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WeWork has filed for bankruptcy, marking a modest downturn for the once-high-flying office-leasing 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, has been unable to escape the combined forces of expensive leases it signed before the Covid-19 pandemic and poor occupancy rates as hybrid working gained popularity.
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 shares in the reorganized company. The US Chapter 11 process allows WeWork to end leases early with little penalty, as it seeks to restructure more than $13 billion in lease liabilities.
WeWork CEO David Tolley said the operation would focus on “addressing our legacy leases and significantly improving our balance sheet.”
In its bankruptcy filing in federal court in New Jersey, WeWork asked to give up 69 leases, saying rationalizing its office portfolio was “critical” to its restructuring. The company is in “active negotiations” with more than 400 landlords to improve lease terms, according to the filing.
WeWork said its office spaces were “open and operational” as usual, and that its international business outside the United States and Canada was not affected by the bankruptcy filing.
WeWork and Neumann once exemplified how charismatic entrepreneurs could pick a seemingly staid sector, apply a touch of technology and attract venture capital to get a “unicorn” valuation or more than $1 billion. But as losses from successive office property collapses and rising interest rates have mounted in the past two years, WeWork has come to represent the worst excesses of the era of cheap money.
At its peak in early 2019, WeWork was valued in private markets at $47 billion, with Neumann courted by Wall Street royalty who wanted a piece of its planned initial public offering. Through approximately $16 billion in equity and debt financing from SoftBank and its Vision Fund, the company has acquired office space around the world in order to stimulate revenue growth, believing that companies from small startups to Fortune-listed multinational corporations 500 prefer flexible real estate. Properties to be linked to long lease contracts.
Before the company filed its application on Monday, Newman 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 capitalize on a product that is more important today than ever before,” he said, while predicting that the reorganization “will enable WeWork to emerge successful.” .
The company was already in the process of reviewing its lease contracts. In September, Tolley informed landlords that the company was seeking to restructure almost all of its leases, citing an “inflexible and high-cost rental portfolio” that was the result of “a period of unsustainable excessive growth.” The company said the leases it planned to reduce were “largely non-operating” locations and affected customers have been notified.
The leases include locations across the United States and Canada, with about 40 locations in New York and dozens of locations in California.
“We are really pleased with the pragmatic approach the landlords are taking in these negotiations and the value they attribute to having WeWork in the buildings,” Tolley told the Financial Times before submitting the application. “It is certain that some of these negotiations will be contentious and some will not be.” The ability to reject leases through bankruptcy would strengthen WeWork’s position in these talks.
Neumann sought to make WeWork a “We Generation” lifestyle brand, with branches in co-living, education and a mission to “raise global consciousness.” But the cash-burning company couldn’t generate profits that matched his vision.
WeWork filed a preliminary prospectus to go public in August 2019, but details of its massive losses and corporate governance concerns spooked investors on Wall Street. She dropped the offer and Newman left that year as CEO. In 2021, WeWork and SoftBank paid several hundred million dollars to settle lawsuits with Neumann that followed his exit.
WeWork eventually went public in 2021 through a special purpose acquisition company (Spac) merger at an enterprise valuation of $9 billion. It projected at the time that by 2024, it could generate $2 billion in cash operating profits. But last quarter, the 72 percent occupancy rate was 10 to 15 percentage points below expectations, and in the first half of this year, cash operating profits remained negative.
The company this year completed a balance sheet restructuring to reduce its net financial debt balance by $1.5 billion and postpone maturities until 2027, a deal that quickly proved insufficient. WeWork’s market capitalization has fallen to just $40 million, and existing shareholders’ shares are expected to be voided in the event of bankruptcy. Its bonds are trading at very distressed prices.
The bankruptcy is the latest blow to the office property sector, although industry experts told the Financial Times that WeWork locations were typically in Grade II buildings and locations that were already struggling.
According to its securities filings, WeWork has more than 700 locations around the world with more than 40 million square feet available for lease. It was just under half that in the United States and Canada. Tully said he expected the bankruptcy process to last less than seven months.
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