WeWork Files for Bankruptcy

The struggling coworking company filed for Chapter 11 late Monday and plans to exit more leases

reprints



Coworking giant WeWork (WE) filed for bankruptcy Monday evening, ending months of speculation about the fate of the long-struggling company that has teetered on the edge of running out of cash for years and saw its valuation tank from a high of $47 billion.

The struggling coworking company filed for Chapter 11 late Monday with a restructuring plan to convert about 92 percent of its lenders’ debt into equity, the company announced. As part of the proceedings, it requested “the ability to reject the leases of certain locations, which are largely non-operational and all affected members have received advanced notice.”

SEE ALSO: Sunday Summary: Some Pretty, Pretty, Pretty Good Deals

“Now is the time for us to pull the future forward by aggressively addressing our legacy leases and dramatically improving our balance sheet,” WeWork CEO David Tolley said in a statement Monday. “We remain committed to investing in our products, services, and world-class team of employees to support our community.”

The company plans to keep its locations operational during the Chapter 11 process and “expects to have the financial liquidity to execute these proceedings and continue business in the ordinary course,” according to the statement.

WeWork’s bankruptcy is a stunning fall from grace for the once darling firm, which saw its name plastered on top of skyscrapers across the world and for a spell became the largest private office tenant in Manhattan. 

Its bankruptcy could have a widespread impact on an already reeling office market as it allows WeWork to easily walk away from dozens of leases, which could cause building valuations to drop and vacancies to spike.

WeWork’s bombastic co-founder Adam Neumann — who faced plenty of criticisms for his mismanagement of WeWork before the company and his backers pushed him out in 2019 — called the bankruptcy filing “disappointing” in a statement Monday night.

“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,” Neumann, who is currently starting a might-be-competitor for WeWork called Flow, said in a statement. “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”

Concerns over WeWork’s financial health have been floating for years but got more severe in August when WeWork warned investors that it had “substantial doubt” over its ability to stay in business.

The fears grew stronger once the Wall Street Journal reported Oct. 31 that WeWork was gearing up for a bankruptcy filing. The New York Stock Exchange suspended trading the company’s shares earlier Monday.

Its bankruptcy also comes a month after WeWork skipped out on $95.2 million in interest payments to its lenders, which the company said it did in hopes of renegotiating the debt to improve its capital structure.

Part of the cash crunch WeWork faces stems from the core of its business model: committing to expensive, long-term leases; renovating and carving out those offices, and then renting them out on a shorter-term basis to members.

“If you look at the Q2 2023 earnings, it’s really revealing a lot of these challenges and problems they’re having,” said Ragini Bhalla, a spokesperson for credit report provider Creditsafe. “They’re running out of cash and they’re having cash-flow issues.”

WeWork has lost about $15 billion since the end of 2017 and netted about $696 million in losses in the first six months of the year, according to The New York Times and WeWork’s second-quarter of 2023 earnings report

Of those losses, $530 million came from operations, and WeWork ended June with $205 million cash on hand, according to the earnings report.

WeWork also had about $13 billion in lease obligations in the third quarter, most of those set to come due in or after 2028, according to its earnings report. While that was a drop from the $15 billion it ended 2022 with, lease obligations still make up more than two-thirds of WeWork’s operating expenses. 

All of that paints a picture of a company struggling for money. And there’s more evidence for that in the number of payments WeWork is missing.

WeWork’s payments that are over 91 days late jumped by 631.82 percent from October 2022 to October 2023, according to credit report provider Creditsafe, which could not provide the exact money WeWork owes.

Its days beyond term — which means how long it takes WeWork to pay its bill past the due date in their contract — reached 67 days in October, according to Creditsafe. By comparison, other companies in WeWork’s industry had an average of 1.38 days late.

“That is really high,” Bhalla said about WeWork’s days beyond terms. “Above 25 is where you start to see things go wrong.”

A spokesperson for WeWork questioned the accuracy of Creditsafe’s data and said WeWork’s “invoice processing has continued according to our agreements and in a timely manner.”

While Creditsafe’s data doesn’t take into account WeWork’s payments to landlords for its leases, and it hasn’t been ponying up for some of those, either. It’s currently facing lawsuits in Manhattan, San Francisco and Chicago for skipping rent.

WeWork’s bankruptcy could make it easier for the coworking company to walk away from the millions of square feet it leases across the world, but it has already gotten out of plenty of lease obligations since 2019; and, in September, started another effort to renegotiate nearly all of its deals. 

In the fourth quarter alone, WeWork dropped 300,000 square feet of space in Manhattan, according to Colliers’ data from Oct. 13.

The company still has 777 locations spread across 39 countries, 229 of them in the United States, and it leases about 6.4 million square feet in New York City, Crain’s New York Business reported.

A bankruptcy could spell more danger for landlords who went all-in on leasing to WeWork, as some who count WeWork among their largest tenants owe about $2.6 billion in commercial mortgage-backed securities debt, according to Trepp data. Eighty percent of those owners are either on a special service watchlist, delinquent on their loans or in default.

“They’re all going to lose most if not all their money,” Anthony Malkin, the CEO of Empire State Realty Trust and long a critic of the coworking model, previously told Commercial Observer. “In the case of landlords, there are going to be a lot of heads that go through the windshield as that business comes to a screeching stop.”

WeWork’s bankruptcy caps off the long downfall of the coworking provider that started after the implosion of its initial public offering in 2019.

Co-founded by Miguel McKelvey and the larger-than-life Neumann, the company was once the largest office tenant in Manhattan, holding massive employee retreats and attracting deep-pocketed investors, including Japanese bank SoftBank Group.

But the wheels started to publicly fall off after the IPO process drew back the curtains on its money-burning business model, eventually leading to the ouster of Neumann and SoftBank taking control after pumping in $5 billion to save WeWork from running out of cash.

WeWork later hired real estate legend Sandeep Mathrani to right the ship, but then had to contend with a worldwide pandemic that forced people out of offices and into their homes. It eventually went public through a special purpose acquisition company merger in 2020.

Recent months showed more distress for WeWork as it faced being delisted from the NYSE when its stock price fell below $1 a share for more than a month, had its credit rating downgraded by numerous agencies, and saw shakeups in its C suite.

Mathrani departed in May for private equity firm Sycamore Partners and, less than two weeks later, Chief Financial Officer Andre Fernandez resigned. Tolley took over as permanent CEO earlier this month. 

After seeing continued net losses and a 1 percent decrease in membership year-over-year, WeWork told investors that it had “substantial doubt” about continuing as a “going concern” — an accounting term that means a company is stable and healthy enough to continue to meet its obligations — after it evaluated its cash need for the next 12 months.

The company tried to downplay the disclosure, saying it didn’t account for its plans to improve its balance sheet by reducing its rent payments, cutting down on membership churn, and looking for new funding. Those steps weren’t enough to avoid a Chapter 11 filing.

Nicholas Rizzi can be reached at nrizzi@commercialobserver.com.