1 Main Capital 的 Yaron Naymark：$IWG.L 论点面临的普遍投资者质疑

I’ve got a smile on my face because I’m having on today my friend Yaron Naymark from White Mountains Capital. As I told him the last time I saw him in person, “You’ve got to wear the shirt the next time you come on.” He is a member of the Five-Timers Club. If you’re watching on YouTube, he’s got the Yet Another Value Podcast shirt on.

Yaron, how’s it going?

Good. How are you doing?

Doing good, man. Excited to have you. Before we get started, quick disclaimer: nothing on this podcast is investing advice. That’s always true, maybe slightly more true today because Yaron and I are going to be heading back over the pond and talking about an international stock, doing an update.

People should remember: nothing on this podcast is investing advice. Consult a financial advisor. International stocks carry extra risk, tax uncertainty, and all that sort of stuff.

I think the disclaimer is out of the way. Yaron, it’s been an interesting year for IWG. We did a podcast last year on IWG, and I think we were chatting and thought an update pod might be interesting. I’ll turn it over to you. Maybe you can quickly give a refresher on who IWG is and what the IWG story is, and then we can start diving into what happened to them in 2024 and what we’re thinking about going forward.

IWG is the largest coworking and flexible-office company in the world. It’s been around longer than WeWork, longer than Industrious, and it’s significantly larger than both of them.

If this is the first time you’re hearing about IWG, you’ve probably heard of WeWork and maybe not of IWG’s brands, which consist of Regus, Spaces, HQ, Signature, and the likes.

You forgot about one.

I’m coming to you from one of the Commons offices right now. I’m long IWG from the lessee perspective. There’s actually a longer tail, but those are the big ones.

Coworking has become a larger and more relevant part of the office market over the last 10, 20 years, and significantly so over the last 2, 3, or 4 years. If you look back a decade ago, it might have made up less than 1% of total office space. Today, it’s a low-single-digit percentage of office space, and that number continues to increase.

IWG has grown to 4,000 locations globally, primarily through reinvesting its cash flow, which has been positive. It’s been a profitable company, reinvesting its cash flow into new locations.

It’s recently embarked on a capital-light strategy where it has a managed and franchise model. It goes to building owners and tells them that IWG can create a coworking space in their building for an upfront fee paid to IWG and then an ongoing management fee, which comes out to about 15% of revenues.

The landlords put up the capex themselves. They pay IWG a 15% management fee, and IWG runs the space for them as part of its 4,000-location and growing network of coworking spaces.

The stock is incredibly cheap today, but that includes very limited contribution from this managed business. I think the managed business is starting to inflect and is going to create substantial value for IWG shareholders going forward.

To give you a sense, today IWG generates almost zero EBITDA and cash flow from this managed business. It still trades at 7 times my 2025 free-cash-flow number. It’s about a $2 billion market cap today. I think they’ll do about $300 million—probably slightly under, but about $300 million—of free cash flow this year.

So, it’s trading at 7 times my free-cash-flow number this year, which is very cheap on its own. The core business is growing and should continue to grow, but the management-fee business is about to go from zero EBITDA and free cash flow to hundreds of millions of dollars of EBITDA and free cash flow.

That is an EBITDA and free-cash-flow stream that comes with zero capital intensity, high margins, and highly recurring revenue. I think it will be worth a very high multiple of those earnings as they come. I think there’s a lot of growth in earnings and free cash flow here from a very low starting valuation. That’s a recipe for really strong stock performance.

There’s a lot of other interesting stuff that I think makes the stock more timely. We’ve spoken about IWG in the past, and someone might ask, “Why now? Why were you wrong before?”

There are a lot of reasons, and we could talk through all of them. To summarize, 2 or 2½ years ago, when I first got involved with the stock, they started signing these management agreements. The management agreements take time to design, build out, open, fill, and convert into management fees.

I was really excited about the KPIs. In the first year, they made a big push toward these management agreements. They signed 400 of these locations. Back then, their global base of locations was maybe 3,000. A year later, they signed about 800. This past year, they probably signed close to 1,000—maybe slightly under, but about 1,000.

Those KPIs got me really excited, but they never really converted into system sales, EBITDA, and free cash flow. I think that lag is finally starting to hit the income statement in 2025 and 2026. It’s going to accelerate even further.

As we sit here today, core-business profitability has improved substantially from 2 years ago, coming out of COVID. Occupancy is back up in their core locations. EBITDA has almost doubled: it’s up probably 70% if you’re not deducting partner contributions, and up almost 100% over that 2-year period if you are deducting partner contributions from EBITDA.

Profitability is up a lot. They’ve generated a few hundred million dollars in free cash flow and paid down debt with it. The stock has basically gone nowhere. So, we have a flat stock price, lower net debt, significantly higher EBITDA, and we’re 2 years closer to these management fees starting to contribute substantially to earnings and free cash flow.

On top of that, some of the problems that have led to the stock being depressed are in the process of getting rectified. One of those is that the stock is listed in the U.K. today. A very small percentage of their business actually comes from the U.K. Most of their business is in the U.S., and this really does belong on a U.S. stock exchange, whether it’s the New York Stock Exchange or Nasdaq.

The company has been working on doing what it needs to do to eventually get a U.S. listing. The biggest steps have been converting from IFRS accounting to GAAP accounting and converting from sterling reporting to U.S. dollar reporting.

2024 was the first year the company reported in U.S. dollars. 2025 will be the first year the company reports in U.S. dollar GAAP instead of IFRS. GAAP accounting makes it significantly easier to understand the accounting of this business because of the lease structures of their own locations.

From just an ease-of-understanding-the-financial-reporting perspective, it’s getting easier. It’s also getting easier to re-list this onto a U.S. exchange eventually.

The company has said that it wants to start buying back stock once it gets down to 1 times net debt to EBITDA. They’re going to achieve that level this year, in 2025. At that point, they’ll be able to start buying back stock, which I also think will really help re-rate the shares.

We don’t need a re-rating to do really well here. I do think free cash flow is going to grow significantly over the next few years. I should keep reiterating that. But I do think those things will help a potential re-rating.

Another thing that’s worth flagging is that there was just a real validation of coworking a couple of weeks ago. CBRE, which is probably the largest, most sophisticated commercial real estate player globally, bought Industrious. They already owned 40% of it, but they bought whatever they didn’t own, so now they’re going to own 100% of it.

They paid an $800 million enterprise value for Industrious. Industrious has about 200 global locations. Again, we have 4,000. Industrious probably did $400 million to $500 million of sales. We have $4 billion of system-wide sales.

Industrious barely generated any EBITDA on its $400 million to $500 million of sales. That’s my understanding. We generate substantial EBITDA on our $4 billion of system-wide sales.

CBRE sees that coworking is going to be a part of every end user’s office-space real estate portfolio, and they want to have an offering for their clients. I think that provides strong validation that coworking is here to stay and is a durable business.

IWG is the largest by far in the space, the most profitable, and has the longest operating history.

And so I think that validation is a big stamp of approval. It kind of tells us that 7 times free cash flow is way too cheap, especially if you compare that to the free cash flow or EBITDA multiple paid by CBRE for Industrious. I might have other points that I think about as we continue talking, but I'll stop there and see—

No, no, no. I'm laughing because I don't know what other points you could have. You touched on a lot of things that I did really want to ask you about. But let's start by setting the stage, just valuation-wise. Roughly, as you and I are speaking, IWG is trading for 163. I don't know if it's pounds or pence; I can never remember what the listing is. But if I said, “Hey, Yaron, this is a $2.2 billion market cap company and a $3 billion enterprise value company,” would I be talking about it correctly?

It's about a $2 billion U.S.-dollar market cap and about $700 million of debt.

I'm not sure if you're looking at pounds or U.S. dollars, because they report in U.S. dollars now.

Yeah, I think I switched over, and either way, we don't have to split hairs. It's probably $700 million U.S. dollars of debt and a $2-ish billion market cap. So, just add two-thirds of a billion to get enterprise value.

So, I guess the first place I want to start is here. The company has said, “Hey, in the medium term”—and you can correct me if I'm wrong; I don't think they've ever defined what the medium term is—“we're going to hit $1 billion of adjusted EBITDA.” We can pick apart that adjusted EBITDA in a second, but do you think that—look, if they're going to hit $1 billion in adjusted EBITDA, it doesn't matter if this is a coal-mining company or a tech-growth AI startup: $3 billion in EV is probably too cheap if they're going to do $1 billion of adjusted EBITDA. Do you still think, in the medium term, that kind of $1 billion number is in play?

Yeah, so the medium term, I believe, is 2028.

They didn't guide to that year specifically, but a lot of the charts in the Investor Day deck went out to 2028. That's actually what I had in my head, but they never specifically said it, so I thought it was worth just telling you.

Yeah, yeah, yeah. The slides went out to 2028 on all the charts, so I'm assuming that's what medium term means. The billion dollars is very much in play. There are some good puts and takes. I think the 2 positives are in their core business, which is coworking, and the negative is in Worka, which is a business where they bought an asset called The Instant Group and merged part of their virtual-office business into Instant. That business has disappointed since Investor Day, but the other 2 segments—the coworking spaces they manage for other parties and the coworking spaces they own and manage for themselves—have significantly outperformed my expectations and, I think, their internal expectations since they put that target out there.

Worka, which has underperformed, has done so to a lesser extent than the outperformance in those 2 other segments. So, I think the billion is still very much in play. Hopefully, they're able to beat the billion, which I think they will. CapEx is a very small part of that EBITDA looking out to 2028. There are no taxes and very low interest expense because they're going to have almost no net debt, or they're going to have net cash by then. And so the $1 billion-plus of EBITDA probably converts into $700 million or so of free cash flow.

Yeah, and as you said, $700 million of free cash flow—the net debt's going to be very low at that point, even if they hold it steady at this level. Like, a $2 billion-ish market cap and $700 million of free cash flow, that's really interesting.

Let me start with the biggest question. You mentioned that the most interesting part is that if a significant part of the free cash flow at that point is coming from management fees, and I owned KKR from 2018 until early 2024, I always thought the management fees were undervalued by the market. Eventually, the market realizes that a secularly growing, capital-light, predictable, high-margin revenue stream is worth a high multiple. I see a lot of similarities between that management-fee side of the business and the management fees at IWG. So, I think it's worth considering that if over half of free cash flow at that point is coming from management fees, there's a shot you get a really big multiple on this stock. I think that's the upside case.

Then let me try and be a good host and respond to that, because I do have questions on that as well. When you talk to the people managing the franchises—or, I guess, the franchisees, the building owners who are doing this—do you hear that they are happy with the IWG solution here?

Yes. I've spoken to dozens and dozens of building owners. I've started conducting surveys as well, and the most recent survey I did was 2–3 months ago. I got responses from a little over 50 building owners. I asked a ton of questions, but one of the questions I always ask in every survey is, “On a scale from 1 to 5, how happy are you with your current relationship with IWG?”

It's been pretty consistent that 4s and 5s—5 being the happiest you could be—make up a majority of those responses. 3s have made up a single-digit percentage of the responses, and then there have been very few, if any, 1s and 2s across the surveys.

Do you think there's a selection bias there? Your broker is looking for people to talk about it, and the people who are unhappy with it aren't willing to hop on a call.

No, I don't think so, because they do give negative feedback on what IWG could do better or what they're unhappy with. And, by the way, those responses are consistent with conversations I've had with building owners myself who've been very impressed with what IWG has been able to do.

I've spoken to building owners who gave IWG locations to manage that they had previously leased to a smaller coworking company. The smaller coworking company was not able to make its rent payments because they were saying, “This location's bad. Coworking doesn't work in this building.” They've given it over to IWG to manage, and IWG fills it at higher rents per foot and operates it very well. So, I've had anecdotal stories from conversations with building owners. The surveys help as well. I think, in general, IWG is helping them convert empty space into monetized space at rates that are probably higher than they would get even if they were able to fill that space with a triple-net lease.

What do you think the secret sauce is? When I think about it, obviously IWG knows a few people. I've gotten a little more skeptical—I don't want to put words in your mouth—about the network effect of having, like, 100,000 units and me being able to say, “My home base is in New York, but when I travel to Boston, I can go to IWG.”

You can address any of that, but when IWG goes into a space and takes over from a small coworking company and dramatically improves the operations—if Chick-fil-A takes over a space that's run by Andrew and Yaron's Fried Chicken, Chick-fil-A is going to way increase the revenue, right? So, what is the secret sauce that this big IWG brand has that increases revenue in the same way Chick-fil-A would improve Andrew and Yaron's Fried Chicken revenue?

Yeah, look, it's a lot of small things that build on themselves to create a significant competitive advantage. Customer acquisition is really important. You need to have a big funnel, and you need to convert those leads into signed contracts. So, you need a big funnel, high conversion, and you need to know how to price.

What is their advantage in the funnel when a lot of their upcoming locations—I’m going to have questions on this—are going to be suburban? What is their advantage in the funnel in suburban? Because if you told me urban, I could believe it, but when they move—if they've got no location in my hometown of Kenner, Louisiana, and they make a move there, it's not like they've got any existing sales base. They don't have an existing sales base, so how are they going to get people there that Andrew and Yaron's local coworking company wasn't getting, right? Because in my mind, suburban, if you want an office in a suburb, you just look around for the nearest office space and kind of go there. So, how do they improve the leads there?

Yeah, a lot of people just go on Google. You need to have good customer acquisition. They're—I guess they're probably much better at SEO, right?

Because I'd say that's—I think that's 100% right.

So, I think the brand—about 70% of their locations are under the Regus brand—is very well known. I do think the ability to market at scale, and a sales and marketing budget, and then knowing which keywords to buy and, importantly, how to convert those leads, is really important.

I don't know how many coworking spaces you've signed up for, but I'm on my second one and I've shopped around a lot. There are plenty of places I've reached out to that don't get back to me, or they get back to me a week late. IWG, if you put in your information, you will get a call within 5 minutes from someone, right? And they're trying to get you to sign a contract right then.

And they're throwing promotions at you, and they just know how to convert these into signed contracts. Once you've signed a contract, I think retaining you is also really important. They know how to retain customers because they have years and years of operating history.

They know how to price because, in a lot of these locations, they have plenty of locations within 1 mile, 3 miles, or 5 miles of where they're opening new ones. If not, they know other areas that have similar demographics, similar levels of occupancy, and similar levels of co-working as a percentage of the total office space. They have a pretty good sense of how to maximize pricing.

For spaces being built out for the first time as co-working spaces, they know how much common area—how much open-floor space—to put in, where people are willing to share floor space with other colleagues; how much private office space to put in; how many conference rooms to put in; and how to price each of those things. I think it's important to fill the space efficiently.

They also have 15% of center-level revenues normally coming from ancillary products and services, not necessarily signed contracts. Being able to charge for a conference room by the hour, sell coffee, or sell phone-answering services is really important. The receptionist could answer the phone at the front. By the way, I'm in a Regus right now. They could answer your phone and be like, “This is 111 Capital Oaks. Can I speak to your owner? Okay, hold on. Let me check if he's available.”

They could collect your mail for you. If you're out of the office for a week, they could tell you what mail you got. These are all services that they charge you for; they don't do them for free. Smaller operators don't necessarily know how to monetize each of those line items.

I'm laughing because I was just going to say, forget smaller operators. I remember in 2016 when Mark Dixon was saying, “Hey, WeWork's getting 3% of its revenue from ancillary services. We've been doing this for 20 years. You cannot make a co-working space work unless you're getting 15% to 20% of your revenue from ancillary services.”

By the way, they also know how to keep costs low. They're one of the largest office furniture buyers globally. I think behind the U.S. government, they might be number 2. They know how to staff with minimal headcount, keep the operating expenses of the location low, and build these spaces out cheaply.

It's just a lot of things that compound on themselves to get to a place where, in their own locations, where they were putting up the capital themselves, they were still earning after-tax returns on capital in the 20s. WeWork was earning in the negatives, and a lot of the smaller players also aren't making money. If they are making money, they're not making a lot of money. I think all those things are really important.

Let me ask you a slightly different question. There was a commentary on the Q3 call where they said, “Hey, the main obstacle right now to us signing our franchised and managed spaces is the ability to fund.” That was kind of surprising to me because, in my head, most of these franchisees and lessees—not all of them, but most—aren't trying to fund a new building. These buildings are already built, and I thought a lot of the spaces were generally already built out.

If they switch over to Regus, they're basically saying, “Hey, this space isn't working for this reason.” Yes, Regus probably needs to come in and slightly shift the floor plan, put in some furniture, and everything, but that's not a huge outlay versus the cost of a building. I was a little surprised by them saying funding is an obstacle.

This doesn't change one thing or the other, but whenever I see something that surprises me, I like to check because sometimes it indicates there's a really big misunderstanding on your part. I just wanted to ask you about that piece.

Yes. Anytime you're going to sign even a 10-year lease with a new tenant, you're giving tenant-improvement allowances. You need to come up with cash to help with the build-out of that location for your new 10-year tenant. In general, that's a much smaller amount than when you're converting it to a co-working space yourself.

The numbers I've gotten from talking to building owners and from some of these surveys are that, if you're trying to convert something that was previously a co-working space, or maybe a law firm that had a lot of small, cubicle offices, the costs might be $20 or $30 a foot. You can get up to $100 or $150 a foot for the really nice locations that you want to convert.

The average location size, I think, is 12,000 square feet that they're signing. Some are 10,000 square feet, and some are 18,000 square feet. If you put $50 or $100 a foot on, call it, 15,000 square feet, that's a lot of CapEx the building owner needs to put in.

Generally, they should be earning a good return on that CapEx. They're going to get their market rent plus a spread. The way to think about that spread is that IWG, on its own locations, is typically earning center-level EBITDA margins of 30% after rent. Here, rent goes to zero, so that 30% is the spread they were earning after paying rent.

The landlord doesn't have rent, and that uplift goes up significantly when you're not paying rent. You still have to pay the 15% management fee, but that's kind of how to think about the return that they're getting on the CapEx. They get their market rent plus a return on the CapEx they're putting in.

You need cash and confidence to do that—not only confidence from the equity holders, but also confidence from the lenders who need to sign off on these types of leases. In an environment where building owners are thinking of giving back the keys to the banks, or going to the bank because they may be distressed and looking for an extension on the loan, they're going to the bank saying, “How would you think about this?”

The banks typically like 10-year leases and guaranteed rent. Landlords obviously like that as well. They need to get comfortable and have some kind of confidence to make an investment of that magnitude into their locations.

The confidence comes from, first, the broader economy. With interest rates going up and offices not doing that well, that's been tough. But it also comes from word of mouth, seeing their peers doing it, and seeing IWG saying, “Look, we've done this 500 times before for other buildings that we've managed—1,000 times before—and look at the results.”

As more and more of these managed locations pop up, not only in the IWG network but also within Industrious and the smaller players—there's Serendipity Labs and a variety of other ones that are going the management-agreement route as well—I think, in general, banks and landlords are getting more comfortable with it.

When I speak to small operators, they're saying it's getting easier and easier to convince landlords to go in this direction. Five years ago, you would pitch this to a landlord, and they would look at you like you're taking crazy pills. Now everyone kind of gets it. I think that hurdle is getting easier to overcome.

The interest-rate and economy hurdle is still there. That's where they've gotten held up with a lot of their signings from 1 or 2 years ago, which are taking a little bit longer to build out. The building owners are saying, “Okay, I get the model. I'm on board. But do I really want to put $1 million of CapEx into this location right now, with the economy and interest rates doing what they're doing?”

It's been slower to open new locations than we would like, but they're still opening.

That was a fantastic answer. I've looked at a lot of QSR franchisors recently. Do you think IWG would be well suited to say, “You're having trouble financing, right? We'll do the conversion and we'll lend you the money,” or, “We'll lend you half the money,” which a lot of these guys do? In return, they could just take it off the top of the franchise fees for the next few months until they get paid, at a pretty healthy interest rate. Do you think that would make sense, or would you not like to see them go in that direction?

I've actually spoken to people to try to figure out if there's a way to get a credit facility. I'm not sure I would want IWG to do it off its balance sheet, but if you could find a third party who's willing to finance it, the duration on these would be very short.

The payback would be pretty quick. But because the pool of management agreements is growing, you could actually get to some pretty big outstanding balances and keep rolling them as you're growing the network. If there was a way to have a third party put up the capital, we would basically pledge part of our management fee, even the management fee on our blended management business, not necessarily on that one location. That's something that I think could be really interesting. I'm not sure how likely they are to do something like that, but I think that would be great. Just a thought I had.

Let me ask one more question. I hate to get too deep in the weeds, but Q3 RevPAR on the management agreements is $412 in the quarter. They say, “Hey, once everything fully run-rates, it's going to be $315 on things that are already opened, and in the long run we think it's going to be $250,” right?

What's happening is you're going from, you know, my Midtown New York City shared office space to—let's use Kenner—a Kenner shared office space, right? The RevPAR is going way down because you're opening more suburban locations, which command much lower rents. And I guess my question is, as all these new signings happen and they go much more suburban, I have two questions.

A, can they still hit their numbers and their growth rate? If you've got to work that math out, it's going to take three suburban locations to match one New York City location, in my example. And B, is the moat in suburban locations? We talked about it on the cost side, but I would like to discuss a little bit more: is the moat that unique in suburban locations?

Because if I'm in the suburbs, I'm probably driving. I've probably got a home office; maybe, I don't know. I mean, I'm thinking more from a solo entrepreneur space, but it does seem like it's not as strong as in an urban location. So I threw a lot out there. I'll just turn that over to you.

Yes, RevPAR has been coming down for a couple of years now on the managed side. Part of that is that it's more suburban locations. The other part is that you're just opening new, emptier locations, right? You're opening them at 30% occupancy, and then they scale—they eventually scale—but if you're opening a lot of new ones, that drags down your RevPAR.

They've got the slide in their deck for that, though. I do think they say, “Hey, here's the RevPAR once all of these are fully scaled,” which should adjust for some of that, right?

Yes, I think once you get down to the RevPAR they're talking about—which I think still takes into account that a bunch of the locations are not full yet because they're new—if you normalize for maturity, the RevPAR they're talking about would end up being higher. Once you get to that point, RevPAR should start growing and getting closer to the system as you fill these newer locations.

But RevPAR has been coming down because they're opening in the burbs and opening newer locations. I think the important thing to know is that most of the decline in RevPAR is in the system. RevPAR should still decline a little bit in 2025 because you have a ton of new locations opening, but I think from 2026 and beyond it should start to grow. Maybe 2026 is flat-ish, but I think it should start to grow in 2026 and maybe 2027. From that point, it should be slightly below the corporate locations because corporate locations have a bigger city mix, but not that much below.

I think it's good that you brought that up. That's one of the reasons why I think the stock hasn't really worked over the last few years. There's a bunch of reasons—we can talk through them—but that's one of the reasons. Initially, when I was looking at these KPIs, my out-year numbers—my 2028, 2029, and 2030 numbers—had come down substantially from when I bought the stock.

When I first bought the stock, this was a brand-new concept, this management-agreement thing. The KPIs were really good—signings—and all we were able to do was look at signings and what they said the unit economics were: an upfront license fee, 15% of sales, and we had to assume what an average location looked like in terms of revenue, occupancy, and price per foot.

Initially, I probably thought the management fee per location was going to be $1 million of average center-level revenue. Times 15% would be $150,000 of management fee per location. It turns out it's going to be substantially below that because your traditional center was about 20,000 square feet. The new managed centers are in the burbs, and they're probably closer to 12,000 or 13,000 square feet.

And then the rent per square foot in the traditional center includes the city and outside-of-city locations, and most of the managed locations are outside the city. So you're probably looking at 40-ish percent lower revenue per managed location. On top of that, because of what we spoke about just earlier, it's taking longer to build these locations out and fill them.

Signings have been really good, probably better than I thought, but openings and then the conversion of those openings into revenue are where my numbers have come down. The counter to that is that I think I have much more confidence in my out-year numbers today than I did when I first bought the stock.

In terms of order of magnitude, sure, the numbers have come down, but the stock—if I used to think this could be a 20x-type investment opportunity, I now think it could be a 5x-to-10x opportunity. By the way, we're 2 or 3 years closer. My confidence in those out-year numbers has gone up, even though the numbers themselves have come down.

I think the decline in RevPAR is almost over, and I think the fee revenue is starting to really accelerate in 2025 and beyond.

Let me ask you a weird question, but I talk to investors about a lot of different companies. I think there's no company I talk about more where people are as skeptical of the management team as they are here.

There are some shady management teams out there, but IWG has Mark, who owns 25%. He's kind of the godfather of the industry. He called the WeWork collapse, which is actually how I first came to know and like him. He's been doing this for 25 years. The new management is awesome.

I don't think there's a company with that set of characteristics that I talk to or follow where people are as skeptical of the management team as they are here. And I'll just point you to a few places. I know you and I can talk about the capital allocation. I think the capital allocation plan, in my personal opinion, is insane, and I know a lot of other people who think that.

When they say it, they use that as a hammer, right? If they've got an insane capital allocation plan, it's because they're seeing something you're not. We can talk about that. The adjusted EBITDA numbers—you mentioned the partner contribution add-back. I know a lot of people who get tripped up on that. I know a lot of people who get tripped up on some other stuff in the adjusted EBITDA and everything.

But if I just took it all together, if Mark owned no stock and they were issuing shares like crazy to try to grow à la WeWork 6 years ago, I could understand the skepticism. And I do understand the skepticism, but I'm just surprised by the degree of skepticism given a 25% owner, the godfather of the industry, and someone who called a lot of this.

Again, that's a huge ball to throw at you, but I guess I'd just love to get your thoughts on all of those pieces.

Yes, I think they've shot themselves in the foot a lot of times over the last 5 to 7 years. There have been some self-inflicted wounds. That's them shooting themselves in the foot. There have also been a lot of market headwinds that they've had to overcome over the last, call it, decade.

We've spoken about this in some of our prior podcasts. You had the dot-com bubble burst; they managed through that. You had the GFC; they managed through that. By the way, these are short-term leases. These are like 1-year leases, shorter than 1 year in many instances.

When you have a very bad economy, occupancy could decline and vacancies could go up. They've managed through that because they have a really good business model with really good lease structures. We've spoken about this before. Their leases tend to be in SPVs, and they could hand the keys back in any of their own locations anytime they want, which gives them a lot of negotiating leverage with landlords in downturns.

They've gone through 2 big recessions since 2000. They had Brexit, which led to a weakening of the UK office market. They had WeWork destroying the pricing integrity of a lot of big cities because they had $20 billion of capital they were able to light on fire. Then you had COVID.

All of these are examples of things that we've navigated through very successfully, I would say, because of cost discipline, because of insider alignment, and because of focus and an understanding of how to run this business.

The self-inflicted stuff has been, in large part, shareholder communication. I'm not going to say it's all shareholder communication. Some of it is actually fundamental performance. But the shareholder communication—they talked about getting to capital-light much faster in a manner that probably depended too much on outside forces to convert to capital-light: selling some of the owned locations to third parties to convert that into capital-light, à la Hilton selling down their hotels and retaining the management-fee and franchise business.

They spoke about that pretty aggressively at a time when the likelihood of succeeding in actually converting that quickly was probably not as high as you would have wanted it to be before talking about it with your shareholders. That’s one thing.

They overpromised on the speed of getting to capital-light. They started floating the U.S. relisting too early. They weren’t ready to execute against the U.S. relisting, and they started floating it in Yahoo and Financial Times articles. Then they had to say, “It’s not going to happen as quickly as you guys think.” They dangled that in front of shareholders.

They took leverage up to buy The Instant Group. In my opinion, they overpaid for Instant. They bought it in 2022, but they took leverage up almost to $1 billion at a time when EBITDA was depressed coming out of COVID. Reported leverage got up to around 4× net debt to EBITDA to buy an asset that I don’t think was that great.

Now they’re saying they want to get to 1× net debt to EBITDA before they start buying back stock. They’re over 1×, but they’re less than 1.5× at this point, or something like that. The fact that they’re saying, “We really need to wait to get to 1× before we buy back stock,” in our own business, which is better than what we bought when we took leverage up to 4× in 2022, is a little bit hypocritical.

I think they probably could start buying back stock earlier, and they’re choosing not to for credibility reasons, which I think is actually doing the opposite with equity holders. Maybe it’s giving them credibility with lenders, but definitely not with equity holders.

They had this capital markets day in late December 2023 where they put out the billion-dollar medium-term target. In that, they talked about Worka, which is what they folded Instant into, growing double digits for as far as the eye can see. That was in December. Then they came out and talked about the annual results in March and said, “Actually, Worka is not going to grow this year.”

You just told us this business was going to grow double digits for as far as the eye can see. You had the opportunity to tell us, “As far as the eye can see, except for 2024,” and then you didn’t tell us that at the capital markets day. You told us when you reported full-year results, which seems like they probably knew about that at the capital markets day. I’m not sure why they didn’t disclose it.

Then Mark had this equity sale into strength last year, where he sold down 35 million shares—probably 10% or 15% of his stock—into strength. If you really believe the billion-dollar target, why are you selling at this valuation? We spoke about that on the last podcast, but a lot of these things were self-inflicted communication issues.

I still think they’re running the business very well. I think the intention to do the right things to create long-term value is there. The business plan makes a lot of sense. Hopefully, communication gets better from here. They have a new IR person and a relatively new CFO.

I understand that those things cumulatively lead to skepticism. I think the important thing to note is that the business model from here relies on them continuing to run their own locations very well, which I think they are, and then signing more management agreements.

It’s really nice that you’re able to talk to third-party building owners, confirm the details of these management agreements, and see that these building owners are happy. You don’t have to rely on management and take their word because, to your point, historically, some of the things they’ve said to investors haven’t panned out.

I think the ability to survey building owners and talk to building owners is really important to getting comfortable with this thesis. Once it hits the income statement—and, by the way, once it’s reported in GAAP, which is going to be much easier to understand—and once it converts to free cash flow, with free cash flow really growing and the company able to buy back stock with that free cash flow, it’s just going to become much more tangible to investors.

I think the fact that it becomes more tangible makes it easier for investors to value and put a multiple on.

No, it’s just like you read the Q3 call, and they say, “Given the momentum in signings on the managed and franchise side, we’re confident this division has years and years of growth ahead of it.” Cash flow in company-owned and leased locations is expanding, and cash flow is going up.

You read all these great quotes, and then—not that the stock price is the be-all and end-all—you look at the stock price. I’m sure everyone involved in it should look at it, and it’s flat to down over the past couple of years.

Then, as you said, you look at the Dixon sales, or you look at, “Despite the fact that the business seems to be more valuable than ever, we need to hit 1× leverage before we will buy back shares.” I guess we’ve already talked about the EBITDA numbers, so we don’t need to go there.

They stopped disclosing occupancy. I know a lot of people, myself included, when you stop disclosing occupancy, you’re like, “Wait, that was a pretty important KPI.” I think they had good reason for it, but you can talk to that. I’m not really sure it’s that important of a KPI for a variety of reasons.

I think it makes it easier to just think about revenue per location. With occupancy, if you’re mixing the number of dedicated desks per location, right? If you have more shared space or more conference rooms, and if you’re reducing that, occupancy could look different.

You might not want to have signed one-year leases in all your locations if you can fill your space with a lot of day users. They tend to pay significantly higher rates. You can get much more revenue in that location if there’s a lot of demand for booking by the day, or if there’s a lot of demand for more conference rooms in a given location.

If those conference rooms command really high rates, you’re not going to get a one-year lease for that conference room. Really, I think you should care about revenue per location.

On top of that, with a lot of new locations opening up, that’s going to depress occupancy, and I think investors are just going to freak out over it. If you can get 10% higher prices with 50 basis points lower occupancy, you should take that all day. Investors might freak out, though, so I think there are lots of reasons why all of that is completely understandable.

I was just saying that I think they disclosed it until late 2023. Anytime you’ve got a KPI that, for years, people have thought was important and management pulls it away, even if they had a good reason, I know I’m not alone in being like, “Where did my KPI go?” Sometimes the ball’s getting hidden, you know?

I totally agree. I think there are lots of reasons investors have been skeptical here. Some of them are warranted and fair; some of them are unfair.

I do think Mark’s intentions are good. He cares about this business. He cares about his employees. He cares about the ecosystem of building owners. He cares about the stock price. But he still owns 25% of this thing.

I’ve spoken to people who not only work for him currently, but also a lot of people who have known him or continue to know him outside of the employee-employer relationship. They say he feels slighted and has a chip on his shoulder. He really feels like the public markets are not giving him the respect that he deserves.

WeWork got a lot more respect than he ever did, even though they never made money. I think he has a window of maybe 5, maybe 10 years. I’m not sure. Does he really want to work until his mid-70s? I’m not sure, but he has a window over the next 5 years to really get the stock price up a lot.

If he doesn’t succeed in doing that, it’s hard for me to imagine he’s going to allow someone else to step in and become Satya Nadella while he’s perceived as Steve Ballmer. It’s just hard for me to imagine he’s going to hand the keys to this empire to someone else at a low starting valuation with inflecting fundamentals, and then let that person take credit for getting the stock price up 5× or something like that.

I think either he shepherds it to a much higher stock price himself and then rides off into the sunset with a higher stock price—maybe he sells some stock down before he does that—or he has to sell it to private equity for a big premium.

We know there’s demand for these types of assets because Industrious just sold for an $800 million enterprise value, despite being a much smaller business.

Great transition. There have been 2 transactions over the past year. WeWork emerged from bankruptcy, and Industrious, literally a couple of weeks ago, got bought for $800 million by CBRE, if I remember correctly.

I don’t know the multiple on the CBRE-Industrious deal. I know very few details. WeWork, I thought, came out at a crazy valuation, but I’d love to ask you what you think those deals mean, both about the industry overall and about IWG specifically—whether that’s valuation, look-forward potential, ownership, or whatever it is.

These are 2 big deals in the industry, and I’d love to get your thoughts on them.

Yeah, I think, look, Industrious specifically sets a really good comp. It’s a smaller, arguably faster-growing concept.

But I actually think with IWG accelerating its growth now that its signings are converting into openings and the openings are filling, the gap in terms of growth between IWG and Industrious will narrow significantly. Industrious is a fresher, hipper brand: people on their MacBooks with their AirPods, drinking their chai lattes, versus Regus, which is more you and me, sitting and chatting stocks on our Zoom call. By the way, I have a PC. I'm not sure what you're working on, but I think Industrious is definitely hipper and faster-growing, so maybe you could say it commands a higher multiple.

Does that matter for shared space, though? I hear you—it sounds nice right now, but a year from now, do you want the hipper WeWork shared-space location, or do you want a staid one with an accountant who's going to work there for 20 years?

Yeah, look, if you want something hipper, we have that, too. Our Spaces offering is hipper and newer, so building owners have all of the above with us. Personally, I would rather have the more profitable company, with a longer operating history, more operating scale, higher margins, and better free-cash-flow conversion. That's the one I would pay the higher multiple for.

I think it's a really good comp. If you throw a revenue multiple or a center-level contribution multiple at it, you can back into what you think they're making. IWG makes about 25% center-level EBITDA margins. At the peak, we were at about 30%; at the trough coming out of COVID, we were in the low double digits or something like that. Let's just say Industrious does a 20% center-level contribution or EBITDA margin. Then they're probably doing $100 million of contribution, and they just sold for 8 times that number. If you put 8 times on our contribution, you get multiples of our current stock price. If you put their revenue multiple on our revenue, you get multiples of our stock price.

My understanding is that they don't really generate that much EBITDA because they have a lot of G&A that they're hopefully going to leverage as they open more locations. But if you put that EBITDA multiple on our EBITDA, you get a significantly higher stock price.

I think that's a great comp. With WeWork, it was a little more complicated—there were creditors who were well positioned to buy it out of bankruptcy.

Pause there. Why doesn't Regus own WeWork right now? Mark has not been shy about saying there would be enormous synergies if he bought WeWork. I think both you and I can do the math and say, "Hey, I can't even remember. WeWork went for what, like $550 million to one of the creditors?" I think Mark's talked about hundreds of millions in synergies if he merged Regus with WeWork. Even if you value WeWork's business at a negative number, hundreds of millions of dollars of synergies would more than cover that bid. So why does Regus not own WeWork right now?

They really should. They're the natural owner. WeWork is now owned by the lenders, right? The lenders took it out of bankruptcy and put in fresh capital. But if you have the ability to credit-bid your debt, you're in an advantageous position to bid for an asset. Unless someone comes in with an over-the-top bid that satisfies the creditors, the creditors are in an advantageous position to own it.

I think Mark probably could have come up with a bid that satisfied the lenders and superseded their ability to take it out of bankruptcy themselves. I don't know why he didn't do that. On the one hand, he has watched WeWork be overvalued by others for a very long period of time, and he's said, "This isn't worth that. This isn't worth that." He's been proven right. So I don't think it's crazy to sit there and think, "This isn't worth that" again.

I think sometimes you need to think about what it could be worth in your hands, not necessarily what it's worth to someone else, if you want to win an auction. I think it's worth significantly more to him and to us than it would be to anyone else. But maybe he figured he might get another bite at the apple, another shot on goal.

It's one of those dichotomies that I struggle with at IWG. I'm like, "Mark, godfather of the industry, owns 25%. It seems like he should know that WeWork should be in his hands." Then he passes, and I understand he thought maybe it was worth less, or maybe he thinks he can get it for a song.

But let's say he can buy WeWork 3 years from now for $1, so he gets it for $550 million less. If there were $100 million in synergies over those 3 years, to miss out on all those synergies—to say nothing of the sales and getting your networks in the right place—would be more than $100 million.

It's $100 million—I was being super low on cost because I think there's revenue, I think there's everything. It's like, "Cool, you save $550 million, but you probably missed out on $1.5 billion of value creation over those 3 years."

And by the way, I think having a managed offering with the WeWork brand probably accelerates the number of signings. When you go to building owners and say, "Hey, let me manage your location as a Regus," I think they might say, "What are Spaces or Regus?" But if you come to them and say, "Let me manage this location for you as a WeWork," a lot of them will just get it much more easily. It's an easier sale, I think.

I think it would accelerate growth. I think there are a ton of synergies. I've spoken to him a few times about why I think it's worth paying up for. On the other hand, it takes 2 to do a deal, and if they were being unrealistic, I don't blame him; I commend him for being patient because I do think that if they were being unrealistic, eventually they might have to become more realistic.

Yep. I think this Anant Goenka who controls 60% of this now, he didn't buy it. It wasn't his software company, Goenka Systems, that bought it. He personally bought it out of his family office. He's older than Mark, even—I think he's in his 70s—and he's very involved in the day-to-day, is my understanding at the moment.

King Street and the bondholders aren't in the business of owning assets forever, right? They need to have liquidity, an exit, as well. I think there will be a need to find liquidity here, whether they IPO WeWork or sell it. If they sell it, I think Mark could have another bite at the apple. Maybe CBRE goes for it, too, now, because they have Industrious and they have capital.

I still think WeWork with IWG makes the most sense. We could squeeze the most out of it in terms of costs and synergies and operate it the best. If they're asking for too much, I commend him for being patient. If he could have bought it for $750 million or $1 billion and he chose not to—which I'm not sure is possible—then I kind of question why he didn't do that. I'm still hopeful we get another bite at the apple. Maybe that's why they're not buying back stock yet. Maybe there's a shot that deal happens. I'm not that optimistic that it's happening anytime soon, right? They just took it out of bankruptcy last year.

Yep. You need to wait for things to shake out. My understanding from talking to people in the industry is that, even coming out of bankruptcy, the business is still not performing that well. They pruned the bad leases. They were able to restructure the business, but I still think they're really not generating cash and they're not growing the business. If that's the case, I think there will be another shot on goal. The question is whether you get it or CBRE gets it—TBD—but hopefully we're able to.

We're coming up on an hour, so I want to end it, but I've got so many questions. I've followed this company for so long, and I'm always so interested and so close to pulling the trigger on it. Let me end with this: as you and I are talking, it's Monday, January 27. As I mentioned earlier, the stock's trading for about 160. I can never remember if it's pounds or pence, but whatever. You said, "Hey, if they hit the targets over the next 5 to 7 years, you could see a 5 to 10x." Can you help walk me through the math of how you get to that valuation?

It can be as easy as starting with the $1 billion adjusted EBITDA number they gave for the medium term. I get to free cash flow, but I'd love for our listeners to be able to do the math of how you get to such large upside.

I think $1 billion of EBITDA—I'm actually slightly over $1 billion. I'm closer to $1.1 billion by 2028.

And you've adjusted for the partner contribution. We don't have to spend crazy amounts of time on it, but—

Yeah. So $1.078 billion is where I am for 2028 EBITDA in dollars. By that point, partner contributions aren't $100 million anymore; they're, call it, $75 million or something like that. So $1.078 billion gets down to $1 billion after partner contributions because the lease portfolio is getting smaller and smaller as a percentage of overall EBITDA and in nominal terms. Then taxes are $200 million or something like that, so you're in the mid- to high-$700 millions—$750 million of free cash flow or something like that.

There’s no debt anymore in the business. In fact, at that point, you’re sitting in a net cash position. So, in theory, the share count could be lower even, right? I think you probably have $1 billion of net cash at that point.

And so, $1 billion of net cash plus maybe a multiple on $750 million of free cash flow, of which a significant portion is coming from management fees—I don’t know. 15 times doesn’t sound crazy to me. That gets you to $11.25 billion, plus $1 billion and change of net cash on the balance sheet. That gets you to, like, a £12 stock compared to 170p today.

Perfect. Perfect. And you get, as we discussed, they’ve just converted to U.S. GAAP. I can’t remember if it’s completely done or if it’s being done this year. They’re already reporting in dollars.

You and I have talked offline about the relisting opportunity. Nobody likes selling U.K. stocks, but everybody likes selling U.S. stocks. And if this relists, this could get interesting pretty quickly.

Yeah, by the way, there’s a shot they end up generating much more cash. There’s a shot EBITDA ends up being higher. But the real thing is, the multiple really could be higher than 15 times at that point, right? It’s not crazy to think this trades at 20 times, right?

20 times $750 million is $15 billion, plus cash. As you said, they start putting a multiple on that managed-services business, it could get crazy. Or there’s a chance they buy WeWork 2 years from now, and all of a sudden, they could add scale, synergies, and profitability.

Down the line, let’s say they do buy WeWork, or let’s say they buy a bunch of other small, struggling operators and get more scale. Once you get more scale on both sides of the business—the managed side of the business and the owned-and-operated side of the business—you could split them up à la Hilton, which I spoke about earlier.

I think you probably need hundreds of millions of EBITDA on both segments so that they could each stand alone on their own. But you could eventually sell the owned business for 6 times EBITDA, 5 times EBITDA, or 7 times EBITDA, depending on what you think the managed side of the business will trade for, and buy stock on the managed side of the business or pay yourself a special dividend.

So, there are lots of things you could do over time to create value. And if public markets don’t give you that value, I think there’s private-equity interest that could extract that value for themselves, whether it’s Brookfield, Blackstone, or—there are lots of private-equity firms that see the value here and are probably pretty sophisticated in terms of thinking about how to extract that value for themselves.

All right. Actual last question.

We’ve talked about IWG multiple times, on and offline, on the podcast over the past 2 years. At some point, the valuation gets low enough and the momentum gets big enough that the market’s not going to be able to ignore it anymore. And I suspect—I hope, I suspect—that’s 2025.

If you and I were talking here 18 months from now and—forget the stock price—but the momentum here had stalled out for some reason or another, with managed signings down and the business not working, what do you suspect the most likely reason, other than, hey, we’re in a massive recession, would be?

Yeah, it’s a recession, or you’ve bitten off more than you could chew in terms of opening too many managed locations too quickly. You’re not filling them, you’re not focused on providing a good experience for your building-owner partners, and that destroys the integrity of your product offering and your reputation.

Then you stop signing new locations, and the market doesn’t put a multiple on the management fee because they think it’s not a durable enterprise and they think it’s going to be a melting ice cube.

This has been great, Yaron Naymark. Hopefully, on the next podcast, we’re going to have to do a different name than IWG. But look, this is one of the most fascinating stocks. I continue to follow it really closely. I’ve been long in the past. I wouldn’t be surprised if I’m long in the future. I have friends who are long in it.

It’s just a fascinating story, but there are just 1 or 2 things that are a little funky. It’s hard.

I’m with you. It’s just hard to see it: You’ve got the base business, you’ve got the management business ramping up. It’s hard to see material downside, and the upside of the management business if it keeps ramping is just enormous.

Yeah. Yeah, I think, look, there aren’t many. The reason why it’s my biggest position is because I think you could do well even if I’m wrong on the managed side of the business, just based on the current valuation. You could do fine.

If we go into a recession, maybe you lose a little bit of money, but I don’t think you get diluted into oblivion here. I don’t think you get permanently impaired. We’re generating cash, we’re at a cheap starting valuation, and I really think there’s an open-ended, S-curve-like growth story here, which I don’t really have in my portfolio most of the time because I’m a value-oriented guy.

We’re buying cash shells that find litigation-related claims worth, like, 10% of their market cap out of nowhere.

Exactly. Like, open-ended growth stories don’t normally come attached to a business that’s trading at 7 times free cash flow. And that’s kind of how I view this.

So, I love how you compared it to KKR because I was there for KKR, not as long as you, unfortunately, but it does remind me that with KKR it was like, “Hey, but remember, the stock’s at $20 and they have $12 per share of balance-sheet investments.”

So, it’s like you’re buying this—when the stock’s cheap, there’s always a reason. With KKR, to your point, there was a reason: “Oh, it’s levered beta. We’re at peak leverage. In a downturn, the balance sheet’s going to get smoked, and their portfolio companies are going to get smoked because everything’s leveraged. They’re never going to be able to raise bigger funds again. They’re already so big.”

There are lots of reasons, but the reality is that we have strong secular tailwinds with a really good business at a low valuation. And I think that’s kind of what we have here.

I’ll caveat that by saying I’m always looking for signs that I’m wrong, and I’m open to changing my mind. I have changed my mind in the past. So, I continue to follow this business very closely because it’s a big position, and I might change my mind tomorrow and sell my position.

But based on everything I know today—I’ve been doing 2 and 1/2 years of meaningful research on this name at this point—I think I’m right, and I think it resembles KKR to me. I hope it works out that way.

If you did a survey tomorrow of 50 building owners and the responses went from mainly 4s and 5s to mainly 2s and 3s, would that change your mind?

It would definitely make me question what was going on, and I would try to have conversations with those building owners and see if I could understand what was driving that displeasure. But it would definitely be a sign that something’s going wrong, for sure.

No, it’s just—I look at a lot of these franchise businesses. How the franchisees are responding is always a difficult one for me to base things on, because I will find that sometimes the franchisees are just furious because they want to be making more money, and that’s the bottom line.

Sure, everybody does, but they’re making really good money and they just want to be making more money. But then sometimes it’s like, “Hey, they were revolting because there are real issues with the business.”

And it’s always tough to, in the multivariate complexity of franchises—happy, sad, whatever—like, weigh that against the stock price being really down, the managed business being completely free here, all that type of thing.

Most of the building owners that have these management contracts have multiple buildings. And so, one of the questions I ask in the survey is, “How likely are you to give another one of your buildings to IWG in the next 12 months with a management agreement?”

If they all went from 4s and 5s to 2s and 3s, but they were still answering 4 or 5 on likelihood to give IWG another location, then that would be one thing. But if they all went to 2s and 3s on both of those questions, I think that would be kind of scary for me.

It reminds me of that French trader who, instead of asking people, “Are you going to vote for Donald Trump or Kamala Harris?” said, “Who do you think your neighbor is going to vote for?”

And it was like, “Oh, everybody thinks their neighbor will vote for Donald Trump. Let’s load the boat.” If all the franchisees are like, “This sucks. I hate it. Oh, yeah, we’d love to open as many as humanly possible under IWG,” it’s like, “Well, your actions are kind of speaking louder than your words.”

But we’ve gone way over.

This has been awesome. I appreciate you coming on. Looking forward to—I think it's going to be time number 7 when you come back on. We're approaching a concentration in your own Naymark podcast, but this has been great. We'll chat soon, buddy.

All right. Cheers. Thanks.