Reporter: Claudia ChongCO-WORKING operator JustCo is planning to launch more centres in Asia-Pacific, after it hit a profitability milestone last August following a recovery in its markets.JustCo, a GIC-backed company last valued at over US$1 billion, manages around two million square feet of space across nine cities.It tracks its profitability using an Ebitda (earnings before interest, taxes, depreciation and amortisation) metric that accounts for lease payments to landlords – one of JustCo’s largest expenses.The company has been recording positive adjusted Ebitda every month since August, said chief executive officer and co-founder Kong Wan Sing.Demand has rebounded enough for selling rates in JustCo’s higher performing markets to increase by at least 30 per cent over the past year. Average occupancy in its portfolio was over 80 per cent as at January 2023, according to the company.“People are coming back, and we are able to sell at the rates we want,” said Kong.Still, recovery has been uneven across JustCo’s centres. Kong said Australia, the company’s second-largest market outside of Singapore, is “not performing so well” because workers have been returning to offices at a slower pace.JustCo pulled out of China and Indonesia in December after shutting a centre in Shanghai and two others in Jakarta. It has one more centre in Jakarta, which it is planning to close in the next six months.“China, for the past six to seven years, has been a very tough market,” said Kong. “Same thing for Indonesia. We’ve been there for the last four years and it’s very tough. We couldn’t make it work, so we shut it down.”He said the two markets were a small part of the overall business and contributed to 2 per cent of group revenue.The company’s market exits reflect some grim realities that were brought into focus during the pandemic. Co-working operators in Indonesia have been struggling amid an oversupply of office spaces for the past few years.One of the country’s largest co-working startups, CoHive, was declared bankrupt on Jan 18 following pressure from the oversupply situation, coupled with Covid-19 and financial woes.In Shanghai, vacancy rates remain high. In the city’s Grade A office market, vacancy rose to 15.9 per cent in the third quarter last year, according to Knight Frank Research. In comparison, the vacancy rate in the Central Business District of Singapore, a JustCo core market, was 6.1 per cent.“Another reason (for China) is the policies. We can’t keep up with the changes, and couldn’t travel there for the last two years. We don’t know what’s going to happen in the next year,” said Kong.As a rough gauge, JustCo needs at least 60 per cent occupancy at a non-subsidised selling rate before it can break even. But that also depends on the structure of its agreements with landlords.Co-working operators have traditionally grown by leasing spaces from landlords, bearing the costs of fitting out and running the spaces, and earning revenue from members that use the space.JustCo wants to focus more on management contracts. Instead of paying rent, the company manages the space and has a performance-based revenue or profit-sharing agreement with the landlord. The landlord bears the cost of fitting out the space.About 10 per cent of JustCo’s deals with landlords are management contracts. The company is aiming to grow the proportion to 50 per cent in the next three years.Its latest centre in Singapore, located in International Plaza at Tanjong Pagar, is under a management contract. The centre was opened in December and currently has an occupancy of 40 to 50 per cent. The biggest challenge in expanding JustCo’s footprint would be convincing landlords, who have traditionally made money from recurring rent and long-term leases, to let the company manage spaces for them.“You really need to be able to prove and convince a landlord that there’s a real demand, and we are the ones who can manage that for them and make their yield better,” said Kong.Leasing spaces requires a significant outlay of cash, which is difficult to raise in the current environment. But JustCo is not currently fundraising, said Kong. It has a “nine-digit cash position and zero debt”.In 2021, the company’s net losses widened to US$55.1 million from US$38.2 million, according to the latest audited financial statements of JustCo Holdings.While revenue increased 22.4 per cent to US$79.4 million, other operating expenses (mainly comprising staff compensation and benefits) jumped 72.8 per cent to US$48.7 million; depreciation and amortisation expenses rose 15 per cent to US$67.4 million.Operating cash flow was US$33 million, dipping from US$47.5 million the year before.Since January 2022, JustCo has launched six new centres across Singapore, Tokyo, Bangkok and Hsinchu in Taiwan.Over 3,000 clients have signed one or more contracts with the company. These members include startups, small and medium-sized enterprises and multinational corporations.About half comprise enterprise clients, defined as clients that occupy at least 25 desks. Kong said he intends to maintain the split, as overdependence on enterprise clients – albeit a source of large short-term recurring income – could leave the company scrambling to fill a big gap whenever one client leaves.The year ahead could be a test for co-working operators as high interest rates and inflation continue to dampen business sentiment. Companies are beginning to downsize more aggressively, which could dent demand for office space. Conversely, it could also heighten the demand for flexible spaces.The costs for fitting out spaces are rising too, by as much as 50 per cent over the past year.JustCo, an initial public offering (IPO) contender that once considered going public through a special purpose acquisition company (SPAC), will first focus on expanding to more locations in Asia, said Kong.Publicly-listed tech companies have been battered over the past year. JustCo’s fiercest competitor WeWork, valued at around US$9 billion during a SPAC merger, has seen its market capitalisation fall to US$1.2 billion.When market conditions improve, and JustCo can maintain its profitability while expanding to more locations, then it will be ready for an IPO, said Kong.“I hope to do it in the next one to two years,” he said.