WeWork: 13 billion reasons for bankruptcy
From WeWork's quarterly earnings release last night...
“The company’s transformation continues at pace, with a laser focus on member retention and growth, doubling down on our real estate portfolio optimization efforts, and maintaining a disciplined approach to reducing operating costs.”
Then a bomb...
"...as a result of the Company’s losses and projected cash needs, combined with increased member churn and current liquidity levels, substantial doubt exists about the company's ability to continue as a going concern."
Which set this up...
"The Company’s ability to continue as a going concern is contingent upon successful execution of management’s plan to improve liquidity and profitability over the next 12 months, which includes, without limitation: Reducing rent and tenancy costs via restructuring actions and negotiation of more favorable lease terms..."
----- Painful math for WeWork landlords -----
There are lots of complicated situations in real estate, but this isn't one of them.
WeWork revenue (2Q23): $844M
Annualized revenue: $3,346B
Best-case OpEx ratio: 40%
Best-case NOI: $2,025B
Best-case multiple: 8.0x FFO
Best-case valuation: $16.2B
Long-term liabilities: $16.2B
Equity value: $0
Assume everything goes WeWork's way. If it operated like a big office owner with 60% operating margins and an 8x multiple, it'd be worth about $16B.
But here's the kicker: WeWork has $1.9B of debt and $13.3B in outstanding lease obligations, which totals $16B+ of liabilities.
16 - 16 = 0 = bankrupcty = bad for landlords
----- "So you're telling me there's a chance?" -----
WeWork is saying there's "substantial doubt" it can continue as a going concern, but we think this is an optimistic take. There is no doubt that WeWork is not a going concern. WeWork is a zombie and will continue staggering toward insolvency until it can rip up most of its leases.
----- Our prediction last year -----
"...we think 2023 will be the year WeWork tries to rip up many of the leases it signed over the last decade. The firm is fighting for survival under the leadership of Sandeep Mathrani. Softbank famously valued WeWork at $47 billion in 2019. WeWork kicked the can after the Adam Neuman debacle by SPAC-ing into a $9 billion company, but the firm is burning cash. It will be difficult for WeWork to kick the can beyond 2023."
From "10 Headlines You'll See in 2023"
----- How bad will it be? -----
WeWork redefined office space and has a massive footprint. Nearly 800 locations, 900K workstations, and 15 msf of space. It's not going anywhere.
But there's clearly not enough value to go around, and we would expect a judge to reject many WeWork leases, which could throw another iron on the office market fire.
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