In August I proposed five reasons not to bet on WeWork stock. That was before September 5 — when a stock split aimed at avoiding delisting from the New York Stock Exchange — went into effect.
The next day, the Wall Street Journal reported the co-working service was trying to renegotiate the long-term leases that could send the company into bankruptcy.
Since then — after a 40-for-one reverse stock split — WeWork shares have fallen another 41% to trade at $3.31 a share. From a peak private market valuation of $47 billion, the market values WeWork’s common stock at a mere $182 million.
If WeWork — which added three restructuring experts to its board last month — can use the looming threat of bankruptcy to convince landlords to reduce its lease obligations and avoid collapse, its shares would be a bargain.
The odds of pulling that off seem slim because its near-term obligations are so much higher than its cash balance. Yet some experts say landlords may prefer renegotiation to fighting for scraps in court.
I have contacted WeWork for comment and will update this post if I receive a response.
WeWork’s Cash And Financial Obligations
Without an investor willing to finance its losses, WeWork’s business model does not make sense to me. It took out discounted long-term leases from landlords and subletted desks for short-term leases to entrepreneurs and small businesses, noted the Journal.
When SoftBank was pouring billions of dollars into WeWork, its valuation peaked at $47 billion. After the IPO market shut down in late 2021 and a pandemic that made it clear people could work from home rather than renting a desk from WeWork, investors have become less keen on the company.
WeWork’s cash position is shaky. It immolated $530 million during the first six months of 2023, ended June with $205 million in cash, and last week borrowed $313 million from SoftBank, the Journal reported.
Meanwhile, it faces much larger financial obligations. Public filings indicate WeWork must pay an estimated $10 billion in lease obligations between the second half of 2023 and the end of 2027 — with $15 billion more starting in 2028.
Additionally, WeWork’s liabilities have exceeded its assets by an increasing amount between June 2022 and June 2023 — yielding negative equity which rose from $2.3 billion t0 $3.6 billion, the Journal reports.
WeWork’s Plan To Renegotiate ‘Nearly All’ Its Leases
WeWork is “here to stay,” according to a September 6 letter from CEO David Tolley. His survival plan hinges on renegotiating “nearly all [WeWork’s] leases.” According to CNBC, WeWork expects “to exit unfit and underperforming locations and to reinvest in our strongest assets as we continuously improve our product.”
In retrospect, I am amazed landlords thought WeWork would have enough cash to meet its lease obligations — perhaps they thought SoftBank would make the payments. It is unclear whether landlords will go along with Tolley’s plan.
The answer depends on whether landlords see bankruptcy proceedings — which would allow WeWork to reject undesirable contracts and extinguish its liability for resulting damage claims — as worse for them than renegotiating leases out of bankruptcy.
After all, landlords who are parties to such rejected contracts would be deemed unsecured creditors and go to the bottom of the pile of bills to be repaid.
Can WeWork Convince Landlords To Reduce Its Lease Obligations?
Experts think some renegotiation will happen. I doubt the result will make WeWork profitable. Here are the opinions of five experts:
- Some landlords will give WeWork concessions. Landlords with less desirable properties might be willing to negotiate with WeWork said Ruth Colp-Haber, founder of Wharton Property Advisors and my Wharton classmate. By contrast, she suggested owners of more popular locations would reject concession requests from WeWork, noted the Journal.
- Even if WeWork can renegotiate leases, it is unlikely to make money-losing locations with low occupancy rates profitable. Kent Reynolds, a director at credit-ratings firm Fitch Ratings, told CoStar News, a profitable renegotiation “seems like sort of a stretch.” He said the only way to make a profit on locking in 10- to 20- year lease obligations and renting desks short term is to have high occupancy and utilization rates — which is not yet happening.
- WeWork stock will keep losing value. Charlie Morris, a consultant who worked with brokerage Avison Young’s flexible office space group, told CoStar News, that WeWork’s “decision to negotiate now could be too little, too late. At the end of the day, they signed on to too many big leases to be justifiable.” He concluded, “It’s hard to keep that many spaces filled especially when they are in such proximity to other locations.”
- WeWork’s long-term leases were too expensive. Flip Howard, CEO of Dallas-based Lucid Private Offices, said the terms of WeWork’s deal were unfavorable. As Howard told CoStar News. “They picked the most expensive buildings at the top of the market or above market leases. … They spent too much money building the space out.” Entrepreneurs and small businesses will not pay a high enough rent in today’s market for WeWork to make a profit, Howard concluded.
One observer seems to think WeWork’s renogotiation plan has a shot. Sam Chandan, director of the Chao-Hon Chen Institute for Global Real Estate Finance at New York University’s Stern School of Business, told the Associated Press: “WeWork’s challenges are not a secret to anyone. The primary motivation for landlords today is to secure tenant retention, [so] I think we can expect to see the landlords come to the table.”
Sitting at the table does not mean landlords will accept a big enough reduction in lease payments for WeWork to make a profit leasing short-term desks to entrepreneurs and small businesses who can work more cheaply from home.
Do not catch this falling knife.
Read the full article here