WeWork, one of the largest flexible office providers globally at the forefront of flexible office solutions, offering a refreshing approach to workplace design and access. However, its more recent journey has been nothing less than a rollercoaster ride, with leadership and management change, additional rounds of funding, a global pandemic, and the rise in competition.
As such its hands were forced to make an announcement that its operations were becoming unviable if it could not reduce its cost base – embarking on a turnaround plan to save the business. The latest twists and turns have seen the US and Canada entities of WeWork file for Chapter 11 bankruptcy (as of 7th November), which should give them protection against creditors and landlords, and added tool in which restructure and streamline operations.
The UK subsidiary operates as a separate legal entity, as such it will not automatically fall under the US bankruptcy proceedings, meaning the business is operating as normal. However, if its finances are dependent on the parent company, for example payment of contractual obligations and is unable to meet them then the UK entity could get financially squeezed and go down the administration route in this country.
This is option is not being suggested, the new global CEO of WeWork, David Tolley has emailed property advisory community to assure us that WeWork UK is operational and client agreements are not impacted by the current events in the US. They remain committed to restructuring the business, which in the short-to-medium term we will see start to see the results of landlord negotiations. So what of the turnaround plan so far?
Finally securing a new CEO has been a major step forward for the business, taking on interim David Tolley on a permanent basis. Tolley now gets to see through his cost-saving measures.
With bankruptcy filing much of what has happened to stock listing and values has been usurped. Nevertheless, the WeWork board commenced its turnaround plan with it devaluing its stock, through a reverse stock split, this was to adhere to NYSE listing rules of shares being no less than $1. Therefore, WeWork new shares equate to 40 old shares. Amidst bankruptcy rumours, trading continued to be rocky, but it did maintain its stock exchange listing, albeit leaving many investors out of pocket.
The company’s credit rating took a knock when Fitch Ratings downgraded them from a CC to a C having defaulted on $95 million in interest payments. This week it has had also agreed with creditors for debt payment postponements – its reported debt is $3bn. Chapter 11 bankruptcy in the US will protect the creditors of the bulk of these outstanding payments.
As a result of debt accrual and wider operational difficulties WeWork has instructed a number of specialists to help surmount some of their issues, not least of all the renegotiation of lease liabilities. Specialists engaged include professional services firms Hilco Global, Alvarez & Marsal and legal firm Kirkland & Ellis.
WeWork has made its intent clear to negotiate on every single lease, to reduce its spending and streamline operations. It has also made its intent clear that it will exit unfit and underperforming locations. These negotiations have begun and whilst we are not aware of details, the potential hit to UK landlords has been reported to be close to £3bn.
The exiting of buildings has indeed started at the start of October WeWork customers in 133 Houndsditch were given a 30 day notice to leave, whilst other WeWork centres can accommodate members, the decision will have come as shock. Other buildings that are being exited include 12 Moorgate and The Hewitt.
WeWork’s operations at The Bower in Old Street were shut down briefly as negotiations on its lease came to halt, with members being decamped elsewhere. An agreement with the landlord was achieved and the centre reopened a few days later. What this highlights, is the speed in which events are taking hold, disrupting tenant operations and loyalty.
The coming weeks and months will reveal the success of the negotiations. The exiting of space in London so far, serves as an example of how they could operate if other centres must close.
Its aim remains to get back on a better financial footing. It therefore needs to keep hold of its customer bases and attract new members too. Over the summer, WeWork in the UK has resorted to heavy discounting of its spaces to retain and attract members. This may well serve as a short-term campaign, ultimately costs to customers will need to increase to market prices to further fund operations.
The Chapter 11 bankruptcy filing has made press headlines, and will continue to do so, not least of all because this news could impact the 500,000 members WeWork has worldwide. Their plan to restructure WeWork and its operations will see its exiting of buildings and the costly leases ramp up in pace, and not just in the US and Canada.
Firstly, we must stress to tenants that WeWork is still in operation and making efforts to maintain all its global centres. Yet, recent events with tenants being relocated or locked out of their centres means uncertainty amongst businesses is likely to rise. Having an emergency workplace strategy is always a good measure to have, as proved by the onset of the pandemic.
Uncertainty that emanates from the current events will not sit lightly with some businesses. If after reaching out to your WeWork centre manager(s) and any concerns are not quashed, then we urge you to talk to a flexible office market specialist.
If you at renewal time and have doubt, we encourage all companies, regardless of the operator and current circumstances, to pause and take stock of all solutions available.
WeWork’s covenant and liquidity looks less than rosy and will certainly be called into question by many landlords and asset managers as administration of the UK business could well be on the cards. DeVono research shows that in 2022 and 2023 (H1) leasing across central London by other providers surpassed 705,000 sq ft, accounting for 5% share of leasing across that period. Now is the time to talk to flexible operators and understand their appetite to take on other centres into their portfolio, possibly entertaining a management service agreement.
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