WeWork's Cash Reserves Rapidly Declining, Increasing Risk of Default

WeWork Inc. is attempting to become profitable before its substantial funds are depleted. Unfortunately, the Federal Reserve's attempts to combat inflation have made this goal more difficult to achieve.

Concerns about a potential recession and job losses in the tech sector are having a negative effect on the demand for co-working desks. Additionally, companies such as WeWork, which are not profitable, are facing difficulty due to the rise in interest rates, making it more difficult to obtain debt and less attractive to potential investors.

WeWork has been struggling financially due to its costly long-term leases and over $3 billion of debt. From July 2020 to September of this year, the company had a negative cash flow of around $4.3 billion. To help cover these losses, SoftBank Group Corp., its largest investor, has provided loans and equity investments totaling more than $10 billion.

WeWork has nearly exhausted its resources. The company has $500 million in unutilized debt from SoftBank and anticipates that it will have $300 million in cash by the end of 2022, which is less than a third of what it had at the end of 2021. Its debt contracts permit it to borrow an additional $500 million.

Experts have noted that WeWork has been successful in reducing expenses in recent times, resulting in a decrease in losses. Additionally, some real estate agents have suggested that the company could benefit from the hybrid work model and the current economic instability if more businesses opt for shorter-term co-working memberships instead of long-term leases.

In a recent interview, WeWork CEO Sandeep Mathrani expressed confidence that the company has the resources to make it through 2021, even if occupancy drops by 10%. In November, WeWork announced the closure of 40 U.S. locations that were not profitable, and Mathrani stated that he is willing to close more if necessary to conserve cash.

He stated that they have been taking steps to streamline their company since March of 2020, rather than just now due to the current challenges they are facing.

Analysts have suggested that WeWork is still feeling the repercussions of its former CEO Adam Neumann's strategy of expanding without limits.

This month, Fitch Ratings lowered the ratings of some of WeWork's bonds, which were already classified as one of the lowest junk bond ratings. The company's stock has dropped more than 70% in 2019.

Fitch's report suggested that WeWork's difficulties could be compounded by the economic climate in 2023. The ratings agency also noted that the company may need to secure additional funding in 2024. On Monday, WeWork bonds were trading at 48 cents on the dollar, a significant decrease from the 97 cents they were worth in January.

The destiny of co-working companies, which enter into long-term leases that can last up to 15 years and rent out their space on a monthly or yearly basis, is closely linked to the economy. If businesses let go of employees or become concerned about declining profits, they are more likely to abandon their desks as well. The tech industry, which makes up a large portion of WeWork's customers, has experienced a rise in layoffs. Meta Platforms Inc., Amazon Inc. and Twitter Inc. are among those that have declared job reductions.

Co-working memberships are typically simpler to terminate than traditional office leases due to the shorter terms. WeWork pays a fixed rent for the majority of its leases, which can lead to significant losses if it is unable to fill the desks.

Vikram Malhotra, co-head of real-estate investment trust research at Mizuho, noted that if occupancy levels decrease, more money is being spent.

The outlook for WeWork appears to be positive. With the increasing prevalence of remote work and the current economic climate, short-term co-working memberships may be more attractive to companies that are hesitant to sign long-term leases. Additionally, the tech industry still employs more people than it did a few years ago, even after recent job cuts.

Mr. Mathrani, who was the CEO of GGP Inc. before taking the helm of WeWork in 2020, commented that there is a positive outlook for flexible office space. He likened it to his time in the shopping center industry, when e-commerce sales were increasing and brick-and-mortar sales were declining.

The current weak office market gives WeWork more leverage when negotiating with property owners, according to Alexander Goldfarb, an analyst at Piper Sandler & Co. He noted that WeWork's leases are long-term, but the company only provided guarantees for a few years of rent payments in most cases. Goldfarb stated that WeWork can go back to the landlord and say, "We want to stay, but we're not paying this rent anymore, so give us a new deal."

This year, WeWork's losses have decreased, and 72% of their desks were leased in the third quarter. This is an increase from the 50% occupancy rate in the summer of 2020, but still lower than the 84% occupancy rate in 2018. According to Mr. Mathrani, the demand for flexible office space is returning more slowly than expected in the U.S., where occupancy is still behind Europe and Asia.

The company's cash flow decreased significantly from $523 million in the third quarter of 2020 to $205 million in the third quarter of 2021.