company right now. Like if they sell instant, all of a sudden, this is about a $1 billion enterprise value company and all the math we were kind of talking about with, hey, in 2019, they did $400 million in EBITA, hey, you know, we. think their 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 kind of talking. You're like, oh, like, this is a really benty angle, 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, when they merged, 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 it sounds like there's going to be a value realization in the near term. And if you look at kind of the Remain Co, if you value instant anywhere close to CBC, I mean, it gets you excited really quick.

It was multiple inbound approaches from multiple private equity firm. CBC was just the only one to mention. And I think, yeah, to your point, like anywhere near 1.5, that buys down your enterprise value to a billion, I think excluding instant by, you know, 2026, 2027, when you roll on some of these new management contracts and normalize the existing own corporate locations to the margins they should earn, it will probably do, I don't know, 700, 750 million of EBITDA X instant. And so, like, you would be creating this thing for like one and a half times EBITDA on 2026, 2027 numbers if they're able to sell instant for that valuation. And there would be some tax leakage.

I think it won't, you know, as them, they said, there are ways to mitigate it. So it sounds like it won't be that big of a number, but sure there will be some tax leakage. So let's say 1.5 turns into 1.4 or 1.3. You're still creating this thing at 1.2, right, X that, and you're buying 700 million of, you know, of EBITDA. It's still going to be growing very fast because if you're adding 1,000 locations, that's adding 100 million, right? 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 100 million of EBITDA, and you're going to sign multiple of thousands.

And so, you know, once those roll on, like, I don't know, you're creating this thing for one, one and a half times EBITDA. And the business will be way less capital intensive at that point. You know what kind of gets me excited as I'm just thinking about it and spitballing with you? like CBC and all these other guys made the 1.5 billion pound offer in November, markets are way up since November. Credit markets have improved since November, but even more than that, just like kind of overall macro financing backdrop. Like we saw WeWorks, I read WeWorks Q4 earnings this morning and prep for the podcast. And we worked at January and February were, I think they said, the strongest months in our history, right? So you've got this instant play that

people bid $1.5 billion in November when things were worse. And we've had this. strongest months in history since then, like maybe instance worth 1.8 now, maybe it's worth two, or maybe it's just worth 1.5 and everybody. But, you know, I could see a scenario where actually I'm kind of running these models and saying, oh, you know, if I give instant one 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, you know, again, IWG, it's got this great story. It's got the managers coming on. It doesn't seem like anybody's giving them any credit for, we work just said, this is the hottest flex market we've ever seen, all of this.

Like the Instant asset, you know, I spoke about the marketplace, Airbnb competitor. One of the assets they contributed in the process of contributing in the instant is also their virtual office assistant and a virtual office space business, which like if you think about this asset, it will do way better as an independent asset in this part of IWG because it opens up instant to using any flex office space provider for the virtual. business. And, you know, today on Instant, we work 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 OWG. And once it's unleashed from IWG, I think it could

re-accelerate the growth on that business. So like, if you do believe the market is going from 2% flex to 10 or 15 or 20% flex, this is a really awesome asset to want to own. So, like, I don't think $1.5 billion is so crazy if you're getting it with $100 million of EBTA that can accelerate once it's out of the hands of IWG, I think it makes a lot of sense. I love that point, right? If you're rework and you're listing on Instant, an instant is owned by, an instant is owned by IWG, you're giving IWG information, right?

You're saying, oh, you know, the downtown market in New York, we're listening to it and we're putting premium prices because it's so hot, there's so much demand. The uptown market, there's no demand. seeing really low prices. We're just desperate. Like you're giving them information on how they should be pricing, leasing, looking for new assets. Once it's out of IWG's hand, you've got, you've got synergies when it's owned by WG. 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. So if I'm looking for a virtual office solution and I reach out to the, you know,

Instant, which is now going to be managing the virtual office business of IWG, they're really only going to 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 could use industrious locations. It could use independent regional players. And so I do think the business just will have way more, way better growth potential, you know, standing on its own. And, you know, I think for that reason, they've committed to making this an independent asset one way or the other, either through a sell, you know, selling it off to private equity

or by IPOing it and eventually spinning it off to existing holders. And I think, you know, my sense is that Mark Dixon has very high aspirations for this asset and wouldn't mind, right, he owns 30% of IWG if this ends up getting spun off to us as shared holders of IWG, he would end up owning close to that third of that business as well. And I think, you know, 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 a full price, I think he would entertain it and accept it. If, if, you know, for whatever reason, a buyer isn't willing to pay a full price, I think he's very willing to just own it himself because

there's a lot of tailwinds in this market, right? The market's going from two to a much larger number. The only other thing I'll add here and then I'll give you final thoughts is they are, they're London listed and they're they used to they've got a little better about it but you know they used to give hey here's one eBidon number and another you bought a number and here's the group operating profit and here's the overall operating profit and here's four different forms of capex like I do look forward to it's probably not this year because they're consolidated instant and they've got but I do look forward to maybe 2024 once they've gotten rid of instant and you can kind of just see a nice clean hey COVID's in the background here's the nice clean uh earnings number for the overall company so I think they could do

some favors by hitting that. They, you know, they've shifted to this IFRS 16 accounting. And so they have one EBITDA, which is kind of the way us, you know, American GAAP investors are using EBITDA, and then they have the IFRS version, which, you know, takes the add back the least liability is basically the EBITDA, because it treats it as interest expense, and then you have to deduct that. And so there's all these bridges and their financial statements. and it really is very difficult to follow their financial statements in annual reports.

I've probably spent 100 hours in their annual reports. I'm not even kidding. Maybe even more than that. To bridge everything and understand everything. I think I finally have a candle 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 follow something. You look at the balance sheet. The lease is categorized as debt.

It looks levered. You see all these numbers that are hard to reconcile on bridge to. and the amount, you know, this isn't like an industry that has a ton of specialists following it already. Like you would have to get up to speed on this one industry and then at a 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 a concentrated investor, it might not even move the needle anyway. So like, why are you going to spend all this time for a potential one or two percent position if you're like a diversified mutual fund company? So I do think, like, there's a lot to be desired for the reporting here. Only 15% of revenue is in the, or it comes from the UK, and then pound.

And, you know, when I spoke to the CFO and I asked them about the reporting is, 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, because everyone was worried about UK listed and businesses, they sold off because it's listed in London and denominated in pounds, but 15% of revenue comes out of the UK. Their biggest market is North America. So he's like, that's one of the things I think about.

Why do we have to report in pound in IFRS accounting? So maybe they relist this thing in the U.S. one day and start reporting in dollars, which is their biggest currency. Maybe they find another solution for it. I also think their segment reporting, you know, 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 and managed revenue and profitability. And I think that's something as that business scales and becomes a more meaningful part of profitability, they will break it 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, right, before they do it. and maybe they'll two-step it and break out revenue first and then break out profitability once at scale. Maybe they'll do it all once. I do think they're going to do a capital market status here 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. business inflecting, the business transformation starting to take hold as they start reporting

these quarters and apps and years, where they're adding 500 or 1,000 new management contracts on a base that's much smaller than that today. So cyclical upside, you know, that's one, business transformation towards management. That's two. Potential sale of Instant. That's three. Dressing the maturities, which probably comes with Instant. that's four, which I don't think I'm really...

I don't know anybody who's too concerned about the maturities, but I don't know that. Generating cash again, right? If you just screen for companies that are profitable in generating cash, like this one over the last like two years hasn't really looked that exciting, right? And we're about to inflect on profitability. So it's about to start looking offically cheap again on actual reported numbers. And I think they had to cancel a dividend and buybacks during the pandemic. they probably turn both of those back on in the next year or so.

So also then dividend investors can come back. Maybe you re-list this thing. Maybe eventually he decides to sell this thing, right? He's getting older. He's not super, super old. But maybe one that he does decide to sell this thing. But the nice thing is, like, 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, right, if I just painted a case for you where you could 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 right so the two most exciting things to me are this is this one's legacy just floating around in my mind like the last time in 2018-ish or whatever when they looked to sold there were two big serious private equity companies i mean bam knows real estate very well and both of them were apparently big. Say again. Pre cat flat. 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 expectation. So I'm going to walk. But, you know, that's like kind of a validation. Now that's pre-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 2003 is the year where you really see the inflection and we start getting back to the free 2020, you know, 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. Like that is, 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 up, really ramp up. And it could be 50, 100, 200, 200 million of extra earnings on top all that. So anyway, your own, this 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 get on for the third one. Yeah. Thanks for having me on. And just a reminder, nothing on here is investment advice to your own research in all the typical stuff. But yeah, it was fun coming on.

Thanks for having me. A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.