When hearts swell with fear of missing out, investors bet big on impresarios touting visions of a bright future. After the impresarios fail to deliver, the media takes notice and investors flee.
WeWork — whose second CEO quit in frustration last month, according to the New York Times — exemplifies this pattern. In October 2021, when WeWork merged with a SPAC, it had an unsustainable business strategy.
How so? WeWork burned through cash because locked in long-term leases with office building owners while offering business people short-term desk rentals. With the pandemic well underway, WeWork customers had no reason to pay up when they could work for free in their homes while lowering their risk of catching Covid-19.
With hybrid work driving a glut of office space in major urban centers where it operates — WeWork’s business strategy is even less sustainable.
After almost completely wiping out investors, there are many compelling reasons WeWork will not survive as a public company.
WeWork’s Wobbly Condition
Adam Neumann, WeWork’s first CEO, was an impresario extraordinaire who convinced Softbank to invest billions on the idea that short-term desk rentals would “elevate the world’s consciousness.”
In 2020, after a failed IPO, Neumann was replaced — while being paid $1 billion to go away. This despite leading the wipeout of roughly $40 billion of WeWork’s $47 billion valuation, the withdrawal of its IPO, and “screwing over employees hoping valuable stock shares would offset long hours and alarming office culture,” according to Vanity Fair.
His replacement as CEO was real estate executive Sandeep Mathrani. As the Times noted, Mathrani “focused on the staid details of running a real estate company. He steered WeWork through the pandemic, got its landlords to accept less rent, took the company public and oversaw a financial restructuring, completed last month, that cut the company’s debt.”
WeWork’s most recent financial report revealed its tenuous condition. Its revenues in the March 2023-ending quarter were $849 million — slightly above the year before. It burned through $156 million in free cash flow during the quarter and held $295 million in cash, according to the Wall Street Journal.
Ratings agencies have a gloomy view of WeWork. In March 21, S&P downgraded WeWork’s “issuer credit rating by three notches, to CC, after it reached a deal to cut its debt by roughly $1.5 billion and extend some maturities,” noted the Journal.
S&P said it expected to lower WeWork’s credit rating to D, or default, if it completed its exchange offers, calling its capital structure “unsustainable.”
Meanwhile, Fitch cited negative earnings before interest, taxes, depreciation and amortization, and free cash flow for downgrading WeWork two notches to C. WeWork declined to comment, according to the Journal.
WeWork lost two key executives last month. Mathrani departed in May as did CFO
CFO
, Andre Fernandez, according to MarketWatch.
Why WeWork’s Business Strategy Was Unsustainable When Its First IPO Fizzled
In August 2019, there were many reasons not to invest in the company then known as We. Along with the nonsense about elevating the world’s consciousness, We operated an obviously unsustainable business model — posting $1.8 billion in losses in 2018 while losing $904 million in the first half 2019.
We also made the classic mistake that brought down Lehman Brothers and Silicon Valley Bank — its sources of capital could flee before their financial obligations came due.
At We, members rented its desks for relatively short time frames — according to CNBC, the average rent contract was two years. But We had much longer-term leases with landlords of up to 15 years.
We’s 2019 S1 revealed that future lease payment obligations were $47.2 billion as of June 30 — 38% more than at the end of 2018.
We also had terrible corporate governance. Neumann and his wife, Rebekah, — dubbed “a strategic thought partner to Adam since our founding” — controlled the company through multiple classes of stock.
Were Neumann to be “permanently disabled or deceased” in the 10 years following the IPO, Rebekah would form a committee with one or two board members to select a new person for the role.
The prospectus also included five pages of potential conflicts of interest between Neumann and We. Ultimately, the IPO was canceled and WeWork went public in October 2021 through a SPAC merger.
How WeWork’s Competitive Environment Has Deteriorated
WeWork’s competitive environment has gotten much worse than it was in 2019.
I speculated We would be in trouble if there was a recession and its members cancelled their rental agreements for something cheaper.
I failed to envision the Covid-19 pandemic which not only slashed in-office work, but also created an opportunity to slash — possibly permanently — demand for office buildings since people can working from home a few days a week — saving them the time and money associated with daily commuting.
Landlords who borrowed money to lease out office space are now scrambling to meet their financial obligations.
The basic problem as of April 2023, was all-time high office vacancies. For example, in the first quarter of 2023, the average U.S. office vacancy rate was 18.6%, 5.9 percentage points higher than the last quarter of 2019, according to Cushman & Wakefield
CWK
.
Bloomberg estimated that more than 17% of the U.S. office supply was vacant with 4.3% available for sublease. While these averages masked wide differences across the country — with San Francisco’s nearly 25% vacancy rate leading the pack — C&W expected unleased office space to keep rising until the second half of 2023.
The CRE headwinds are so great that some 330 million square feet of U.S. office space could become obsolete by 2030.
Office landlords were dreading WeWork’s woes because it rents 20 million square feet of office space — more than any other company in the U.S., the Times reported.
Those landlords are offering much lower prices than WeWork. As my business school classmate, Ruth Colp-Haber — CEO of office space broker Wharton Property Advisors — told the Times, a 5,000 square foot office in a second-tier Manhattan building would lease for about $12,500 a month, 22% below what WeWork would charge.
What’s Next For WeWork?
Since going public in October 2021, WeWork stock has lost about 95% of its value. Back then its market capitalization was about $5.3 billion — $4.9 billion more than its $373 million value on June 12.
Prospects for a recovery in the stock seem slim. Neumann — who landed $350 million in capital for Flow, a new real estate venture — had considered partnering with others to inject up to $1 billion in WeWork. Mathrani canceled a meeting with Neumann to discuss this and did not reschedule it, noted the Times.
At this point, I can see three things that might levitate WeWork stock. Neumann could go to WeWork’s board with his proposed investment; the meme stock crowd could squeeze short sellers; or WeWork could rebrand itself as a generative AI company.
If those don’t work out, WeWork could file for bankruptcy.
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