{"id":22023,"date":"2023-06-13T10:57:23","date_gmt":"2023-06-13T14:57:23","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/after-flushing-10-billion-why-wework-is-not-working\/"},"modified":"2023-06-13T10:57:24","modified_gmt":"2023-06-13T14:57:24","slug":"after-flushing-10-billion-why-wework-is-not-working","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=22023","title":{"rendered":"After Flushing $10 Billion, Why WeWork Is Not Working"},"content":{"rendered":"
\n

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.<\/p>\n

WeWork \u2014 whose second CEO quit in frustration last month, according to the New York Times<\/em> \u2014 exemplifies this pattern. In October 2021, when WeWork merged with a SPAC, it had an unsustainable business strategy.<\/p>\n

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.<\/p>\n

With hybrid work driving a glut of office space in major urban centers where it operates \u2014 WeWork\u2019s business strategy is even less sustainable.<\/p>\n

After almost completely wiping out investors, there are many compelling reasons WeWork will not survive as a public company.<\/p>\n

<\/fbs-ad><\/p>\n

WeWork\u2019s Wobbly Condition<\/h2>\n

Adam Neumann, WeWork\u2019s first CEO, was an impresario extraordinaire who convinced Softbank to invest billions on the idea that short-term desk rentals would \u201celevate the world\u2019s consciousness.\u201d<\/p>\n

In 2020, after a failed IPO, Neumann was replaced \u2014 while being paid $1 billion to go away. This despite leading the wipeout of roughly $40 billion of WeWork\u2019s $47 billion valuation, the withdrawal of its IPO, and \u201cscrewing over employees hoping valuable stock shares would offset long hours and alarming office culture,\u201d according to Vanity Fair<\/em>.<\/p>\n

His replacement as CEO was real estate executive Sandeep Mathrani. As the Times<\/em> noted, Mathrani \u201cfocused 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\u2019s debt.\u201d<\/p>\n

WeWork\u2019s most recent financial report revealed its tenuous condition. Its revenues in the March 2023-ending quarter were $849 million \u2014 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<\/em>.<\/p>\n

Ratings agencies have a gloomy view of WeWork. In March 21, S&P downgraded WeWork\u2019s \u201cissuer 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,\u201d noted the Journal<\/em>.<\/p>\n

S&P said it expected to lower WeWork\u2019s credit rating to D, or default, if it completed its exchange offers, calling its capital structure \u201cunsustainable.\u201d<\/p>\n

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<\/em>.<\/p>\n

WeWork lost two key executives last month. Mathrani departed in May as did CFO
\n CFO
\n <\/fbs-ticker>, Andre Fernandez, according to MarketWatch<\/em>.<\/p>\n

Why WeWork\u2019s Business Strategy Was Unsustainable When Its First IPO Fizzled<\/h2>\n

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\u2019s consciousness, We operated an obviously unsustainable business model \u2014 posting $1.8 billion in losses in 2018 while losing $904 million in the first half 2019.<\/p>\n

We also made the classic mistake that brought down Lehman Brothers and Silicon Valley Bank \u2014 its sources of capital could flee before their financial obligations came due.<\/p>\n

At We, members rented its desks for relatively short time frames \u2014 according to CNBC<\/em>, the average rent contract was two years. But We had much longer-term leases with landlords of up to 15 years.<\/p>\n

We’s 2019 S1 revealed that future lease payment obligations were $47.2 billion as of June 30 \u2014 38% more than at the end of 2018.<\/p>\n

We also had terrible corporate governance. Neumann and his wife, Rebekah, \u2014 dubbed \u201ca strategic thought partner to Adam since our founding\u201d \u2014 controlled the company through multiple classes of stock.<\/p>\n

Were Neumann to be \u201cpermanently disabled or deceased\u201d 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.<\/p>\n

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.<\/p>\n

How WeWork\u2019s Competitive Environment Has Deteriorated<\/h2>\n

WeWork\u2019s competitive environment has gotten much worse than it was in 2019.<\/p>\n

I speculated We would be in trouble if there was a recession and its members cancelled their rental agreements for something cheaper.<\/p>\n

I failed to envision the Covid-19 pandemic which not only slashed in-office work, but also created an opportunity to slash \u2014 possibly permanently \u2014 demand for office buildings since people can working from home a few days a week \u2014 saving them the time and money associated with daily commuting.<\/p>\n

Landlords who borrowed money to lease out office space are now scrambling to meet their financial obligations.<\/p>\n

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<\/em>
\n CWK
\n <\/fbs-ticker>.<\/p>\n

Bloomberg<\/em> 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 \u2014 with San Francisco\u2019s nearly 25% vacancy rate leading the pack \u2014 C&W expected unleased office space to keep rising until the second half of 2023.<\/p>\n

The CRE headwinds are so great that some 330 million square feet of U.S. office space could become obsolete by 2030.<\/p>\n

Office landlords were dreading WeWork\u2019s woes because it rents 20 million square feet of office space \u2014 more than any other company in the U.S., the Times<\/em> reported.<\/p>\n

Those landlords are offering much lower prices than WeWork. As my business school classmate, Ruth Colp-Haber \u2014 CEO of office space broker Wharton Property Advisors \u2014 told the Times<\/em>, 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.<\/p>\n

What\u2019s Next For WeWork?<\/h2>\n

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 \u2014 $4.9 billion more than its $373 million value on June 12.<\/p>\n

Prospects for a recovery in the stock seem slim. Neumann \u2014 who landed $350 million in capital for Flow, a new real estate venture \u2014 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<\/em>.<\/p>\n

At this point, I can see three things that might levitate WeWork stock. Neumann could go to WeWork\u2019s board with his proposed investment; the meme stock crowd could squeeze short sellers; or WeWork could rebrand itself as a generative AI company.<\/p>\n

If those don\u2019t work out, WeWork could file for bankruptcy.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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 \u2014 whose second CEO quit in frustration last month, according to the New York Times \u2014 exemplifies this pattern. In October 2021, […]<\/p>\n","protected":false},"author":1,"featured_media":22024,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-22023","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nAfter Flushing $10 Billion, Why WeWork Is Not Working | iFintechWorld<\/title>\n<meta name=\"description\" content=\"When hearts swell with fear of missing out, investors bet big on impresarios touting visions of a bright future. 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