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WeWork has filed for bankruptcy, a humbling fall for the once high-flying co-working start-up co-founded by Adam Neumann and backed by billions of dollars from Japan’s SoftBank.
The company that set out to revolutionise office real estate could not escape the combined forces of pricey leases it had signed before the Covid-19 pandemic and weak occupancy rates as hybrid working gained popularity.
WeWork and Neumann once symbolised how charismatic entrepreneurs could pick a seemingly staid sector, apply a sheen of technology and attract venture capital to get a “unicorn” or billion-dollar-plus valuation. But as losses mounted from a cascading office property bust and interest rates rose in the past two years, WeWork came to represent the worst excesses of the era of cheap money.
On Monday, Neumann issued a statement saying the impending bankruptcy was “disappointing”.
“It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before,” he said, while predicting that a reorganisation would “enable WeWork to emerge successfully”.
WeWork said it had struck an agreement with nearly all its creditors to convert $3bn of existing loans and bonds into equity of the reorganised company. The Chapter 11 process also allows WeWork to terminate leases early with little financial penalty. It is seeking to restructure its more than $13bn in lease obligations.
In September, WeWork’s chief executive David Tolley informed landlords that the company was seeking to restructure nearly all of its leases, citing an “inflexible and high-cost lease portfolio” that was a consequence of “a period of unsustainable hypergrowth”.
“We are really pleased with the realistic approach landlords are taking to these negotiations and the value they ascribe to having WeWork in the buildings,” Tolley told the Financial Times in an interview on Sunday night. “Certainly some of these negotiations will be contentious and many will not.”
At its peak in early 2019, WeWork was valued in private markets at $47bn, with Neumann feted by Wall Street royalty who wanted a part of its planned initial public offering. With roughly $16bn of equity and debt funding from SoftBank and its Vision Fund, the company snatched up office space around the world in order to turbo-charge revenue growth, believing that businesses from small start-ups to Fortune 500 multinationals would prefer flexible real estate to being tied into long leases.
Neumann sought to make WeWork a lifestyle brand for “the we generation”, with offshoots in co-living and schooling and a mission to “elevate the world’s consciousness”. But the cash-burning company could not generate the profits to match his vision.
WeWork filed a preliminary IPO prospectus in August 2019 but details of its heavy losses and corporate governance concerns spooked Wall Street investors. It dropped the offering and Neumann departed that year as chief executive. In 2021, WeWork and SoftBank paid several hundred million dollars to settle litigation with Neumann that followed his exit.
WeWork ultimately went public in 2021 through a Spac merger at an enterprise valuation of $9bn. It projected at the time that by 2024 it could make $2bn in cash operating profit. But in its most recent quarter, its occupancy rate of 72 per cent was 10 to 15 percentage points below forecasts, and in the first half of this year, cash operating profits remained negative.
The company earlier this year completed a balance sheet restructuring to reduce its net financial debt balance by $1.5bn and push out approaching maturities to 2027, a deal that quickly proved to be insufficient. The company’s market capitalisation has fallen to just $40mn and existing shareholders are expected to have their shares cancelled in the bankruptcy. Its bonds are trading at deeply distressed prices.
The WeWork bankruptcy is the latest blow to the office property sector, though industry experts told the FT that WeWork locations were typically in second-tier buildings and locations that were already struggling. The company said its international operations were not going to be affected by the bankruptcy filing in the US.
According to its securities filings, WeWork has more than 700 locations around the world with more than 40mn square feet available to rent. Just under half of that was in the US and Canada.
Tolley said he expected the bankruptcy, which was filed in a New Jersey federal court, to last less than seven months, around the time US bankruptcy laws call for lease rejections to be finalised.
“We are on trend for where work is going. We give people a reason to come in the office. We are open for business,” he said.
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