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Adam Neumann and his patrons at SoftBank thought they were building a tech company. WeWork ultimately resembled a bank, saddled with an existentially challenging asset-liability mismatch. On Monday, shares in the US flexible office space start-up were suspended in anticipation of a Chapter 11 bankruptcy filing.
WeWork’s private valuation peaked at $47bn. Its public equity is only worth $40mn. $3bn of bond debt trades at perhaps half that.
The company has been overwhelmed by lease obligations. It signed up space in buildings in big cities for years while striking flexible deals with customers allowing them to jump in and out of office space.
The bankruptcy process should allow WeWork to shed some portion of its $13bn in long-term leases it does not want or, more critically, strong-arm its landlords into better terms. The over-reach of Neumann and SoftBank through the 2010s defined an era of magical thinking inspired by cheap money. A slimmer, humbler WeWork can now emerge.
According to filings, WeWork’s typical lease with landlords started with 15-year terms. At the same time, it said its customers had average “membership agreements” of around a year and a half. About 75 per cent of WeWork revenue — set to be just under $4bn this year — now goes to paying leases. Heavy interest expenses and even slimmed-down overhead costs, have left the company with almost no ability to be profitable.
The tricky question now is what level of rent WeWork can agree with landlords. Their own capital structures are under stress. The massive shift towards working from home is bad for both sides.
WeWork’s occupancy rates this year have hovered just above 70 per cent. Stock prices of two large office space landlords, Vornado and SL Green, are down around 60 per cent from their pre-pandemic levels. The pair would be down even more if it was not for tenants stuck in long-term leases.
It could be that office occupancy and central business district traffic begins to snap back. WeWork may then capitalise on its ability to reset membership prices higher while its leases remain fixed at modest levels.
There may even be ways to hedge or leverage this tension between revenues and costs. Some bankers display that kind of operational skill — of which Neumann and SoftBank have appeared disappointingly devoid.
The Lex team is interested in hearing more from readers. Please tell us what you think of WeWork in the comments section below.
