The Wall Street Journal - 21.08.2019

B6| Wednesday, August 21, 2019 THE WALL STREET JOURNAL.

American Dream, a long-delayed shopping and entertainment complex in East Rutherford, N.J., is scheduled to open on Oct. 25.

JULIO CORTEZ/ASSOCIATED PRESS

Comporta, Portugal, has at-

tracted vacationing royalty,

politicians and celebrities, but

for decades its 18-mile coast-

line has remained largely un-

developed.

Now, some international de-

velopers are aiming to capital-

ize on the area’s growing pop-

ularity by launching new

resort and residential projects.

“Demand has been building

in Comporta for the past three

to four years, but there wasn’t

the supply,” said Martim Es-

pírito Santo, whose family was

once the region’s largest land

owner. He is now a business

development director of Por-

tuguese property agency Ath-

ena Advisers.

Construction along the

coast has been limited by Eu-

ropean Union regulations in

this environmentally sensitive

region. Another barrier to de-

velopment was that, since

1955, the family that founded

Portugal’s Banco Espírito

Santo owned much of the

area’s beachfront.

The bank’s 2014 collapse

brought about a sale of the es-

tate, opening up the prospect

of Comporta’s first major new

development in decades.

A consortium that includes

Lisbon-based developer Van-

guard Properties acquired de-

velopment rights for the es-

tate last year for €158.2

million (about $175.5 million).

The group is completing plans

for two large-scale hotel and

residential golf resorts.

Vanguard in May launched

a separate €200 million resi-

dential project on 865 acres

near the village of Muda.

A 90-minute drive from Lis-

bon, Comporta is often com-

pared with the Hamptons of

the 1970s or Ibiza 20 years ago.

BYLAURALATHAM

Portuguese

Coast Area

Pulls In

Developers

beginning of the year, bringing

its market capitalization to

$4.45 billion.

By contrast, WeWork

racked up an operational loss

of $1.37 billion on $1.54 billion

in revenues in the first half of

this year, according to the IPO

filing, after spending heavily

in pursuit of growth.

IWG “is almost going in the

opposite direction to the di-

rection WeWork is going in,”

said Michael Donnelly, a stock

analyst at Investec.

IWG was founded in 1989

and went public on the Lon-

don Stock Exchange in 2000.

News reports at the time de-

picted Regus, as the company

was then called, as a disrupter

changing the way people work

amid globalization and the

rise of the tech economy.

IWG has since doubled

down on a franchising model

that it hopes will allow it to

grow quickly without having

to spend as much money. The

company in April sold its Jap-

anese locations for $387.2 mil-

lion under a franchise agree-

ment, and sold its Taiwan

locations in August under a

similar arrangement. It has

held talks with potential fran-

chisees in other countries,

people close to the company

say.

Investec’s Mr. Donnelly said

IWG’s franchising approach

would likely perform better

than WeWork during a reces-

sion because the company

isn’t on the hook for expensive

long-term lease obligations at

franchise locations.

IWG has suffered from

downturns before. After the

dot-com bubble burst, Regus

was stuck with long-term

leases and struggled to pay

rent as more companies

moved out of its spaces.

In 2003, the U.S. subsidiary

filed for chapter 11 bankruptcy.

Part of the problem, say cur-

rent and former executives,

was that it rented furnished

space to single companies un-

der flexible deals, leaving it

with big vacancies when they

moved out. IWG has since

made efforts to avoid leasing

entire locations to single

firms, say people close to the

company.

Some analysts say that We-

Work could repeat the same

mistake. At some WeWork lo-

cations, a single company oc-

cupies most or all of the office

space. As of June 30 the com-

pany had $47.2 billion in lease

obligations, of which it guar-

anteed around $6 billion, com-

pared with a committed reve-

nue backlog of $3.95 billion.

We said in its filing that it

expects to be resilient in a

market downturn because

companies will seek out We-

Work in “search for more flex-

ible and lower cost alterna-

tives.” It cited the example of

Argentina, where it said occu-

pancy remained above break-

even levels in 2018 despite the

country’s economic crisis.

Investors and analysts are
looking at the rocky experi-
ence of a WeWork rival that
went public nearly 20 years
ago for insight into what could
lie ahead for the New York-
based co-working company.
WeWork’s parent, We Co.,
last week released papers for
its initial public offering,
which could price by next
month. Unlike Lyft Inc., Snap
Inc. and a number of other
startups that have gone public
recently, We Co. already has a
public competitor with a simi-
lar business model in IWG
PLC.
The Zug, Switzerland-based
company offers a similar busi-
ness model and has roughly
the same-sized footprint as
WeWork.
Some think that IWG’s tra-
vails during the economic
downturn in the early 2000s,
when its U.S. unit filed for
chapter 11 bankruptcy, is an
ominous sign for WeWork
when the U.S. bond market
and slowing global growth
may be signaling the possibil-
ity of a U.S. recession ahead.
WeWork has said its flexible
space model would have an
appeal during uncertain times.
The IWG comparison is also
raising questions about
whether We is worth what its
backers say: IWG has been
profitable for years and has a
market capitalization roughly
one-tenth of We’s $47 billion
private valuation, despite re-
porting big losses.
“I’m going to watch We-
Work’s numbers very carefully
and then probably be buying
them short,” said Frank Cottle,
chairman and chief executive
officer of the Alliance Business

BYKONRADPUTZIER

THE PROPERTY REPORT

Centers Group, another office-

management company. He

added that he considers IWG’s

stock “hugely” undervalued

relative to WeWork.

Like WeWork, IWG operates

furnished, serviced offices

around the globe that it rents

out to companies and individ-

uals under short-term deals

and is best known for its Re-

gus brand.

As of June 30, WeWork had

604,000 workstations, accord-

ing to its filing. IWG had

602,535. Many of IWG’s desks

are in Regus office suites that

are aesthetically a far cry from

WeWork’s more open, commu-

nal offices. But IWG has ag-

gressively expanded its co-

working subsidiary Spaces,

which offers a look that more

closely resembles a WeWork

office.

While their products and

strategy differ, “the business

models are identical,” said

John Arenas, chairman and

CEO of flexible-office company

Serendipity Labs and former

president of Regus Americas.

We usually dismisses com-

parisons to IWG or any prede-

cessor, and it did so again in

its IPO filing. “We consider

ourselves to be the pioneer of

the space-as-a-service model,

with a significant first-mover

advantage,” We wrote.

We also has suggested it is

a tech company, not an office-

services company. CEO Adam

Neumann has referred to his

company as a “physical social

network,” evoking Facebook.

WeWork has a better-known

brand and it has started to ex-

pand into education, fitness

and the rental-apartment busi-

nesses.

Yet the clearest difference

between the two firms may be

that IWG’s more measured ap-

proach to growth has kept it

profitable. The company made

an operating profit of £50.6

million ($61.5 million) on $1.59

billion in revenue. IWG’s share

price nearly doubled since the

WeWork Rival

Offers Hint

Of IPO’s Fate

Office-space disrupter

IWG lost heavily in

early 2000s following

similar business model

developing real estate in Al-

berta in the 1970s. The family

also owns Peoples Trust Co., a

Canadian financial institution,

the Community Federal Sav-

ings Bank in New York City,

and it has interests in oil and

gas exploration.

The pledge of the devel-

oper’s biggest properties sug-

gests it is confident that

American Dream mall will suc-

ceed. But it also significantly

raises the stakes for Triple

Five.

“There’s a long list of devel-

opers who have exposed their

entire family’s wealth this

way,” said Tomasz Piskorski, a

real-estate professor at Co-

lumbia Business School.

“Sometimes, it doesn’t go as

planned.”

Representatives for Triple

Five and JPMorgan Chase

Bank didn’t respond to re-

quests for comment.

Real-estate financiers said

that if lenders require addi-

tional assets as collateral, it

typically indicates that the

lenders deem the project risky

and that leasing might be

challenging.

“Lending standards for

malls have tightened in the

last five years,” said Vince Ti-

bone, an analyst at real-estate

research firm Green Street Ad-

visors.

While American Dream is a

unique project with more en-

tertainment tenants, “there’s

still risk involved, and it

doesn’t surprise me that lend-

ers want collateral in its high-

quality malls,” said Mr. Ti-

bone.

Officials from the city of

Bloomington, where Mall of

America is located, said they

were surprised to find that

their mall was pledged as col-

lateral, and later had some

calls and meetings with Triple

Five to find out more, accord-

ing to Schane Rudlang, Bloom-

ington Port Authority adminis-

trator.

“We now require a formal

notice from Triple Five” if this

were to occur again, Mr. Rud-

lang said. Mall of America

generates 10% of the tax pro-

ceeds in the city.

The total cost to complete

the American Dream project is

estimated at $2.9 billion, ac-

cording to loan documents.

The developer contributed

$548 million in equity, which

has been spent. Construction

documents show the project is

82% leased as of June 30, and

that temporary partitions and

temporary pop-up stores will

be set up in spaces that have

yet to be leased when it opens.

Apart from the construction

loan, the Wisconsin state gov-

ernment has issued $1.087 bil-

lion in bonds to facilitate the

construction of the project,

and the New Jersey Economic

Development Authority agreed

to grant the developer up to

$390 million in subsidies as

part of its Economic Redevel-

opment and Growth program.

The Public Finance Authority

in Wisconsin says it joins local

governments in financing pub-

lic-benefit projects and that it

has funded projects in 44

states. Funds from these enti-

ties are disbursed over time.

The developer of American
Dream, a mall and entertain-
ment complex outside New
York City, is so confident this
much-delayed project will suc-
ceed, it is putting ownership
of its two most high-profile
holdings at risk.
Triple Five Group , which
owns the Mall of America in
Bloomington, Minn., and West
Edmonton Mall in Canada, has
pledged 49% interest in these
two properties as collateral to
secure a $1.67 billion con-
struction loan for the East
Rutherford, N.J., project, loan
documents show.
That means if American
Dream fails and the developer
defaults on the loan, Triple
Five would have to give up
nearly half its ownership in
these malls, which the firm
has owned for decades.
The combined net worth of
the two stakes is at least $680
million, according to loan doc-
uments. JPMorgan Chase Bank
is one of the senior lenders in
the lending group, according
to the documents.
The Minnesota and Canada
malls produced over $1.75 bil-
lion in sales revenue a year,
according to loan documents.
As a private company, Triple
Five doesn’t make its total
revenue public.
American Dream Meadow-
lands is scheduled to open on
Oct. 25. The 3 million-square-
foot mall would be one of the
largest on the East Coast. The
mall is expected to bring
17,000 jobs, an American
Dream spokesman has said,
from lifeguards at a water
park to amusement-park engi-
neers and customer service.
The project, formerly called
Xanadu, was initiated in 2003
but the original developer and
a subsequent one both ran
into financial difficulties, caus-
ing them to pull out and delay
construction until Triple Five
took over in 2011.
The property developer is
controlled by Canada’s Gher-
mezian family, which started

BYESTHERFUNG

Company’s Other Malls Back Up Megaproject

The Swiss-based workplace franchiser is seen as more recession-proof than We Co. Offices operated by IWG unit Spaces in New York.

ANDREW MITCHELL FOR THE WALL STREET JOURNAL (2)