WeWork’s CEO on what went wrong

The chief executive of WeWork has pinned much of the flexible office provider’s woes on the shift to homeworking and other effects of the Covid-19 pandemic, but has reiterated that this week’s application for Chapter 11 bankruptcy protection will give it “renewed prospects for long-term, sustainable growth”. [caption id="attachment_1206668" align="alignright" width="200"] David Tolley[/caption] WeWork filed for bankruptcy yesterday (6 November) laden with debt and with its share price having plummeted. It said the process will allow it to remain “the global leader in flexible work” as it restructures its balance sheet and renegotiates leases. Among the documents filed with New Jersey courts is a personal declaration from David Tolley, who was interim chief executive at WeWork since May 2023 and has been in the role permanently since October. In it, Tolley maps out the history of the troubled company since its founding by Adam Neumann and Miguel McKelvey in 2010 and offers his hopes for what comes after the Chapter 11 filing. “The premise was straightforward: people in need of flexible office space would find it with WeWork,” Tolley wrote of the company’s beginnings. “But WeWork’s ambitions went far beyond the office space it provided. For the founders, WeWork promised to change how people worked by creating inspiring environments where people and companies, spanning countless industries and a wide range of interests, could come together to create community and pursue their professional passions and aspirations.” Peak valuation The company’s international expansion called for rapid fundraising: $4.4bn (£3.6bn) from SoftBank in 2017 at a valuation of $20bn and, just two years later, a further $2bn at a valuation of $47bn. “By the time it reached its peak valuation at the beginning of 2019, WeWork had invested billions of dollars to improve its existing leased properties and expand into more than 700 locations across 34 countries on six continents,” Tolley said. Paperwork for a planned stock exchange listing in 2019 threw that valuation into doubt and the IPO was pulled within weeks, causing “significant financial pressure”, in Tolley’s words. “The unsuccessful IPO had a number of repercussions,” Tolley wrote. “First, Neumann resigned as the chief executive officer and relinquished majority voting control. Second, the company was left with a dire need for capital, and SoftBank stepped in, this time providing approximately $5bn in new financing. Third, the company formulated and began to execute on a strategic plan to transform its business.” That turnaround called for cutting “uncontrolled” expenses, exiting non-core businesses and turning around a real estate portfolio filled with unsustainable rental payments. “Unfortunately, just as the company’s lease rationalisation process was progressing, the Covid-19 pandemic struck and wreaked havoc on the commercial real estate landscape, particularly in major cities where WeWork has a large footprint,” Tolley said. “As a company focused on providing office spaces intended for people to work together, the widespread work-from-home mandates necessitated by Covid-19 were extraordinarily disruptive to and inflicted significant damage on WeWork’s business and financial condition.” Adapt or die Some 18 months into the pandemic, WeWork listed on the New York Stock Exchange. Since then, Tolley said, the company has benefited from a “cyclical recovery” but has remained “burdened by the need to adapt to permanent changes among companies and employees in work and work-from-home behaviours”. By this year, WeWork had struck a refinancing to secure a fresh $1bn, cancel or turn into equity $1.5bn of debt and extend the maturity of a further $1.9bn of borrowing. “Unfortunately, these many steps and the extraordinary efforts of the company’s management and employees could not overcome the legacy real estate costs and industry headwinds WeWork faced,” Tolley said, leading to this week’s filing for Chapter 11 bankruptcy protection. Tolley’s declaration reveals that WeWork’s membership numbers “have not grown at a rate sufficient to support its capital structure”, falling from about 650,000 in the first quarter of 2020 to 470,000 in the first quarter of 2021 before rebounding to a post-pandemic peak of 682,000 in the fourth quarter of 2022. “Since that time… memberships have declined modestly to approximately 635,000 in the third quarter of 2023,” Tolley said. “Further, in an attempt to retain memberships, the company has often offered additional discounts and deferrals, negatively impacting the company’s top and bottom line.” Active negotiations WeWork has said that it will now strike agreements with lenders over recapitalising the company, and expects to reshape its real estate portfolio alongside this. Tolley said the company remains in “active negotiations” with more than 400 landlords over amending leases and hopes these efforts will let it “secure the foundation of long-term profitability”. “The company will emerge from these Chapter 11 cases with a vastly improved real estate and lease portfolio, a deleveraged balance sheet and renewed prospects for long-term, sustainable growth,” Tolley wrote. “As the effects of Covid-19 recede and its impact on how people work continues to evolve, flexible workspace is projected to take up as much as 30% of total office supply in the United States in the long term (compared to just 2% today).” He added: “[WeWork] will be particularly well-positioned to capitalise on this revenue growth opportunity with a global portfolio of profitable leases, well-established market connections and, most importantly, a community united by passion and entrepreneurship. These Chapter 11 cases are the next step in that journey.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photos © WeWork