"I got 9 billion problems but my rent ain't one."
WeWork finally filed for bankruptcy last night. Here's a quick rundown...
----- WeWork's footprint -----
240 locations in the U.S.
$838 million of rent due in 2024
$9.4 billion of total rent due in outstanding leases
PV of U.S. rent obligations = $5.4 billion
Note: WeWork's global exposure is much bigger with $25 billion of total outstanding rent.
----- Will WeWork go away? -----
Probably not. It has a huge user base and a ubiquitous brand. Some of its locations are profitable, and it doesn't have many obligations beyond its leases.
The problem is big but relatively simple: It signed too many expensive leases and has too much infrastructure to support those leases.
The solution will be equally as simple: Cut infrastructure costs (employees) and lease exposure.
Expect a judge to reject the worst leases outright in relatively short order and then follow by significantly modifying most of WeWork's remaining lease obligations (reduced rent, % rent, etc.)
----- How many leases will be affected? -----
Hard to say without more detail on individual leases, but we think it could easily be 60%+ of WeWork's U.S. footprint. Here's why...
1. 70% of WeWork's leased SF was executed near the peak of WeWork's delusionary hype between 2017-19. We think many of these leases will be toast, and nearly all will be modified.
2. We have a pretty decent comp for a coworking bankruptcy. Regus filed for BK in 2021. The courts only rejected 5% of Regus's leases, modified 29%, and left 66% unchanged. But there's a big difference between Regus and WeWork: Regus actually made money, while WeWork burns $300M+ per quarter. Expect much bigger cuts to WeWork's leases.
3. Ascena was one of the largest retail bankruptcies in history with annual rent obligations of about $700M a year. WeWork will easily overshadow Ascena, and unlike with Ascena, WeWork's landlords will be the primary creditors. i.e., the critical path toward solvency runs through modifying and rejecting leases.
----- Where will the WeWork fallout be concentrated? -----
-- New York City: 70+ locations totaling nearly 5.5 msf, and WeWork makes up at least 25% of the rent roll in 30+ buildings.
-- Northern California: 20+ locations totaling 1.4 msf, and WeWork makes up at least 25% of the rent roll in 7 buildings.
-- Southern California: 30 locations totaling 1.4 msf, and WeWork makes up at least 25% of the rent roll in 9 buildings.
-- Other likely hot spots for lease rejections: 90% of WeWork's square footage in Boston, Dallas, and Denver was signed in the 2-3 years leading up to WeWork's failed 2019 IPO.
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