Global Courant
Sandeep Mathrani would be WeWork’s savior.
As a real estate manager, he became the CEO of the troubled office space company in 2020 after a failed IPO pushed it to the brink of collapse. He brought discipline and order to a company that had grown rapidly and chaotically under co-founder Adam Neumann.
Instead of building a company that would “raise the consciousness of the world” as Mr. Neumann would have liked, concentrated Mr. Mathrani focuses on the solid details of running a real estate company. He guided WeWork through the pandemic, reduced landlord acceptance, took the company public and oversaw a financial restructuring, completed last month, that reduced the company’s debt.
But just weeks into the restructuring, the company said on May 16 that Mr Mathrani would step down and had no permanent successor lined up. Wall Street analysts who had recently met him were stunned — one analyst wrote in a research note that the director “abandoned ship.” A few weeks later, WeWork’s chief financial officer, who joined last June, also left.
The turmoil raises new questions about the viability of WeWork, which has spent billions of dollars building a company that has never come close to breaking even – and now has to compete with the flood of low-cost office deals that have become available since working from home reduced demand for commercial real estate.
Investors have all but given up on WeWork’s turnaround. The stock trades for about 20 cents, down more than 95 percent from October 2021, when a merger secured a listing.
“We still believe that the current capital structure remains unsustainable,” said Pranav Khattar, a primary credit analyst at S&P Global Ratings.
Much of the company’s fate rests with SoftBank, the Japanese conglomerate that has invested nearly $12 billion in WeWork and is its largest shareholder. SoftBank also loaned the company hundreds of millions of dollars and took a write-down on its WeWork debt during last month’s restructuring.
By reducing WeWork’s debt by a total of $1.4 billion and delaying the repayment of the remaining debt, the restructuring gave WeWork more time to try to build a sustainable business. But the company is still burning large amounts of cash every quarter and may be forced to shrink significantly, perhaps through bankruptcy.
Office landlords look at the company with fear.
A WeWork collapse could be a “systematic shock” to the weak commercial real estate sector in New York, San Francisco and other cities, said Stijn Van Nieuwerburgh, a Columbia Business School professor who specializes in real estate.
“It would pour more cold water on the office market, which is struggling,” he said, noting that WeWork rents nearly 20 million square feet of office space, more than any other company in the United States.
Until recently, Mr. Mathrani determined to turn WeWork around. But he was exhausted by the company’s challenges and frustrated by what he saw as a lack of involvement from SoftBank, according to four people familiar with his leadership who spoke on condition of anonymity. He told colleagues that he was particularly annoyed that the debt restructuring was not being completed faster, say three people familiar with his conversations.
The transaction could not be executed quickly because it was complex and had to be signed by many parties, according to a person familiar with SoftBank’s thinking.
Mr Mathrani declined to comment.
While WeWork and SoftBank discussed restructuring, other parties proposed deals to stabilize the company.
Last fall, Mr. Neumann, the co-founder, who has a small stake in the company, told friends and associates that he was thinking about getting back involved with WeWork and buying back some of his stock, according to three people familiar with his conversations. He scheduled a meeting with Mr Mathrani in October to discuss a major investment and other strategic initiatives that could strengthen the company, four people familiar with the plans said.
Mr. Neumann had recently secured a $350 million investment from venture capital firm Andreessen Horowitz for his new real estate venture called Flow. He and other investors were considering an investment in WeWork of up to $1 billion, part of which could have been used to buy back some of the company’s debt, two of the people said.
Mr Mathrani canceled the meeting and did not reschedule it, the three people said. The two men never met to discuss Mr Neumann’s proposal, and it is not clear why Mr Mathrani was not interested.
Mr. Mathrani chose to negotiate the debt restructuring with SoftBank and other investors associated with the Japanese company. But he and SoftBank executives struggled to get the attention of SoftBank CEO Masayoshi Son to get his approval for the debt deal.
In March, as negotiations for the deal continued, Mr. Mathrani increasingly felt that Softbank’s influence over the company was hindering his ability to make important decisions, three people familiar with the matter said.
In the spring, as WeWork’s stock plummeted, he approached SoftBank with offers from other companies interested in doing deals with WeWork. The co-working firm IWG discussed a deal to operate WeWork’s locations in exchange for a fee, and JLL, one of the world’s largest commercial real estate brokers, was in talks about a potential operating deal with WeWork, according to two people familiar with the conversations.
SoftBank was not interested. JLL and IWG declined to comment.
WeWork has made some progress under Mr. Mathrani. The company has cut costs by negotiating lower rents with landlords and closing some locations. A recent WeWork securities filing said it had saved nearly $12 billion since 2019 by terminating and amending hundreds of leases.
But the company fell far short of the goals Mr. Mathrani had stated. In August 2021, the company projected it would bring in $4.3 billion in revenue by 2022; it ended up reporting $1 billion less than that.
And the company’s costs may still be too high given weak demand for office space. It had 614 locations at the end of March, up from about 715 at the end of 2020.
Mr. Mathrani and office renters could not have fully appreciated the transformation of office work during and after the pandemic. With fewer people coming to the office five days a week, many employers decided they no longer needed expensive office space.
A major challenge is that WeWork competes with a huge amount of office space that employers no longer need and are trying to rent out to others. “There is no doubt that WeWork is more expensive than a well-priced sublease,” said Ruth Colp-Haber, CEO of Wharton Property Advisors, a New York office real estate broker.
She said a 5,000-square-foot office — big enough for 20 people — in a second-rate building in Manhattan could be bought on the subrent market for about $12,500 a month. A comparable amount of space in a comparable WeWork facility would likely cost about $16,000 a month, Ms. Colp-Haber said, acknowledging that WeWork offers tenants more flexibility about how long they want to stay in a space.
A WeWork representative said that subletting has significant costs and inconveniences that can make using a WeWork space more attractive.
Even before the recent decline in demand for office space, WeWork’s business model has always been based on a shaky premise.
Founded in 2010 by Mr. Neumann and Miguel McKelvey in the wake of the financial crisis, WeWork signed long-term leases for floors in office buildings or entire buildings. The company has refurbished those spaces and rented them out to freelancers, start-ups and large corporations. The idea was that WeWork could generate more rental income than it would pay landlords by offering shorter leases, well-designed spaces, and perks like happy hours.
The model never really worked on a large scale. In most locations, costs far exceeded revenues. WeWork grew rapidly, doubling its revenue in most years since its inception, but also doubling its losses. When the company wanted to go public in 2019, investors hesitated.
WeWork withdrew its IPO in September 2019 and Mr. Neumann resigned as CEO. Since then, he has received more than $700 million from SoftBank stock sales and cash payments.
Two people familiar with the matter said Mr. Neumann had moved and was no longer interested in investing in WeWork. In a recent financial filing, SoftBank disclosed that it had incurred more than $10 billion in losses on its investments in WeWork to date.
