Sandeep Masrani was supposed to be WeWork’s savior.
A former real estate executive, he took over as chief executive of a struggling office-space company in 2020 after a failed initial public offering threatened bankruptcy. He instilled discipline and order in a business that grew rapidly and chaotically under co-founder Adam Neumann.
Rather than building a company that “raises world awareness” Neumann wanted, Matrani focused on the solid details of running a real estate company. He oversaw WeWork weathering the pandemic, getting landlords to accept rent cuts, taking the company public, and overseeing a financial restructuring completed last month that would reduce the company’s debt.
But on May 16, just weeks after the restructuring, the company announced that Mr. Masrani had stepped down and would not have a permanent replacement. Wall Street analysts who met with him recently were stunned, with one analyst writing in a research note that the executive had “abandoned ship.” A few weeks later, WeWork’s chief financial officer, who joined the company last June, also left.
The confusion raises new questions about WeWork’s viability. WeWork, which has spent billions building a business that has never been close to breaking even, has to compete with the flood of cheap office deals that have become possible since the demand for working from home has waned. For commercial real estate.
Investors have largely given up on rebuilding WeWork. Shares are trading at around 20 cents, down more than 95% since October 2021, when the merger secured a stock market listing.
“We still believe the current capital structure is unsustainable,” said Pranav Qatar, primary credit analyst at S&P Global Ratings.
WeWork’s fate rests in large part on Japanese conglomerate SoftBank, which invested nearly $12 billion in WeWork and is its largest shareholder. SoftBank, which also lent hundreds of millions of dollars to the company, reduced WeWork’s debt in a restructuring last month.
By reducing WeWork’s overall debt by $1.4 billion and deferring payments on remaining debt, the restructuring gave WeWork more time to work on building a sustainable business. However, the company still runs out of cash on a quarterly basis and could possibly be forced to cut back significantly through bankruptcy.
Office owners are watching the company with dread.
Stein van Neuwerberg, a real estate professor at Columbia Business School, said the WeWork bankruptcy would be a “systemic shock” for the weak commercial real estate sectors in New York, San Francisco and other cities. said it was possible.
“It will.” We should throw more cold water on the struggling office market,” 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. Masrani seemed intent on turning WeWork around. But he was exhausted by business challenges and frustrated by the lack of involvement from SoftBank, according to four people familiar with his management team who spoke on condition of anonymity. He told colleagues that he was particularly frustrated at not moving more quickly to complete the debt restructuring, according to three people familiar with the conversation.
A person familiar with SoftBank’s thinking said the deal could not be completed quickly because it was complex and required approval from many parties.
Matrani declined to comment.
As WeWork and SoftBank debate restructuring, other parties have also proposed deals aimed at stabilizing the company.
Co-founder Neumann, who has a small stake in WeWork, began telling friends and colleagues last fall that he was thinking of re-engaging with WeWork and buying back some of the stake, three people familiar with the matter said. clarified. his conversation. He had planned to meet with Masrani in October to discuss major investments and other strategic initiatives that would strengthen the company, according to four people familiar with the plan.
Neumann recently landed a $350 million investment from venture capital firm Andreessen Horowitz for a new real estate venture called Flow. He and other investors are considering investing up to $1 billion in WeWork, some of which could be used to buy back some of the company’s debt, two people said. .
The three said Masrani canceled the meeting and did not reschedule it. The two never met to discuss Neumann’s proposal, and it’s unclear why Masrani wasn’t interested.
Matrani has opted to negotiate debt restructuring with SoftBank and other investors affiliated with Japanese companies. But he and SoftBank executives struggled to get SoftBank Chief Executive Masayoshi Son’s attention and approval for the debt deal.
By March, as talks dragged on, Mr. Masrani felt SoftBank’s influence was interfering with his ability to make important decisions, according to three people familiar with the matter.
In the spring, as WeWork’s stock plummeted, he approached SoftBank with offers from other companies interested in doing business with WeWork. Co-working firm IWG is in talks to run WeWork locations in exchange for a commission, and JLL, one of the world’s largest commercial real estate brokers, has signed WeWork, according to two people familiar with the matter. It is said that it is discussing the possibility of a management contract with. conversation.
Softbank showed no interest. JLL and IWG declined to comment.
WeWork has made some progress under Masrani. The company cut costs by negotiating lower rents with landlords and closing some stores. Hundreds of lease terminations and modifications have saved nearly $12 billion since 2019, according to a recent securities filing to WeWork.
But the company fell far short of some of the goals Masrani set. In August 2021, the company predicted that it would bring in $4.3 billion in revenue in 2022. In the end, he was reported $1 billion less than that.
And given the weak demand for office space, the company’s costs may still be too high. The number of stores stood at 614 at the end of March, down from about 715 at the end of 2020.
Matrani and the landlord of the office didn’t fully understand how office work would change during and after the pandemic. With fewer people in the office five days a week, many employers have decided they no longer need to maintain expensive office space.
One of the big challenges is that WeWork is competing for the vast amounts of office space that employers no longer need and want to rent out to other companies. “There’s no question that WeWork is more expensive than subleasers with reasonable prices,” said Ruth Colphherber, chief executive of Wharton Property Advisors, an office space broker in New York. .
She said a 5,000-square-foot office in a Manhattan double-story building — big enough for 20 people — could be owned on the sublease market for about $12,500 a month. A similar space at a comparable WeWork facility would likely cost about $16,000 a month, Kolphaber said, acknowledging that WeWork gives tenants more flexibility on how long they want to stay in the space. .
WeWork representatives said subleasing would entail significant costs and inconveniences, making WeWork space even more attractive.
Even before the recent downturn in demand for office space, WeWork’s business model has always been built on precarious assumptions.
WeWork, founded by Neumann and Miguel McElvey in 2010 after the financial crisis, signed long-term leases for floors in office buildings or entire buildings. The company refurbished those spaces and rented them out to freelancers, startups and large corporations. The idea was that WeWork could generate more rental income than it paid landlords by offering perks like shorter leases, well-designed spaces and happy hours.
This model didn’t really work at scale. Costs significantly exceeded revenues at most sites. WeWork grew rapidly, doubling his earnings in most years since its inception, but also more than doubling his losses. Investors were hesitant when the company tried to go public in 2019.
WeWork withdrew its IPO in September 2019, and Neumann stepped down as CEO. Since then, he has received more than $700 million in stock sales and cash payments to SoftBank.
Neumann left and was no longer interested in investing in WeWork, two people said. In a recent financial report, SoftBank revealed that it has lost more than $10 billion so far on its WeWork investment.
