WeWork bankruptcy, amid crisis in the office sector

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WeWork filed for bankruptcy, a humiliating fall for the once-successful office rental startup co-founded by Adam Neumann and backed by billions of dollars from Japan's SoftBank.

The company that set out to revolutionize office real estate could not escape the combined forces of the expensive leases it had signed before the pandemic and weak occupancy levels as hybrid work gained popularity.

WeWork reported At the time of Monday that he reached an agreement with almost all of his creditors to convert $3 billion of outstanding loans and bonds into shares of the reorganized company. The Chapter 11 protection process in the United States allows WeWork terminate leases early with a small financial penalty as it seeks to restructure its more than $13 billion in lease obligations.

The CEO of WeWork, David Tolley, He said the process will focus on “addressing our legacy leases and dramatically improving our balance sheet.”

In its bankruptcy declarationyou a federal court in New Jersey, WeWork requested to give up 69 leases, stating that rationalizing its office portfolio is “critical” for restructuring. The company is found in “active negotiations” with more than 400 owners to improve lease terms, de according to the document.

WeWork indicated that its office spaces are “open and operational” normally, and that its international business outside the US and Canada was not affected by the bankruptcy filing.

WeWork and Neumann They once symbolized how charismatic entrepreneurs could choose a seemingly formal sector, apply technological splendor and attract venture capital to obtain a billion-dollar-plus valuation, but as losses mounted due to a cascading decline in office real estate sector and interest rates have risen over the past two years, WeWork came to represent the worst excesses of the era of cheap money.

At its peak in early 2019, WeWork was valued in private markets 47 billion dollars, and Wall Street royalty, who wanted a piece of his planned initial public offering, celebrated Neumann. With about $16 billion in equity and debt financing from SoftBank and its Vision Fund, the company secured office space around the world to drive revenue growth, believing that companies, from small startups to Fortune 500 multinationals, would prefer flexible real estate to long-term leases.

Before the company's bankruptcy filing on Monday, Neumann issued a statement saying the impending move was “disappointing.”

“It has been difficult for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant than ever today,” he said, while predicting that a reorganization would “allow WeWork to emerge successfully.” The company was already in the process of reviewing its contracts. In September, Tolley informed landlords that the company was seeking to restructure nearly all of its leases, citing an “inflexible, high-cost lease portfolio” that was a consequence of “a period of unsustainable hypergrowth.” The company indicated that the locations it planned to cut were “largely non-operational” sites and that affected customers were notified.

The leases include sites across the US and Canada, about 40 in New York and a dozen in California.

“We're really pleased with the realistic approach the owners are taking in these negotiations and the value they place on having WeWork in the buildings,” Tolley told the Financial Times ahead of the presentation. “Some of these negotiations will be controversial and many will not.” The ability to reject leases through bankruptcy will strengthen WeWork's position in these conversations.

Neumann there was tried to make WeWork a lifestyle brand for “the we generation” (the community-oriented and altruistic we generation), with ramifications in coexistence and education and a mission to “raise the consciousness of the world”, but the money-consuming company could not generate profits that matched its vision.

WeWork filed a preliminary initial public offering prospectus in August 2019, But the details of its huge losses and concerns about its corporate governance spooked Wall Street investors. He abandoned the offer and Neumann stepped down as CEO that year. In 2021, WeWork and SoftBank paid several hundred million dollars to resolve the litigation with Neumann which followed his departure.

WeWork finally went public in 2021 through a merger with a SPAC (special purpose acquisition company) with an enterprise valuation of $9 billion. At the time it projected that it could make $2 billion in cash operating profits by 2024, but in its most recent quarter, its occupancy rate of 72 percent was 10 to 15 percentage points below forecasts, and in the first half of this year, cash operating profit remained negative.

This year, the company completed a restructuring of its balance sheet to reduce its net financial debt in one thousand 500 million dollars and delay upcoming maturities until 2027, an agreement that quickly proved insufficient. The market capitalization of WeWork fell to just $40 million and the bankruptcy is expected to void current shareholders' shares. Its bonds are trading at very low prices.

The company's bankruptcy is the latest blow to the office real estate sector, although industry specialists commented to Financial Times that WeWork locations were typically in second-level buildings and already distressed locations.

According to its securities records, WeWork has more than 700 locations worldwide with more than 40 million square feet available for lease. Just under half of that figure is in the US and Canada. Tolley said he expects the bankruptcy process to last less than seven months.

Financial Times Limited. Declaimer 2021
Financial Times Limited. Declaimer 2021

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