WeWork’s glass walls are starting to close in

WeWork has terminated hundreds of real estate leases and slashed fixed costs and capital expenditures since its first disastrous attempt to go public in 2019.

When WeWork Inc finally went public in 2021, the hope was it would leave behind the excesses that were a hallmark of co-founder Adam Neumann’s leadership and become a serious flexible workspace provider for the work-from-home era. This week’s “going concern” warning included in the company’s second-quarter results suggests the next 12 months will every bit as fraught as WeWork’s near implosion four years ago. Absent effective remedial action or another capital raise, it could be lights out.

WeWork has terminated hundreds of real estate leases and slashed fixed costs and capital expenditures since its first disastrous attempt to go public in 2019; its workforce has shrunk by 70 percent and fripperies including the corporate Gulf Stream jet have been sold. A debt restructuring in March won additional breathing space by reducing its borrowings, lowering interest payments and extending maturities until 2027.

However, the firm still has an ugly balance sheet and continues to lose heaps of money, burning through an eye-watering $650 million in just the past six months and reducing cash reserves to just $205 million.
WeWork has lost almost $17 billion since it was founded more than a decade ago.

To be sure, building owners won’t want such an important lessee to fail, leaving them with huge amounts of space to rent out all at once. Hence WeWork has leverage to renegotiate leases, some of which are coming up for renewal. (Canceling long-term leases isn’t straightforward, however, and may require termination fee payments).

The company desperately needs to boost revenue via winning more tenants, but the opposite is happening: Memberships have declined 3 percent since December, while occupancy fell to 72 percent from 75 percent during the same period. Boosting membership prices is difficult due to competition with rival shared workspace providers such as IWG Plc, which gained as much as 10 percent in London trading on Wednesday after the WeWork announcement.

Mathrani was a reassuringly sensible adult in the room and, so far the company hasn’t named a permanent replacement. Compounding the sense of drift, three board directors resigned last week due to a “material disagreement” regarding governance and the company’s strategic and tactical direction, according to the latest accounts. The official acknowledgement that the company’s cash reserves might not be sufficient to survive the next 12 months will further unsettle clients.

“The perception that we may not be able to continue as a going concern may cause members, landlords and others to choose not to do business with us due to concerns about our ability to meet our contractual obligations,” the filing states. WeWork can’t afford to lose customers as it might then have to refund their security deposits, further draining cash.

Shareholders were heavily diluted earlier this year when part of WeWork’s debts were equitised – the stock has declined 98 percent since the listing. WeWork has little debt maturing soon, but its bondholders also aren’t optimistic about a full recovery; its $164 million of 7.875 percent senior unsecured notes maturing in 2025 traded at just 33 cents on the dollar this week.

Although the debt restructuring cut the company some slack, almost $500 million of borrowings have a floating interest rate that has risen to 15 percent. The company’s decision to draw $175 million from a $475 million Softbank Group Corp affiliate debt facility in July is also not reassuring — in May, former management had said there was no need, while conceding the company wouldn’t reach cashflow breakeven until the second half of 2024.

The big unknown is whether majority owner Softbank will ride to the rescue again. The Japanese tech investor has lost a gargantuan sum — $12
billion since 2017, according to the Wall Street Journal — on its WeWork misadventure. Another bailout is unappealing — but without one,
WeWork’s prospects look bleak.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg