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WeWork chief executive Sandeep Mathrani is in an exceptionally bullish mood. In the midst of the pandemic, he’s seriously considering a second attempt at an IPO, and has vowed that the serial loss-making business will turn a profit in the final quarter of this year.
“My job was to streamline the company and streamline the real estate portfolio so we could go to our path of profitability by Q4 2021,” he said in an interview with Reuters this month. “We are completely on track.”
Bold words from a man who inherited a basket case of a business at the end of 2019. If everything had gone according to plan then the shared office provider would be busy spending between $3 billion and $4bn raised in a blockbuster 2019 IPO. Things didn’t work out that way.
WeWork spent 2020 haemorrhaging cash on rents and former CEO Adam Neumann’s $7.7m-a-month payoff, rather than getting its house in order. The plan to stabilise the business by making thousands of people redundant was blown out of the water by a pandemic which turned its global office spaces into ghost towns.
Now, with costs mounting and no set date for the return of office workers post-Covid, WeWork has to figure out how to survive long enough to see its market bounce back.
Peter Papadakos, head of European research at property consultant Green Street Partners, says the flexible-office space is not expected to recover “until probably 2023”. Whether WeWork can last until then will depend on the lenders and how patient they are, he says.
It was no secret that WeWork – a group of businesses consolidated under New York parent WeWork Inc – had significant issues in the run-up to its botched stock-market listing. Even before the listing was abandoned, that venture was denigrated by commentators as “ bananas, bonkers and unbelievable” and “the most ridiculous IPO of 2019”, while the Financial Times gave it the dubious honour of “making Uber’s initial public offering look prudent”.
In hindsight, they were all fair comments. WeWork’s IPO prospectus shows how it had adopted the complicated umbrella partnership corporation (Up-C) structure so early investors could enjoy tax breaks; and it later emerged that Neumann had benefited from large, low-interest loans from the business, while also being in the habit of buying stakes in buildings and leasing them back to WeWork.
But the company’s accounts for 2019, which were published at the beginning of January 2021, show just how much trouble it was in. Despite rampant expansion making global revenues almost double from $1.8bn to $3.5bn, the business saw losses balloon in 2019. By widening from $1.7bn to $3.9bn – an increase of 129 per cent – the company’s losses were growing at a faster rate than its income.
The same picture was replicated in its UK arm – WeWork International – where, despite rental income almost doubling from £35.8 million to £68.4m, losses for 2019 more than tripled to £231.7m. (The company stresses that the UK business is a holding company and that a large portion of the loss – £93m – is attributable to the UK business taking on and developing the intellectual property rights of a company called WW Worldwide, a Netherlands-based entity that was established in April 2019. It is not clear what purpose WW Worldwide serves in the wider organisation.)
WeWork’s ability to burn through cash always made it look like a dangerous investment. By 2019, the company controlled 528 buildings across 111 cities in 29 countries. According to its website, the fact that the public listing fell through didn’t slow WeWork down: as of November 2020 it controlled 859 buildings across 151 cities in 38 countries, although Mathrani told Reuters that his streamlining has led to WeWork exiting “over 100 locations”.
Exits aside, because the exponential growth was built on WeWork signing long, expensive leases on space it rents out in a multitude of short-term deals, the company has exposed itself to a near-ruinous level of risk. As a broadly positive report from market intelligence firm CBInsights noted in January 2019: “WeWork’s big selling point of office space flexibility is also one of the greatest threats to the long-term stability of its business. Members can pick up and leave if they want to, leaving WeWork on the hook.”
That risk has become existential after a year in which a large proportion of the company’s members have picked up and left: figures provided by WeWork show that its total membership fell by 11 per cent in the third quarter of 2020 alone.
That was made possible by another flaw in WeWork’s strategy: its over-reliance on the freelancers and startups whose year-long contracts can be broken after six months rather than larger corporates – otherwise known as enterprise clients – who had to keep paying for unused office space right through the pandemic. (WeWork says it was “able to offer concessions to the overwhelming majority of member businesses that have requested one”.) During the pandemic, the company has been accused of “profound hypocrisy” over its appointment of debt collectors to pursue customers at the same time as the shared offices provider is negotiating with its own landlords over its liabilities.
At the time of the proposed IPO, just 40 per cent of WeWork’s members fell into the latter category. By the third quarter of 2020 that figure had risen to 54 per cent, though the change is only partly due to the company succeeding in attracting new clients. Yes, it will help that Deloitte signed a deal for 35,000 square feet of office space in Manchester city centre, but the overall percentages will also have been skewed by the loss of so many smaller clients.
Papadakos believes that close to 100 per cent of clients with a handful of desks have now gone, taking with them a large chunk of WeWork’s income for the year. The average renter had six months left when the UK entered its first lockdown, he says. “As that came to an end they didn’t renew. Income will be down by about a third.” WeWork company did not provide projections of its financial performance for the full year, but said that global income for the third quarter of 2020 was down by 13 per cent, from $934m to $811m.
That was before countries around the world started locking down all over again. In its 2019 accounts, WeWork made a point of saying that Covid-19 was likely to have a negative impact on its 2020 results. “WeWork Inc as a whole, including its operations in the United Kingdom, is facing a period of uncertainty and expects there will be a material impact on the global demand for our space-as-a-service offering in the short-term, which may adversely affect the 2020 results for the company,” it wrote.
Papadakos begs to differ. “It’s not Covid that’s the problem, but the expansion itself,” he says. “[WeWork] was losing money before because they were trying to think like a tech firm in a real estate business.” In other words, WeWork was posing as a high-growth company in order to attract investment and making bullish statements about strategy, when in fact it was operating in a low-growth sector.
Paradoxically, the risks it took with strategy could mean it doesn’t survive to see the wave of the growth its segment of the real estate sector is expected to see in the wake of the pandemic.
Ben Munn, global flexible space lead at commercial real estate firm JLL, says the shared-office sector will boom as corporates reassess their property needs after more than a year of having employees based almost entirely at home. “Undoubtedly the last year has demonstrated that companies don’t need an office for all the work they need to do,” he says. “When demand comes back it will be for great space on flexible terms and with a level of choice for employees that has not necessarily been there before. The flexible world is really well positioned to provide that.”
If WeWork is able to hold on through the crisis, it could see demand peak again as companies search for flexible spaces to accommodate a hybrid workforce. “There will be a real movement away from economy space to top-drawer, fit-for-purpose space,” says Gavin Kamara, head of leased office transactions at London real estate agency Kontor. “That plays into the hands of WeWork. They have fantastic assets in very good locations.”
As WeWork was Kontor’s launch client when the agency opened in 2015, and as it has been closely involved in the former’s rapid growth since, it is understandable that Kamara would have such a glass-half-full take on the company. Yet even Kamara warns that WeWork’s comeback could be hampered by traditional landlords – the kind WeWork has been negotiating hard with on its own leases – looking to break into the flexible-working space on their own.
“The challenge will be landlords refusing to hand over the keys to the palace and deciding they want to do this themselves,” Kamara says. “There will be a lot of pressure on landlords so there will be some competition.”
But that is likely to be the least of WeWork’s concerns. As well as the eye-watering losses, the company’s accounts for 2019 show that its UK arm was balance-sheet insolvent at the close of that year as its net liabilities ballooned from £75.3m in 2018 to £290.4m.
A note in the 2019 accounts says that WeWork’s global business “has confirmed its willingness and ability to provide ongoing financial support”, effectively propping the UK business up, “for a period of at least 12 months from the date of approval of these financial statements”.
Those financial statements were signed off on December 17, 2020. While that means the guarantee will remain in place for less than 11 months, a spokesperson for WeWork claims it has enough cash to see it through any eventuality. Or at least it did before new lockdowns were imposed at the start of this year. “Our balance sheet remains strong with approximately $3.6bn of cash and unfunded cash commitments at the end of Q3,” the spokesperson adds.
The company has had some success in ensuring cash can be eked out, laying off staff and, as a result of the lease amendments mentioned by Mathrani, reducing its long-term lease liabilities by $1.5bn. That said, Mathrani did note that extricating WeWork from those long-term leases had cost it money, telling Reuters that the exits had been done in a “win-win way for our landlords” as WeWork had “written cheques”. In any case, the business needs to go further to improve its risk profile – and fast.
Eliminating its rental exposure by purchasing properties itself would be one way of doing this, according to CBInsights. WeWork began doing this in 2018, when it established an investment fund in partnership with private equity firm Rhône Group. Its acquisitions to date include the Lord & Taylor building at 424 Fifth Avenue in New York and a 12-building campus in London’s Devonshire Square, bought for $850m and $826m, respectively. But there is only so much that a single fund can do.
Another solution is to enter the kind of co-management deals that are typical of the hotel industry, where commercial landlords agree to eschew the traditional fixed-lease model in favour of a profit-sharing agreement. While landlords are beginning to show an interest in co-management deals, they are not doing so on anything like the kind of scale a business like WeWork would require. “There’s still a relatively low level of understanding of management agreements,” Munn says. “Unless landlords also operate assets like hotels or retail they might not be comfortable with the idea.”
Even if it was to focus on these routes in order to achieve the necessary transformation in the timescale required, WeWork would need more cash – and lots of it. And therein lies the rub. Despite Mathrani’s enthusiasm for a second IPO attempt, WeWork’s problem is that the investment community remains far from on its side.
Fidelity Investments, an early investor whose Contrafund bought $18m of WeWork shares in 2015, has not mentioned the business after being forced to write-down its investment by 35 per cent at the end of 2019, while last year Baltimore-based T Rowe Price made the highly unusual move of publicly lambasting WeWork.
In a filing to the US Securities and Exchange Commission, the fund house said its WeWork investment had been a “debacle” and a “terrible investment” that had caused “outsized headaches and disappointments”. T Rowe Price declined to comment on whether its sentiment towards WeWork had softened. A spokesperson says the fund has already “said what we wanted to” about WeWork.
And so WeWork may, as Papadakos says, have to turn to its lenders for more help, something that would require them to be uncharacteristically patient. That might not be impossible.
“I’m very surprised at how accommodating lenders in the hotel industry are being,” Papadakos says. “I’d expect that to be in a bit of distress and it’s not. That is purely on the basis of lenders saying ‘there’s a vaccine, the end is in sight so we’ll give you another year’. There might be similar thinking with the lenders behind WeWork.”
But when it comes to WeWork’s lenders, Japan’s SoftBank – which has provided more than $11bn of debt finance to the company and owns 80 per cent of its shares – is pretty much the only show in town.
SoftBank did not comment for this story. But their long-standing relationship has somewhat soured since WeWork’s poor performance pushed the conglomerate’s own financials into the red. Last year SoftBank pulled out of an agreement to buy $3bn of WeWork shares from early investors including Neumann – a decision that has ended up in court. Its patience may well prove to have reached its limits. If it has, WeWork’s future could be very bleak.
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