WE - WeWork: When Do We Crash?
2023-11-02 21:11:29 ET
Summary
- WeWork may file for bankruptcy as early as next week, following a 92% crash in its stock.
- Bankruptcy could be a good thing for stakeholders like employees and clients, but shareholders will likely be wiped out.
- A new WeWork could renegotiate leases and reduce expenses, but customer retention during the bankruptcy process is uncertain.
A few months ago, I wrote a cautious article on WeWork Inc. ( WE ). My analysis suggested that WeWork's business model didn't work, as WE still reported negative adj. EBITDA despite occupancy levels achieving 73%. I recommended investors stay far away from WeWork stock. Since my article, WE stock has crashed an incredible 92% (Figure 1).
Figure 1 - WE stock has declined 92% since my article (Seeking Alpha)
Recently, the WSJ reported that WeWork may be planning to file for bankruptcy, as early as next week. Are these rumours credible and what should investors do?
Brief Company Overview
WeWork Inc. probably needs little introduction as it is one of the poster childs of an age of rock-bottom interest rates allowing money-losing companies to raise billions in capital to pursue 'disruptive' business ventures.
The company has over 780 co-working locations within its system globally with 900k workstation 'desks' and had sold over 650k memberships (Figure 2).
WeWork's business model revolves around offering flexible office space solutions in prime locations around the world with built-in amenities like high-speed internet, meeting rooms, kitchens and other office services: Space-as-a-Service, as WeWork called it (Figure 3).
Bankruptcy Is The Logical Conclusion To The WeWork Saga
In my prior article, I noted that WeWork only had $897 million in cash and liquidity as of March 31, 2023 while it was burning through $284 million in operating cash flow in the fiscal first quarter, so the company had resources to last ~3 quarters before a cash crunch.
Fast forward the clock, as we enter November, the timing of this potential bankruptcy rumour certainly fits the runway I had projected for the company, so you can say I am not surprised.
In fact, the potential bankruptcy was foreshadowed earlier in October when the company missed $95 million in interest payments and was rumoured to be negotiating with lenders to restructure its debts.
Bankruptcy Could Be A Good Thing For Stakeholders But Shareholders Will Be Wiped Out
For stakeholders of WeWork like employees and clients, a Chapter 11 bankruptcy filing may actually be a good thing as it allows the company to stay open for business while it restructure its debts and potentially turnaround operations.
However, for long-suffering shareholders, a Chapter 11 bankruptcy probably means they will be wiped out as typically in a Chapter 11 bankruptcy, bondholders take possession of the company and exchange their bonds for new shares.
What Could A New WeWork Look Like?
One problem I highlighted in my prior article was that despite occupancy hitting 72% in the fiscal second quarter, WeWork still operated at a negative adj. EBITDA (Figure 4).
Figure 4 - WE adj. EBITDA margins still negative (WE 10Q report)
This suggest either WeWork's costs are too high or its products were priced too cheaply, or both. The beauty of a Chapter 11 bankruptcy is that it will allow WeWork to renegotiate all of its leases with its various landlords.
Since the COVID-pandemic and the resulting work-from-home ("WFH") policies, office vacancies across the globe have skyrocketed (Figure 5).
Figure 5 - Office vacancies continue to skyrocket (Financial Times)
It would not be unreasonable to expect WeWork to be able to substantially reduce its lease expenses through a Chapter 11 restructuring to market lease rates.
The challenge is whether customers will stick around with WeWork through the bankruptcy process, since by definition, WeWork's customers have short-term memberships and can easily move to a competitor. For example, a simple google search of "coworking space in New York" returns dozens of WeWork-clones that look materially the same (Figure 6).
Figure 6 - Coworking space is not a differentiating factor (Author conducted google search)
Even before this bankruptcy rumour, WeWork's membership growth has stalled, with systemwide memberships declining for 2 quarters in a row from 682k in Q4/22 to 664k in Q1/23 and 653k in Q2/23 (Figure 7).
Figure 7 - Memberships have been declining (WE investor presentation)
It remains to be seen whether customers will stick with WeWork if it decides to file for bankruptcy.
Risks
Of course, the bankruptcy rumours could be just that, rumours. WeWork is majority owned by Softbank who is also a lender to the company (Figure 8). If Softbank chooses to, it can inject capital into WeWork to stave off bankruptcy.
Figure 8 - Softbank is a large shareholder and also a lender to WeWork (tikr.com)
However, without a restructuring of its cost-base, the ultimate end result will still the same, as WeWork, in its current state, is not profitable and will just burn through whatever cash Softbank injects.
Conclusion
Hopefully, investors heeded my advice and stepped to the sidelines on WeWork. From my lens, the latest bankruptcy rumour is the expected outcome, as the company is quickly running out of liquidity and options.
Whether the company files for bankruptcy next week or next month is irrelevant given the poor fundamentals. For equity investors, I continue to believe WE's shares are worthless and would recommend investors avoid this company.
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WeWork: When Do We Crash?