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WeWork has filed for bankruptcy, a humiliating fall for the once-successful desk rental startup co-founded by Adam Neumann and backed by billions of dollars from Japan’s SoftBank.
The company, which set out to revolutionize office real estate, couldn’t escape the combined force of expensive leases it signed before the Covid-19 pandemic and weak occupancy rates as hybrid working became more popular.
WeWork said late Monday that it had reached an agreement with nearly all of its creditors to convert $3 billion in existing loans and bonds into equity in the reorganized company. The Chapter 11 process in the US allows WeWork to end leases early with small financial penalties as the company seeks to restructure its more than $13 billion in lease obligations.
WeWork CEO David Tolley said the process will focus on “addressing our legacy leases and significantly improving our balance sheet.”
In its bankruptcy filing in a New Jersey federal court, WeWork asked to waive 69 leases and said streamlining its office portfolio was “critical” to the restructuring. According to the filing, the company is in “active negotiations” with more than 400 landlords to improve rental conditions.
WeWork said its office space is “open and operational” as usual and its international business outside the U.S. and Canada is not affected by the bankruptcy filing.
WeWork and Neumann once symbolized how charismatic entrepreneurs could pick a seemingly staid sector, apply a touch of technology and attract venture capital to achieve a “unicorn,” or valuation of more than a billion dollars. But over the past two years, as losses mounted from the cascading office real estate bust and interest rates rose, WeWork became a symbol of the worst excesses of the cheap money era.
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At its peak in early 2019, WeWork was valued at $47 billion in private markets, with Neumann feted by Wall Street royalty who wanted a piece of the planned IPO. With about $16 billion in equity and debt from SoftBank and its Vision Fund, the company secured office space around the world to fuel revenue growth, believing that companies ranging from small startups to multinationals Fortune 500 corporations would prefer flexible real estate properties tied to long-term leases.
Ahead of the company’s filing on Monday, Neumann issued a statement saying the upcoming move was “disappointing.”
“Since 2019, it has been a challenge for me to watch from the sidelines as WeWork has failed to take advantage of a product that is more relevant today than ever before,” he said, while predicting that a restructuring “WeWork would enable a successful start.” .
The company was already in the process of reviewing its lease agreements. In September, Tolley informed landlords that the company was seeking to restructure nearly all of its leases, citing an “inflexible and costly rental portfolio” that was a result of a “period of unsustainable hypergrowth.” The company said the leases it planned to cut were “largely non-operational” locations and that affected customers had been notified.
The leases cover locations in the U.S. and Canada, including about 40 in New York and a dozen in California.
“We are really pleased with the landlords’ realistic approach to these negotiations and the value they place on having WeWork in the buildings,” Tolley told the Financial Times ahead of the filing. “Certainly some of these negotiations will be contentious, but many will not.” The ability to reject leases through bankruptcy would strengthen WeWork’s position in these discussions.
Neumann had sought to turn WeWork into a lifestyle brand for “the Us generation,” with offshoots in co-living and schooling and a mission to “raise the world’s consciousness.” But the cash-burning company couldn’t generate the profits that matched its vision.
WeWork filed a preliminary IPO prospectus in August 2019, but details of its steep losses and concerns about corporate governance spooked Wall Street investors. The offer was discontinued and Neumann resigned as managing director this year. In 2021, WeWork and SoftBank paid hundreds of millions of dollars to settle the legal dispute with Neumann following his exit.
WeWork ultimately went public in 2021 through a Spac merger with a company valuation of $9 billion. At the time, it was forecast that the company could generate cash operating profits of $2 billion by 2024. But last quarter, occupancy was 10 to 15 percentage points below forecast at 72 percent, and cash operating profit remained negative in the first half of this year.
The company completed a balance sheet restructuring this year to reduce its net financial debt by $1.5 billion and push out upcoming maturities to 2027, an agreement that quickly proved inadequate. WeWork’s market capitalization has fallen to just $40 million and existing shareholders are expected to have their shares wiped out in the bankruptcy. Its bonds are trading at extremely distressed prices.
The bankruptcy is the latest blow to the office property sector, although industry experts told the FT that WeWork sites were typically in second-tier buildings and in locations that were already in trouble.
According to securities filings, WeWork has more than 700 locations worldwide with more than 40 million square feet of leasable space. Almost half of this came from the USA and Canada. Tolley said he expects the bankruptcy process to take less than seven months.