In Defense of WeWork’s Community-Adjusted EBITDA

TL;DR

• This is part 4 of our series exploring the income statement. Previously we have covered revenue, COGS, and gross margin. These are what help determine whether a company’s good is profitable.
• Today we are diving into the blurry, argumentative world of “other” expenses. These are the things that help you know whether the business supporting the product actually works. SG&A, Opex, EBITDA, none of these have universal meaning and are subject of contention among investors and operators.
• Understanding when/how to apply these terms will help you accurately price risk. 

A tall, shaggy-haired Israeli strides across the stage. His every step is greeted with exuberant revelry by his adoring acolytes. They yell. They scream. They begin chanting his name. “Adam! Adam! ADAM!” This isn’t a war hero or local athlete with a championship trophy. Instead, this charismatic, barefooted fellow is Adam Nueman, the once-heralded messiah of real estate, the now-deposed king. He is best known as the co-founder of WeWork, the great Icarus of venture capital-fueled startups. WeWork would fly too close to the sun and burn—burn through mountains of Softbank’s funding to achieve a sky-high $47 Billion dollar valuation. His company would have its wings clipped by investors and would eventually fall back to the bloody, competitive ocean of private markets after their failed IPO. Along the way, they invented their own infamous financial metric, community-adjusted EBITDA, which will be the focal point of today’s article.

Originally proffered up in a bond vehicle, this metric was essentially the company’s attempt to say, “Hey look! Once we decide to flip a switch, each individual building is profitable.” To do so they “subtracted not only interest, taxes, depreciation and amortization, but also basic expenses like marketing, general and administrative, and development and design costs.” If you feel like looking at it, here is the statement from the bond where this metric was introduced.