WeWork files for judicial recovery in the US – 11/07/2023 – Market

WeWork, a coworking startup founded by Adam Neumann and financed by SoftBank, filed this Monday (6) in Chapter 11 of the United States Bankruptcy Law, similar to a request for judicial recovery.

The company that set out to revolutionize the office real estate market was unable to escape the combination of expensive rents contracted before the Covid-19 pandemic and low occupancy rates in its offices after the popularization of hybrid work.

WeWork and Adam Neumann were symbols of charismatic entrepreneurs who could pick a seemingly dull industry, apply a layer of technology, and attract venture capital to achieve a billion-dollar-plus valuation.

But as losses piled up from a cascading decline in the office real estate market and interest rates rose over the past two years, WeWork came to represent the worst excesses of the cheap-money era.

This Monday (6), Neumann, who stepped down as CEO of the company in 2019, issued a statement saying that the imminent bankruptcy was “disappointing”.

“It has been challenging for me to watch from the sidelines since 2019 as WeWork failed to leverage a product that is more relevant today than ever before,” he said, and predicts that a reorganization will “allow WeWork to successfully rebuild.”

WeWork said it had reached an agreement with nearly all of its creditors to convert $3 billion (R$14.6 billion) in existing loans and bonds into equity in the reorganized company.

The process also allows WeWork to terminate leases early with little financial penalty. The company is seeking to restructure more than US$13 billion (R$63 billion) in rental obligations.

In September, WeWork’s current CEO, David Tolley, informed landlords that the company was seeking to restructure nearly all of its leases, citing an “inflexible, high-cost rental portfolio” that was a consequence of “a period of of unsustainable growth”.

“We are very pleased with the realistic approach the property owners are taking in these negotiations and the value they place on WeWork’s presence in the buildings,” Tolley told the Financial Times in an interview on Sunday. “Certainly some of these negotiations will be controversial and many will not be.”

At its peak in early 2019, WeWork was valued at $47 billion, with Adam Neumann being hailed by the Wall Street elite who wanted to be part of its planned IPO (initial public offering).

With about $16 billion in equity and debt financing from SoftBank and its Vision Fund, the company has acquired offices around the world to drive revenue growth, believing that companies ranging from small startups to Fortune 500 multinationals would prefer flexible properties with long rental contracts.

Neumann sought to transform WeWork into a lifestyle brand, with branches in coliving and education, and a mission to “elevate the world’s consciousness.” But the company, which burned through cash, failed to generate profits that matched his vision.

WeWork filed a preliminary IPO prospectus in August 2019, but details of its losses and corporate governance concerns spooked Wall Street investors. The offer was canceled and Neumann stepped down as CEO that year.

In 2021, WeWork and SoftBank paid several hundred million dollars to resolve disputes with Neumann that arose after his departure.

WeWork ended up going public in 2021 through a merger with a special purpose acquisition company (Spac) with an enterprise valuation of $9 billion. At the time, the company projected that by 2024 it could make $2 billion in cash operating profit.

But in its most recent quarter, its 72% occupancy rate was 10 to 15 percentage points below forecasts, and for the first six months of this year, operating results remained negative.

The company completed a balance sheet restructuring earlier this year to reduce its net financial debt balance by $1.5 billion and postpone upcoming maturities to 2027, a deal that quickly proved insufficient.

The company’s market capitalization has fallen to just $40 million and existing shareholders are expected to have their shares canceled with the order. Its bonds are trading at very low prices.

WeWork’s bankruptcy filing is the latest blow to the office real estate sector, although industry experts told the FT that the company’s offices were often in second-rate buildings and areas that were already struggling. The company said its international operations would not be affected by the U.S. bankruptcy filing.

According to its securities filings, WeWork has more than 700 spaces around the world, with more than 3.7 million square feet available for rent. About half of that was in the US and Canada.

Tolley said he expects the restructuring, which was filed in federal court in New Jersey, to last less than seven months, roughly the time U.S. bankruptcy laws require lease rejections to be finalized.

“We’re following the trend of where work is going. We give people a reason to come to the office. We’re open for business,” he said.