Zynga’s Leasing Agreement With Airbnb: A Material Transaction

The tech trendy SF-based email newsletter The Hustle reported on July 11, 2017

“Last night, we received an internal email from an anonymous, verified source at Airbnb confirming that the company has officially signed a multi-year, 5-story lease at Zynga’s headquarters in San Francisco’s SOMA district.”

According to the email:

    • Phase 1 will begin in 2018 and will deliver 3 floors of space ready to occupy by 2019.
  • Phase 2 will commence in 2020, and by 2021, [Airbnb will] be the sole occupants of the east tower at 650 Townsend (the Landlord will continue to occupy the west tower).

According to The Hustle, Zynga declined to comment on their story, and Airbnb didn’t respond to their email requests.

The Hustle’s scoop comes on the heels of another scoop from The Information two month earlier on May 8th of an impending deal. The Information is known for its access to Silicon Valley insider information.

We believe that the lease has a material impact on Zynga’s financials and we believe Zynga will be required to file an official 8-K statement with the SEC once the lease is signed.  

Zynga’s stock has been on the rise in 2017.

Zynga stock (Nasdaq: ZNGA) jumped 14.3% on May 5, 2017 after its 1Q17 conference call where it increased its 2017 revenue and profit guidance due to the early success of its recently acquired game  

Since then, the stock has risen another 14% due to periodic reports by stock analysts upping their stock price targets. For example, CNBC Investing reported on May 30th that a Piper Jaffray analyst raised the stock’s rating to overweight from neutral with a price target of $4.00 a share.

Zynga Stock Chart

The stock did not move on May 8th, the day of The Information scoop. It did not move on July 11th, the day of the Hustle scoop

Both scoops show up when you Google “ Zynga Airbnb.”

The question is why hasn’t the stock market reacted to these scoops?

We present the case below that lease has a material impact on Zynga’s financials.

According to a SF real estate publication The Registry, Zynga bought its 717,000 square foot HQs in 2012 for $228 Million or $ 318 per square foot.  Zynga was growing fast at the time and was flush with cash after raising  $1 Billion in a December 2011 IPO.

The building is a five story, high ceiling, open space structure located at 650 Townsend Street.  It is a block from Airbnb’s current headquarters.  See Link to Youtube Video below showing clearly the similarity between the two HQs

Video Of Interior of Zynga and Airbnb HQs

 Airbnb is no ordinary tenant. It is the second highest valued startup after Uber. Airbnb’s current valuation is at $31 Billion based on a $1 Billion funding round that closed March of 2017.  

In estimating the current value of Zynga’s building, you have to take into account the fact that Airbnb will become an obvious candidate to buy the building in a year or two after it has an a multi-billion dollar IPO. It would negotiate to take over the whole building with Zynga vacating to smaller quarters.

Zynga actually listed the building for sale briefly in 2016, but withdrew because the cost of the leaseback offered by potential buyers was too high.   At the time,  $800 per square feet was mentioned as the going rate for SoMa office building.

Due to the fact that this building is absolutely ideal for high tech, and that the SF office market is still booming,  and last, but not least, that Airbnb might be the buyer after its IPO, we would value Zynga’s HQ currently at closer to $1,000 per square feet or $717 Million.  

This works out to be a tripling of its investment initial purchase price of $218 Million.

Zynga’s market valuation as of July 11, 2017 was $3.11 Billion.  Its cash balance as of 1Q17 was $720 Million.  It has no long-term debt.

The combination of $720 Million in cash with another $717 Million in a readily marketable building totals half of its current valuation.  

Plus the financials of Zynga’s game operations show signs of returning to cash flow positive. In 2016, it turned operating cash flow positive at $60 Million for the first time in 3 years. While not profitable for quite some time, it has three straight quarters of increasing revenue.

Once the lease is made official,  the stock should pop certainly over $3.80 a share.