IWG Plc

LSE:IWG

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's First Quarter Trading Statement Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 2nd of May 2018. I would now like to hand the conference over to your speaker today, Mark Dixon. Please go ahead sir.

[Mark Dixon, CEO & Director]

Hello, and good morning, everyone. Thank you, operator. Thank you for joining this call this morning to discuss our first quarter trading update. As usual, I'm joined on the call by Dominik de Daniel, our group CFO and COO; and Wayne Gerry, our Head of Investor Relations.Firstly, I'd like to make some brief remarks and then I'll hand over the call to Dominik to comment on the financial performance. We'll then open the call, as usual, for questions. I think the key messages in today's statement are very much as we described at the last results presentation, which was that sales activity has improved and this is now being reflected in our revenue performance at constant currency. Revenues from our open centers have increased 9% at constant currency and total group revenues have increased by 6.7% to GBP 503.9 million (sic) [ GBP 583.9 million ] at constant rates. With the prevailing FX headwind, primarily from the dollar, revenue growth at actual rates was 0.6%. We've seen strong performance in EMEA, with double-digit growth and high single-digit growth in both the Americas and Asia Pacific. Revenues for our mature group's business increased 2.3% at constant currency to GBP 544 million. This performance was driven by the Americas and Asia Pacific. In the Americas, that performance is being driven by strong performance from the U.S, our largest market and a very strong performance from Canada. In Asia, revenue growth accelerated in Japan and we've seen a good recovery in our businesses in both Hong Kong and China. As anticipated, our business in the U.K. has stabilized at a level similar to that of the fourth quarter. Mature occupancy has increased by 50 basis points to 73.5%. Our focus, as you know, is squarely on the returns we make on our investments and therefore, pleased to report today that on a 12-month rolling basis the returns in all those locations, opened on or before the 31st of December 2013, was 17.8%, well ahead of our cost of capital. We've added 46 new locations in the quarter, adding approximately 900,000 square feet of space. Global network now stands at 3,144 locations, and overall, offers 52.4 million square feet of flexible space. These new openings were predominantly organic openings and, of course, only 40% were partner deals. 27 locations were closed in the quarter, with the reduction of approximately 0.5 million square feet of space, and a 2% reduction in revenues year-on-year. We have a strong growth pipeline, current visibility over the pipeline is broadly unchanged at approximately at 230 locations, and about 5.7 billion square feet of space or an 11% growth rate in space in the whole network. The anticipated associated net growth investment has increased by about GBP 10 million to circa GBP 200 million. This reflects an increase in the anticipated amount of space and the purchase of 1 property operating as business center. In order to support our strong growth development, we anticipate to modestly increase our marketing spending during the course of the year. In summary, we've seen good sales activity and these trends accelerated towards the end of the quarter. And as a result, we believe the constant currency revenue growth will improve throughout the year. I'll now hand over the call to Dominik to discuss the performance in more detail.

[Dominik de Daniel]

Thank you, Mark, and good morning, everyone on today's call. Now looking to the performance in some more detail. With the headwind from prevailing exchange rates, group revenues increased 0.6% to GBP 583.9 million. As Mark mentioned on the constant currency basis, revenue increased 6.7%. The 2.3% growth in mature revenues reflects a continued acceleration in Q1 from all centers opened on or before December 2015, and a continued strong development of the 2016 year-group addition. As a result, our material cost margin improved. We are particularly pleased with our performance in the U.S., it showed mature revenue growth of 6% in Q1 and is one of the main drivers for the acceleration in mature revenue growth. Further key countries supporting our mature revenue acceleration amongst others, China, Japan and Canada. Given the current level of sales activity, we are confident that our mature business continues to accelerate and we believe this we will be more broad-based as we progress throughout the year. Our post-tax cash returns on net investment remain strong at almost 18%, clearly, well above our cost of capital. Remember, this calculation is on a last 12-month basis and so incorporates the slower trading performance, particular in the second half of 2017. It also reflects the increased investment in [indiscernible] CapEx over this period which we expand in this calculation. Our underlying cash generation was GBP 23.7 million lower in this quarter at GBP 9.5 million compared to same period in 2017. This reflects timing effects around the quarter end date on working capital, with each [indiscernible] period overlapping the month end. As a result, some payments such as quarterly rent payments went out a bit earlier at the first date of Q2, [ a holiday ] day in many markets. There was also the cash settlement of some one-off items amongst others, the U.S. class action in California, which we announced with the 2015 results. Net debt has increased to GBP 347.2 million, compared to an opening position of GBP 296.4 million which is also related to the anticipated step up in our investment program.We have invested GBP 63 million, adding 46 locations and opened 9 million square feet of space to reach over 52 million square feet globally. [indiscernible] out of this new location and Spaces. As Mark mentioned, the growth trended [indiscernible] in Q1, 2018, we actively pursue, but we need to upgrade our portfolio in given cities. This is absolutely right thing for the future of the business, but in the short-term, there are associated closure cost impacting primarily P&L and only to a lesser extent the cash flow. Looking to the pipeline. At the end of April, it stood at approximately GBP 200 million, reflecting 230 locations and 5.7 million square feet. So in conclusion, we remain confident of our position in this exciting growth market. And as Mark said, we are encouraged by the sales activity levels, which accelerated towards the end of the quarter. We're also pleased with the pickup in network growth, the quality of which continue to increase and we believe we will continue to drive shareholder value. Our approach to this remains prudent. Now we'll hand back the call to the operator who will explain the procedure for asking questions.

[Operator]

[Operator Instructions] The first question comes from the line of Steve Woolf.

[Steven John Woolf, Analyst]

Just a couple from me. Just focusing on the closures, just trying to get a feel for the amount of closures you're also are targeting for the full year now, whether there was a particularly, skewed [to then] geographically and whether you're taking out some of those closures pre the end of the lease? And then the sales and marketing spend, these sort of the incremental stuff. What exactly is it the U.S. or the sales and marketing spend and the additional? Where is that being spent now? [ We are ] talking some digital, is it advert? Just some color and granularity on exactly what that is now?

[Mark Dixon, CEO & Director]

Okay, Steve. I think, first just dealing with the closure question first. So all of these closures are at the end of the leases. So this is basically, and many of them we're simply upgrading to a new center. So these are closures for an opening, rather than closures and then we stop. So and as Dominik said, once they might have a P&L impact, there's a little cash impact, because they're just may be small write-offs of the undepreciated fixtures and fittings, okay? So that's first of all. There may be 1 or 2 that would be before the end of the lease, but they would be very, very small in number and they would be in very distressed places like Russia. In terms of the geography, it is -- it's pretty widespread. I think it depends really on what's actually happening in that market, how long we've been in that market, how long -- how old the centers are. So and just to put this in perspective, we actually had a look at our centers the other -- we looked at them in a different way. And we can see very old centers, some of the first ones opened are still performing, very, very well after 28 years, 25 years of being open. So it's not necessarily, all our centers that were affected, but it's old centers in old buildings, where the rents become too high and too high for the market, we can move to a newer building for the same price or may be a slightly higher price and have new products. So many of these are because we can't make the deal that we want to with the building owner and we take the opportunity to change. It's obviously not the course of action we want to take, but all of them are the right commercial move. Some of them are associated with acquisitions and one of the reasons why the numbers are slightly higher at the moment, you should always, by the way, expect an element of closure. So they're slightly higher because of acquisitions we did 4, 5 years ago where -- these are the great acquisitions. We've had our cash back 3 or 4x already, but those centers come to end of life and in particular, this affects places like London, where we consolidated the market 4, 5, 6, 7 years ago, and as those leases come up for renewal, we take the opportunity to either close them or renegotiate and spend more money on them and upgrade them to other buildings at the right time of the market. So a standard thing for our business, slightly higher at the moment because of acquisitions, geography is not worth talking about, because it is just wherever it needs to be done, we do it, slightly higher at the moment, but you should always expect it. So is the marketing. So...

[Steven John Woolf, Analyst]

Sorry, just to go back on that. Last year we had obviously a lot of net closures in the U.K., so it presumably -- that related to some of those points. But do you have as a rough number in mind for the net closures for this year?

[Dominik de Daniel]

If the -- we disclosed those -- yes, last year this number was artificially high because there was one big management agreement in the U.K., which has hardly any impact on the P&L, right? But normally we have seen, if you look at the last year's spec, more towards 60 centers, yes -- it will be -- like Mark was saying, it will be somewhat more this year.

[Mark Dixon, CEO & Director]

And each one of them is carefully considered, Steve. So we -- these -- everyone of them comes to the investment committee, it's fully researched, we look at our options and what I can say, I suppose, it's, we're much more actively managing the estate now and that again is leading us to make decisions earlier and be more proactive in this whole area. So all in all, right thing to do for the business, we're looking constantly on return on capital and whether our capital can be deployed in a newer building to better effect than an older building. So turning to sales and marketing. So basically what we have is, overall, much more growth, okay. So we've got 2 things we're going for: number one, we're adding a lot more space; number 2, we are -- the space that we already have is at 73% occupancy. So we've got a cap on whichever way you want to look at it, [ their ] existing estate that we already have opened has a latent upside of 10%, 12% occupancy to get to 85%. So we've got -- to fill up the new space and fill up the space that we have. Now we've been experimenting at the end of last year with additional marketing activities, and we have already discussed them at the end of last year where we've said and Dominik went into more detail on this about our investment in corporate sales and how that was going to become more and more important. So one of the things we're spending more marketing on is more corporate marketing. So these are more events focused on corporate customers, more marketing is going directly to corporate customers and this is in the form of all types of digital marketing from Facebook, LinkedIn, to the whole reflector of digital marketing activity. It's little, there's not much in print, there's not much in standard advertising because it's less effective. We can be much more effective with digital stuff. So the corporate is one, overall, with increased spend on digital marketing because we've been testing the limits of it. So there's a certain amount that you can spend on digital marketing to get a return on that marketing. Now as you move further -- your limits further out, you get less and less returns. So we're just trying to find the cutoff point. As we tested this in small markets last year, we felt that we could test those limits further this year and get more inquiries that would convert the business. Therefore, we increased the level of spend in digital overall. So it's corporate, it's overall mainly digital and a very small amount of print advertising. There's also some advertising to brokers and also to the direct property market and so on -- we've just gone full-on on marketing, so that does lift sales and marketing expenses but will also enhance also lifted sales. So the reason we're doing it is calculated to lift sales and we -- to fully tested, we're confident that will reap us very, very good returns on that investment. But it has to be done very carefully, otherwise it would be very easy for us to just double that marketing budget, but we wouldn't -- we'd certainly not double our sales and we would start to destroy value, rather than add it. Does that answer both of your questions, Steve? Would you have further questions?

[Operator]

The next question comes from the line of Andy Grobler.

[Andrew Charles Grobler, Analyst]

Just a couple from me, if I may. FX was clearly a headwind during Q1 and rates are moving all over the place at the moment. If you mark-to-market now, what kind of headwind would you -- do you see to revenues and to EBIT for the year from FX? And then secondly, just on large corporates market, you just talked about some of the marketing there. Can you share with us any data on progress with large corporates in terms of contracts that have been signed, space that has been taken up, number of workstations that are filled or anything along those lines and how that has moved over the last 1, 2, 3 years or whatever the right timeframe is?

[Dominik de Daniel]

Andy, if you currently look to FX, so if you look to FX, obviously, the headwind in Q1 is a bit more prominent because if we look how FX moved throughout last year, it is a tougher [indiscernible] to say but in general reflected already through the full year results and then we have seen after the full year results, kind of, continuous weakening of the dollar, but it kind of peaked in the meantime and it’s currently -- it actually back to the level of the full year result. They are, if not a major change the side effects of this basically 2 months, while we see other currencies like Yen or the Euro getting a little bit from a translational point of view the wrong direction. So it is actually on a -- and you know our business has a natural hedge, right? We sell and we provide ourselves in the same currency adjusted translation and base, if let's say today's FX rate, the impact will be low single digit on the EBIT line negative on today's FX rate.

[Mark Dixon, CEO & Director]

And in terms -- and then on the corporate account. I mean, just explain Andy what is that you actually want to know there? Generally speaking, we always come up with the same answers, so as you asked, I thought, same question again. We basically underline, we continue to grow our corporate account business period. That's it. so as the network grows, as it becomes more dense, we just sell to more companies that uses in more than one place. So I think your question is, how many customers are using you in more than one place? Not how many corporate accounts are using it, because what we want our customers to use it more than 1 place, customers the biggest ones are using us in over 200 places, obviously, these are big accounts. And the business really splits into the small transactional business, which is starts ups, individuals, very, very small micro businesses, that's baffling where they are only ever going to use one place. That business is what everyone else is doing because they don't have a network. Our business is about people using the network, using to more than one place. So I think, how I should answer your question is, the people using us in more than one place business continues to grow. We have to find some way to quantifying it. So we don't get the question.

[Andrew Charles Grobler, Analyst]

Yes, I suppose that was the question that's because you've articulated your network strategy and talked a lot about its corporate is growing it from where to where would be interesting.

[Mark Dixon, CEO & Director]

It's not necessary corporate, is it? it's anyone. It's people that are using the network and people that are transaction. So if we have customers that use us in 200 places, that's an efficient sale, they're much more sticky, we've got deals with governments. We've got deals with all sorts of people, so who are these types of people is what you want to know? Have you got any big wins? But mainly, it's the breakdown of the business into those customers that are transactional are they [ only ] going to use one place. And those companies that are multisite users, which is, that really is unleash, because no one else has a network and that, that for a while is our raison d'être. That is what gives us a differentiator. So we need to -- we just need to stop, but we get a question every time and we always struggle with an answer because we don't have the numbers. We need to get -- we need to carve out that number for next time, Wayne please, no exception, you've got to get it done.

[Operator]

[Operator Instructions] The next question comes from the line of Emmanuel de Figueiredo.

[Emmanuel de Figueiredo, Chief Investment Officer]

If I could ask 2, please. The first one is actually on, more broadly on, the competitive landscape, just wondering if you think this is the current environment is business as usual, particularly, given some of the reports, which come out from one of your American competitor who is unprofitable. I just wanted to get a sense to what extent they might be distorting the market. And the second question is kind of related to that. Can you give us an idea from a regional point of view? In the centers, which have opened more recently, let's say, in the last 2 years, where you're happier with the returns you're seeing? And where you're less happy with the returns you're seeing?

[Mark Dixon, CEO & Director]

Which company, we're sorry?

[Emmanuel de Figueiredo, Chief Investment Officer]

My company, LBV Asset Management.

[Mark Dixon, CEO & Director]

Okay. So first of all, I have discussed with Dominik that we may represent all of our numbers as community adjusted. If you've seen the numbers from our competitor that you're describing. So they are miracles of financial engineering. But competitive landscape, let's just talk about this. Look, the environment settled down a bit is what I'd say. So from these guys that came into the market, they're just going in 2 directions, they are either -- they have finance, keep going, don't have finance, starting to go bust, because you can see from, WeWork, they just spend, the business model is okay, except they're not in control of their business. They just, you can see that they're spending way too much on overhead, their marketing budget, for example, coming back to Steve's question at the beginning, I mean, they're spending maybe twice us, maybe 3x us on marketing. So first of all, I'll come back to how it affects us, in a moment, then spending $143 million on marketing is an absolute [ goal sent ] for us, because that marketing is coming to us, and it goes to them, comes to us. So before it was only us spending money on marketing, now we've got someone doubling up our tripling up that spend. That's very, very helpful to us. If you look at this company, same, they're doing the same business as us. They had very few cities. They had very few centers in very few cities. They are in 73 cities against our over 1,000 cities. So they just can't service customers that they market to. So that helps us. If you look, then, at the environment, it settled down. These guys, where they may have been -- they have to get in control of their business, they can't go on losing $1 billion a year. My report says, by the way, that this year they will lose that and more this year. So but they can't go on like that because eventually, they've got to pay the rents. They got a lot of rent freeze at the beginning. Those rent freeze are rolling off right now. Their cash is going to become -- they're going [ to be have to beat today ], as we sit here today focused on cash and generating cash. So they can't unnaturally price anymore. If you look at it competitive environment, our U.S. business has done particularly well in the last couple of quarters. As you know, we changed the management. We have done particularly well, so we've got very strong uplift in both Q4 last year and in particular Q1 this year. And this is right in the home of all of these competitors, which is United States. So and we have good performance throughout the businesses, not just the new centers, it's new, it's mature, its all those things. So and that, by the way, comes back to Andy's question more corporate business, more people using the network and so on. So it's -- these things coming together and of course, our continued focus on cost, which, clearly, these guys don't have at the moment. But they are going to have to get it pretty soon; otherwise, they are going to run out of money, clear. So even against that environment -- the environment is settling down, and we are doing much better in this environment and our outlook for the year, we're feeling quite confident now for the year, albeit the way we're growing to strengthen our position to really extend these national networks, because we think, we're absolutely sure of the fact that this is what customers want. So we are investing in that and we've got good revenue growth following and this would be universal. If I'd point you to another market, the Netherlands, as another example here in Europe. We have every competitive -- we were -- you've got -- 2 dozen competitors in the Netherlands, we have a fabulous business. We have the only national network with multibrand there. We have a great business and that business continues to improve year-on-year, as we both grow it and improve our mature business. And so overall, we -- Dominik and I, when we read the numbers of WeWork first time that become available, and one would hope to be accurate because it was a bond offering. We now know what we're up against and it was good for IWG. We've got work to do, they have to keep sticking to what we thought we had to do. I think whatever we read in that document confirms that we've been doing the right thing. So competitive environment or not, we've got to keep improving our business and we are. Overall, Dominik and I don't think that the market is going to become less competitive. This is an attractive business area that's growing with great returns, these guys are in, they'll be others. It's our job to make sure that we stick to getting absolute market size in place in countries, national networks, keep on working on efficiency and lowering the cost, and overhead, invest in marketing and sales where we need to, that's it, and keep focused on return on capital. So it'd be very easy to start destroying value by just growing for growth's sake. And I think if you analyze our competitor's numbers, you can see very clearly this disruption in value. Because, a huge amount of capital is going in to produce not very much. That's the opposite to the way we look at things, which is, we will invest it, we can get a return on capital, we will not if we can't. We're not still trying to build market share for the sake of market share, which you can see these guys have been doing. So immense disruption of value there and it's benefiting us, [ though ] every investment they make in overhead and marketing is in some way coming through to us as the incumbent. And by the way, we hope they continue for a while. We don't -- certainly, don't want the disruption of not having them there and not having them invested, it's helpful. A long answer to your question, but it is what it is and we're confident of our position and our future within a competitive marketplace.

[Emmanuel de Figueiredo, Chief Investment Officer]

Okay. Well, it's a very clear. Just I ask a second question, which I don't know if you can answer, which is, just on the centers which you've opened more recently, let's say, in the last 2 years, where, from a regional standpoint, are you more happy and where you're, let's say, less happy from the results coming in?

[Mark Dixon, CEO & Director]

I think overall, I mean, there's a whole -- it's -- we're happy everywhere. Generally speaking, the more recent investments in general are better than the older investments as a --- on average because we've become, we believe, better and more disciplined at investing. So by definition, if you get better at it, you're going to make better returns. That's number one. In terms of geography, there's such a -- what I can tell you is there are some markets that we're not growing in today because we don't like the conditions. And those would be markets where either the rents have gone too high or perhaps the competition has become too unreasonable. Or, in some cases, a few cases, the legal conditions make it too risky for us to invest. So a variety of places we would not invest at the moment; we take a holiday. But there's other places that we're very happy with the returns on capital, risk adjusted, and we will invest more. You can see that the level of partnering here has slightly changed, gone down a bit in this period. And that is because we are investing in places where we essentially don't need to partner because the conditions in the market are very, very good for us to make returns, and by partnering, which takes more time, that would slow us down. So all of these things considered, where we're looking at returns on capital, it's broadly the same risk adjusted in terms of how much risk you actually take when you actually do a lease. But the returns on capital may be higher in some other places. Those places would be places where you would be taking more [ lease ] risk and you would expect high returns on those. But overall, more recent ones performing better than the investments we made, say, 3 years and backwards.

[Operator]

The next question comes from the line of [ Gile Sidman ].

[Unknown Analyst]

I had several questions on my side. One is talking specifically of WeWork. Them providing public numbers was actually certainly interesting. So you had the notion of CapEx per desk, [ and it provided some trends. I think you spend like ] $5,000 or $6,000 per annum. So I was wondering what the comparative figure would be for yourself and what are the opportunities to lower your CapEx per desk. That's the first question. Second, I would argue your level of debt versus the strength of your asset is pretty low. So there seems to be a lot of appetite on the debt markets for these kind of papers. So were you to tap this funding source, are there opportunities in the pipeline you can unlock faster? Because you are in growth mode and one could argue you still have the financial resources available to you. And I think I've asked you the question already on a different conference call, but I'll ask again. I'm not sure I understand the benefits of being public considering what WeWork is able to accomplish in being a private company and then having to respond to public equity investors. So maybe if you can answer that. And just the last for me, if I may, just concerning the property ownership. What's the desire to kind of the -- increase meaningfully your state ownership of assets?

[Mark Dixon, CEO & Director]

Okay, clear. Okay. First of all, if we look at WeWork's number of $5,000, $6,000 CapEx per desk, ours would be broadly similar. It really depends. I mean, that is a vast range. Opening up, doing a desk in Japan costs 3x the amount of doing a desk in Spain. So it's this big range. But it's in line. They -- basically, it -- but it's very subjective over how you calculate. So we don't know what's underneath that number. But more importantly, we believe we can bring that cost down and that we are -- we're in the process of doing that. So our objective is to -- we have already substantially reduced the cost of delivering every desk, but we would expect it to come down into next year, especially as we're growing more. We procured a [ known ] process of doing more procurement of every single item that goes into making up a center, just trying both to reduce the cost and reduce the time it takes to build. So we'll have a look at our number. And it's very -- I'm not sure what [ we'll] compare against there, but it's overall broadly in line.

[Unknown Analyst]

And do you -- can you discuss the fact that you have plans to bring this down, call it, another 20% to 30% with no time line defined? Is there scope for such saving in the market?

[Mark Dixon, CEO & Director]

It's good for us to do the same. But I don't think, from what they are doing, we're doing -- we're disrupting the whole supply chain in order to do the 30%. So they just don't have enough scale to do that. But whether they do or they don't, there is more to come on that. So we believe -- key things to try. If you're focused on returns, the best way for us to [ make ] a return is to reduce your costs. If you produce your input either by partnering or reducing the amount of CapEx required, that will have the most effect. So that is a major project for us. And we're full on; we're in the middle of it at the moment. We're already making savings. And we have already made savings, but there's more to go for. So one. In terms of the next question, more cash to grow, tapping the debt markets, I'll come to Dominik on both cash and on the debt markets, but we're not constrained by cash at the moment at all. So we're constrained by finding enough suitable investments, not have we got enough cash to do them. So -- and that's point one. Point two, I think coming to Dominik, I mean, what I said to Dominik once I saw the WeWork bond issue is say, "Well, should we be putting this -- well, what -- how would it price? Would we want to put something in place?" And what, Dominik, you were thinking about it?

[Dominik de Daniel]

I mean, I think by the end of this conversation, like you just said, Mark, is we are not constrained by cash because we have funds -- we have to find the right solutions because we have a business where our existing business generates a lot of cash which we can reinvest. Obviously, if there would be a need and if the pricing is good, then we always think about it. But we feel that our [ fund ] timing and structure are very comfortable. And even if we accelerate our [ core ] -- and what we're also seeing in accelerating our [ core ], even though these are less partnership deals than maybe last year, we're getting much more contribution from our landlord, right. It's what Mark was saying before, we're [ looking to the net investment capital and try to optimize ] as much as possible. So it's currently, I think, not more the need to even think about additional funds.

[Mark Dixon, CEO & Director]

Okay. Then I go to your question for ownership of property. Just to be absolutely clear, we have no desire to own property. That's all. We happen to own some property temporarily, and we would expect that property to leave our balance sheet but remain under our management at some point this year. Overall, we think there is an opportunity to create investable products for investors, a bit like student accommodation where we retain management but we create high-returning, well-managed, quality property investments around the world. So we're doing this for a reason, both to make some money but also to create more managed estate over the medium to long term. So -- but perhaps for clarity, that we will not make returns when it comes to allocation of capital. And the returns that you will make from owning property, they just don't compare to the returns we can make allocating capital [ and sustain the growth ]. Finally, your question about the benefits of being public -- okay.

[Unknown Analyst]

Just another a question just on real estate, if I may, just to expand that. It seems that they're going down the path of trying to generate like a real estate management fee as part of their business model. So not just managing co-working spaces and things like that, but they've done 2 large real estate deals, and they're splitting sometimes the economics, as I understand, with some of the landlords. So not necessarily revenue share but just more generating, I think, a -- like almost like a real estate investment company.

[Mark Dixon, CEO & Director]

Yes. I mean, just -- yes.

[Unknown Analyst]

Is this something that would be under consideration from your perspective?

[Mark Dixon, CEO & Director]

Well, let me just split that into 2 areas, first of all. First, those management fees and doing -- and sort of -- we do it already for building owners. So what you have to be careful with WeWork and others is don't get confused between hype and PR and how much money do you make from doing it. So we do it. We've had, I don't know, 40, 50 of those already. But you don't make a lot of money from the management contracts, okay. They are good [ and we're good at them ]. So first of all, it's nothing new. And we will operate centers on behalf of companies and all sorts of things, white label, because in the end, we're just selling our IP, and we've got our managements, we have everything. It's available to anyone within reason who wants to buy it. In terms of -- what you're referring to is Devonshire Place. So Devonshire Place, very, very interesting. You -- and so why would -- I mean, it's the -- why would you invest? They invested $68 million. Even though it was a small part of the whole thing, they paid a lot of money for it, invested $68 million to get a -- basically a return on that property. I think the return is 2%, 3%. It's all rental return on the property. Now over time, I'm sure that they will work and try and reposition the whole of that estate, Devonshire Place. But the returns on the $68 million that they could possibly make just won't get in the ballpark, even if they did really well, they might make a leveraged 10% or 12% out of that, maybe, okay. But that's a huge amount of work, huge amount of distraction to make a leveraged return of 10% to 12% in a business where you really need to be making returns in the 30%. That should be your target so you can cover for downturns. And in terms of return on capital, that should be almost your minimum benchmark. So the application of capital -- when you start to do bigger property deals, it absorbs time, effort, cash, and it's going to lower your overall returns. Now would we get involved in something like that? Absolutely. But we would not be investing huge amounts of capital in it. I think that's the difference. Management, okay. Investing capital, unless we felt it would make the right return, no.

[Unknown Analyst]

Okay. And then just the need to be public as I guess there's -- are not -- [ so probably ] [indiscernible]...

[Mark Dixon, CEO & Director]

Well, there's no need for us to be public, clearly.

[Unknown Analyst]

No?

[Mark Dixon, CEO & Director]

We -- basically, this morning, good questions. Thank you. Keeps us on our toes. But there's no need for us to be public because we're not coming to the markets, we're not raising capital. But we are public. This is -- so I suppose that that's -- we are what we are. We'll continue. We are -- I mean, it's not -- it's a -- it's more work for Dominik. But for me, it's a few days a year with a -- and frankly, I think -- or generally speaking, not always, but the questions are good and it's helpful. Time consuming but helpful.

[Unknown Analyst]

Right. All right, WeWork is turning at 20x revenue you're turning at 1x. So it seems they're doing great on the PR and marketing side, by selling themselves as a technology company versus a real estate firm. So is...

[Mark Dixon, CEO & Director]

Well, let us address that one if I may. [ So they're standing on themselves ]. Have a look at those published numbers.

[Unknown Analyst]

I've looked at the [indiscernible]...

[Mark Dixon, CEO & Director]

They're a joy to read because if you look at their service revenues, their service revenues, which they have been saying for the last years, this is what differentiates us, we're making loads of revenue from extra services for our customers, [ Larry Blount ], their service revenue percentage is 7%, ours is 28%. We've been saying all along we do all these things, but we do them properly and there's just no comparison. So if tech -- I mean, they have more of a real estate risky company than we are because they don't have any. All the tech is missing, the revenues from it at least. I mean, anyone can do tech if they give it all away. But yes, so that -- all of that will come to roost. That is why they're so prone. They don't -- if you don't have the service revenues, you're going to die. Your -- [ the center ] has already passed. It's just a matter of time. By the way, we need to do a better job of our -- explaining our numbers because in reality, we're getting absolutely no credit for growth. We're just -- we're on a multiple of earnings and that's it, as if we were not growing. So we're going to have -- we have to do something about that. Then I...

[Unknown Analyst]

I think I'd agree. We're investors for that reason. But it seems that there's something lost in translation when, at least on a relative basis, between their valuation and the story [ you're ] -- they're telling and your valuation and the story you're telling, to me it's -- there's discrepancy there.

[Mark Dixon, CEO & Director]

Well, one of the things is this, is -- yes, so one of the things is this. They may -- one of the reasons, I think, they may have put this [bond] out is a simple, why did they do that? They -- certainly, all the information has now gone public. That may be the first step towards an IPO maybe next year, which would be the most helpful thing for us. If they were to do that, we could easily split off [ theirs ]. But if, for example, [ credit ] people, if we felt that our Spaces business, which is, well, about that time be about half the size of their business overall, if they get a high value, we -- that's how maybe we can release value back to our shareholders. If people aren't willing to pay crazy prices, then let's -- then -- [as long as that ] can be converted to cash. At the moment, what they have is a big equity value, but they haven't -- it's not liquid. It's complete. I'm not sure I am -- no one's selling any shares, and they're certainly not selling them at $20 billion. But they're somewhere in the middle. There's a ground. So certainly, it is something we should -- we are and should be considering.

[Unknown Analyst]

Yes, I agree with that. What's the revenue run rate for Spaces for -- on an -- for either Q1 or 2018?

[Mark Dixon, CEO & Director]

I think I can't give you that. But what I can tell you, because I've looked at this, is that if looking into next year, say they were to IPO, I reckon, this is a guess, but our Spaces would be about half the revenue that they have. So if they were to IPO at $20 billion, they won't. But let's say they did. If we've got half the revenue and our Spaces is very profitable, theirs is not, you would expect that we could get a high number for that Spaces business, because if you've got half the revenue and it makes a profit, it could be -- no, could we be -- it's about the size of their business today. So by next year, $800 million, $900 million, absolutely, it could be there. So it's where they are today, we'll be next year. But we're at a profit. Now by the way, some people look at it and say, actually, if they actually make a profit, they wouldn't get the value because it's -- people can value profits much more easily than make a -- they can value losses. But I -- there might be an opening there, and it's certainly one that Dominik and I are thinking about. And Spaces has been prepared always to be a separate company if it needs to be.

[Unknown Analyst]

All right. So $800 million at 20x revenue could be worth $16 billion. And today, the enterprise value for the whole company is $3 billion?

[Mark Dixon, CEO & Director]

I've been told to stop now by Dominik. He's saying stop because he's got a [ white collar ], and -- now guys, look. You can work out. If it were that and if the sun always came up in the East and went down in the West, et cetera, et cetera, we need to be prepared. And if the circumstances arise -- markets can be erratic, and there's no reason why we shouldn't take advantage on -- of the plow -- the field that's been plowed by our friends at WeWork and just go in the furrow, absolutely. That -- so long as we can release cash back to our shareholders, there's no point in us having an expensive paper. We need cash. And cash is what counts because that's what's give -- that's, -- certainly for me as a shareholder, and I hope I speak for people on this call, if we can sit -- if we can convert into cash out, we should do it. And so that's it. But don't start thinking about valuations. But it might be a way for us to release higher value than we have today.

[Operator]

The next question comes from the line of Steve Woolf.

[Steven John Woolf, Analyst]

Just one follow-up. Just the incremental $10 million of growth investments. And if you were keeping the number of centers the same, we got the extra space. Just a little bit of color on this step-up, the change in mix there perhaps on the larger centers. Where has that gone into? Please, just any color you can give on that.

[Dominik de Daniel]

It's a small change. I mean, one reason is there's also real estate in it, and it's just a mix change that we have from a mix point of view, a couple of [ larger bits in the ] opening mix of more Spaces than [ Regus ]. So it's just a small change. As you can see, the number of the centers is small. It's the same. It's the same, but it's 200,000 more a square foot.

[Mark Dixon, CEO & Director]

I think, look, what we have to do is sort out our numbers as well because in a way, we've got to stop talking about centers. It's about square meters, square feet added, what is the network growth.

[Steven John Woolf, Analyst]

It just seems quite a lot of money for the extra sort of 200,000, right?

[Dominik de Daniel]

Because there is one property in it, right. So half of the extra amount is the property actually.

[Mark Dixon, CEO & Director]

Which will come off the balance sheet?

[Dominik de Daniel]

Which come off the balance sheet. It's really part of the portfolio which we'll sell.

[Mark Dixon, CEO & Director]

Yes. So overall, the issue is -- the way we have to look at it is how much is the network growing gross, how much is it going net of closures, how much is that costing and what's the return, what return on capital you're making on the new stuff. And we've got to get the revenue growth going in all of the previous years. So if you look at '17 to '18, '16, all of those, we are heading now in the right direction because we've got -- overall occupancy is moving up, revenue is moving up. So we've got to start now eating into the gap in -- the occupancy gap, and Dominik and I are starting to see that happen. So on the one hand, more cost of growth, right thing to do. That will lead to very good performance in the future. And start soaking up the gap on the existing [indiscernible]. And so that's also happening. Right. So I think we're out of time, guys. As usual, Dominik and Wayne will be available for any further questions you have. We appreciate your questions this morning, and thank you very much for your time. Bye-bye.

[Dominik de Daniel]

Thank you. Goodbye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speakers, please stand by.