Serendipity puts WOTSO in a sweet spot for the flexible work revolution

Serendipity puts WOTSO in a sweet spot for the flexible work revolution

Demand for a more flexible post-pandemic work environment has hit a sweet spot for WOTSO Property (ASX: WOT), one of Australia's largest coworking space providers.

Although lockdowns have impacted the niche business over the past year, WOTSO is making inroads through growing demand from employees who eschew long CBD commutes in favour of working closer to home.

And it is WOTSO's focus on suburban and regional coworking spaces that is playing in the company's favour as both smaller and larger organisations see benefits in scaling back their traditional office operations.

WOTSO co-managing director Tim Brown concedes it has been serendipity rather than hindsight that has driven growth for the business this past year, with the group's coworking sites nationally seeing a 30 per cent increase in operating revenue to $16.7 million for FY21.

"I'd love to say we saw COVID coming, and that people were going to change the way they work," says Brown.

Even though WOTSO experienced a downturn in revenue during last year's lockdowns as memberships were put on hold, a rebound since then has seen the company bolster its annualised revenue to $21 million, based on current monthly revenue.

Brown says annualised turnover has significantly grown as more businesses adopt hybrid working models. WOTSO's member base is now better than pre-lockdown levels, while occupancy at the end of June was sitting at 68 per cent, up from 59 per cent a year earlier. Occupancy would have been higher but for the addition of two new space during the year.

WOTSO targets occupancy of around 85 per cent for its mature spaces, and its best sites can be anywhere between 95 and 100 per cent. 

The coworking sector has become highly competitive with WOTSO going head-to-head with WeWork (NYSE: WEWK) and Servcorp (ASX: CRV), both of which have had a tough 12 months.

But there is also collaboration for the group which has a trial in place with Hub Australia, a premium CBD coworking space provider. WOTSO has just extended an initial three-month trial providing reciprocal arrangements for members by another three months.

While WOTSO's FY21 bottom line is still in the red, to the tune of $4 million, Brown says once accounting standards relating to lease and asset depreciation are stripped away, the business is profitable from a cashflow perspective.

"What drags on that profitability is opening new sites where we have to spend capital initially," he says. 

"Eventually there will be a time when those sites will be making a loss once the revenue catches up.

"Our mature sites can generate EDITDA margins of 25 to 30 per cent and that's the goal. On the current runway of our sites, that revenue should grow to $40 million when those sites mature."

Hard lessons learnt

The WOTSO business has undergone a major restructure this past year to streamline the positioning of entities that drive the business. The group is still led by Brown and fellow co-managing director Jessie Glew. The Glew connection plays a major role in the WOTSO story.

Until early this year, WOTSO was a subsidiary of BlackWall Limited (ASX: BWF). In February, it was stapled to BlackWall Property Trust (ASX: BWR), the investment vehicle that owns most of the WOTSO coworking property assets.

This trio of entities share Brown and Glew as co-managing directors, while Glew's father Seph is chairman.

Seph Glew's credentials in the industry are extensive, including his time leading New Zealand's property development juggernaut Chase Corp, before the company met its match in the 1987 stockmarket crash.

"Each of the property businesses (Seph) has built since then certainly has learned the lessons of over-gearing; he learnt the hard way through that period," says Brown.

Seph Glew's experience in property is evident in the current strength of the BlackWall Property Trust portfolio, currently valued at $335.1 million with net gearing of 25 per cent. It's a different asset mix to the one Blackwall Limited inherited during the GFC when it acquired the management rights to the distressed assets of the Reed Property Trust. At the time, Reed was struggling under the weight of an 80 per cent geared portfolio.

"What we've always been good at is turning around properties or distressed capital structures," says Brown.

It wasn't until 2014 that BlackWall saw promise in the coworking space model, although it deliberately took a different approach to many of its competitors.

"We've always been a property and fund-management business, and we've been very active in the properties we've owned over a number of years," says Brown.

"WOTSO came out of a number of assets we had in our investment portfolio that had some vacancy. So, we went on a fact-finding mission in other parts of the world before coworking spaces really started to take off in Australia. We decided to give it a real go with a number of properties in our portfolio and this stapled security is now quite a unique offering."

WOTSO opened its first coworking space in Sydney's Neutral Bay in 2014, followed by a second in North Strathfield.

"We already had a serviced office offering in those locations, but we changed our strategy to be more coworking and community focused rather than the bulk standard serviced office offering."

WOTSO will officially have 18 locations nationally when it opens upcoming sites at Newcastle and Brookvale in the coming months. If gauged by the number of sites it operates, that would make WOTSO the largest coworking space operator in Australia with 87,000sqm of property and nearly 37,000sqm of flexible space. WeWork has more square metres under management, although, as Brown notes, this is mostly in CBD office space.

Staying close to home

An expansion into Singapore in 2016 and also in Malaysia was short-lived for WOTSO. The group didn't have an appetite for the complexities of international jurisdictions, preferring to focus on growing its presence in Australia and potentially into New Zealand.

Brown describes BlackWall Property Trust as Australia's first 'flexible property security'. This refers to Blackwall disconnecting from the traditional measure of the quality of an REIT's lease as measured by the WALE (Weighted Average Lease Expiries).

It's a direct response to what Blackwall sees as the changes to the way people want to work, with WOTSO providing the flexibility it needs with short-term leases. BlackWall sees this as spreading the risk, with the understanding that 'seemingly long WALE property' easily becomes a short WALE if a single tenant should fail. 

"What we have been really keen on is buying into this flexibility model and not tying people to longer-term contracts," says Brown.

"We are very deliberate in only offering month-to-month contracts. If somebody wants a six-month, 12-month or three-year term, we will give it to them. But we think what we are doing for small to medium enterprises, and for larger enterprises, is really offering them the flexibility to scale up or scale down.

"It allows them to change their minds about what their businesses are doing and give them more spaces they might want to move between. If they were tied to long-term contracts, it really flies in the face of what we are trying to achieve."

For BlackWall, the benefit is that it has a ready-made tenant in WOTSO and that defines its acquisition strategy.

"It's quite well capitalised and lowly geared at the moment and our mandate is to grow that trust which in effect grows WOTSO, the stapled security," says Brown.

"The idea is that the workspace business can generate its own return and that effectively supercharges the yield that a REIT would normally get from market rent.

"When we get it right, we will be able to produce yields that are 3 per cent up to 10 per cent higher for the WOT group when we fill up our spaces."

Hit by a hot market

However, opportunities for growth have been stymied by surging property values making acquisitions more challenging. Although WOTSO's margins are healthy, the figures still need to stack up.

"One of the factors slowing our growth at the moment is the property market is so hot," says Brown.

"We like to buy assets but we aren't just going to buy an asset on a 3 or 4 per cent yield. We don't believe those yields are sustainable. We're looking for empty buildings at 7 to 8 per cent yield and they are harder to come by.

"That may mean that our growth will be slower. But we'll still look at third-party leasing deals on terms that suit us, such as an arrangement where we'll pay a percentage of our turnover. That may mean the property owner in the long run will get higher than market rents, but it also de-risks us in those first few years."

Capital expenditure and the lead times involved in maturing a new coworking space is one of the barriers to entry. WOTSO ideally looks for properties of 1,500sqm to 2,000sqm.

"What we're looking at is flexible property as a whole," says Jessie Glew.

"It's about putting a coffee shop and a childcare centre in so that people's whole life can be integrated in the building where they go to work. We purchase a building with a large enough real estate to accommodate that and our staff build the community within those spaces."

A measure of how much the employment market has changed over the past year lies in the number of flexible day passes issued by WOTSO for casual use.

"Before the pandemic, we had 150 day-passes sold and used per month across our portfolio," says Brown.

"In June this year, that number was 1,300, so it has gone up tenfold. We think this sort of use will become a material line for us, in particular with larger corporates. They have their big office in the city and tend not to have any out in the suburbs, and their staff are now demanding that they work from home or don't want to commute as much.

"In response to buying into this hybrid work model, a good happy medium is to take 100 days with us in our portfolio which can be spread out. In Sydney, where we have most of our sites, that is a real option for some of these bigger companies. That's the network effect of growing the number of spaces we have."

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