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WeWork has filed for bankruptcy, a humbling fall for the once high-flying desk-renting 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 said late on Monday it had struck an agreement with nearly all of its creditors to convert $3bn of existing loans and bonds into equity in the reorganised company. The Chapter 11 process in the US allows WeWork to terminate leases early with little financial penalty as it seeks to restructure its more than $13bn in lease obligations.
WeWork chief executive David Tolley said the process would focus on “addressing our legacy leases and dramatically improving our balance sheet”.
In its bankruptcy filing with a federal court in New Jersey, WeWork requested to give up 69 leases, saying that rationalising its office portfolio was “critical” to its restructuring. The company has been in “active negotiations” with more than 400 landlords to improve lease terms, according to the filing.
WeWork said its office spaces were “open and operational” as normal, and its international business outside the US and Canada was unaffected by the bankruptcy filing.
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.
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.
Before the company’s filing on Monday, Neumann issued a statement saying the impending move 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”.
The company was already in the process of reviewing its leases. In September, 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”. The company said the leases it planned to cut were “largely non-operational” sites and affected customers had been notified.
The leases include sites across the US and Canada, with about 40 in New York and a dozen in California.
“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 before the filing. “Certainly some of these negotiations will be contentious and many will not.” The ability to reject leases through the bankruptcy would strengthen WeWork’s hand in these talks.
Neumann had 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 profit remained negative.
The company 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. WeWork’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 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.
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 process to last less than seven months.