2023-06-27 17:38:40 ET
Summary
- WeWork is being priced for a near-term Chapter 11 bankruptcy filing due to its cash burn and executive turnover.
- A March deal with SoftBank and a group of investors will help reduce WeWork's net debt and extend its cash runway.
- Despite the deal, WeWork still faces challenges in reducing its cash burn and boosting its occupancy rates.
WeWork ( WE ) is being priced for a near-term Chapter 11 bankruptcy filing. It's not hard to see why with cash and equivalents, including restricted cash, of $306 million as of the end of its last reported fiscal 2023 first quarter set against trailing 12-month cash burn from operations of $679 million. The intense executive turnover with its CEO and CFO leaving the company in May has not helped calm stock market nerves. Common shares are down 81% since the start of the year with a reverse stock split now in view as WeWork received a non-compliance listing notice from the NYSE after trading below its minimum listing requirement. To emphasize the extent of the selloff, WeWork's current price-to-sales multiple at 0.05x is less than 90% of the multiple just a year ago and comes at a stark 99% difference to its peer group median of 4.50x.
What's the play here? For bulls, it's that the company will be able to stave off near-term bankruptcy with a March deal that will see WeWork's net debt get reduced by $1.5 billion through a mix of equitization and cancellation. This will see $1 billion of SoftBank ( OTCPK:SFTBY ) unsecured notes become common shares in aggregate with the discounted exchange of $500 million of unsecured notes. Further, another $1.6 billion of debt will see their maturities extended to 2027 from 2025 with the company set to receive $1 billion in new funding and new and rolled capital commitment. Crucially, WeWork's net debt is now set for a reduction below $2 billion. This will see quarterly net interest expenses that grew as high as $127 million during its first quarter get cut down markedly.
Risks Remain As SoftBank Bailout Keeps Co-Working Dream Alive
The highly deleveraging deal is with a group that represented 60% of its public bonds, a third-party investor, and SoftBank's Vision Fund. It has significantly boosted WeWork's liquidity, will reduce its cash burn, and critically extends its cash runway. This came as the co-working company recorded first-quarter revenue of $849 million, a growth of 11% over its year-ago comp and in line with consensus estimates. Further, consolidated first quarter physical occupancy at 73% was a 600 basis point increase from its year-ago comp as the pivot to enterprise clients continues to pay off.
All Access memberships increased to 75,000 , a sequential increase of around 5,000 from the prior fourth quarter with WeWork outperforming management expectations for growth of at least 1,000 per month. For bears, who form the 12.56% short interest, the quarter saw WeWork reverse on progress seemingly being made with its cash burn profile. Free cash flow was - $343 million in the quarter, a material deterioration from a loss of $156 million in the prior fourth quarter. This was due to what management flagged in their first-quarter earnings call as the timing of cash interest payments, the payout of annual bonuses, and other working capital requirements. This came on the back of an adjusted EBITDA loss of $17 million, a huge improvement from a loss of $169 million in the year-ago quarter.
WeWork is guiding for second-quarter revenue to be between $840 million and $865 million, this would be year-over-year growth of at least 3% at the bottom end of the range. Adjusted EBITDA will come in between a loss of $10 million and a $15 million profit. Bears would also highlight that WeWork projected adjusted EBITDA during its debt restructuring that would be better than this range.
Chapter 11 Filing Likely Starved Off
WeWork defaulted on a $240 million loan for an office tower that houses a co-working space in San Francisco at 600 California St., is projecting ending fiscal 2023 with a net positive adjusted EBITDA position, and is forecasting continued revenue growth even as corporate layoffs rise and the economy faces the specter of a recession. The company is in a state of flux. Bears would further flag that occupancy fell quarter-on-quarter by 200 basis points from the fourth quarter with building margin also falling to 16% from 17%.
That revenue has stayed resilient likely influenced the decision by the consortium of lenders, the third-party investor, and SoftBank to help the company restructure its debt. However, its operational results are yet to move in the right direction, and WeWork will have to take more radical steps to reduce its cash burn. Occupancy will also have to start moving up to prevent the first-quarter decline from becoming a trend. Mizuho Securities is penciling in further occupancy weakness on the back of higher US corporate layoffs and bankruptcies that will also delay the company's ability to reach positive free cash flow until 2025. Hence, shares are not a clear buy here. However, with sentiment seemingly already at rock bottom and with the company still set to see decent revenue gains I'm rating the ticker as a hold for its current investors.
For further details see:
WeWork: Solvency Is Secured For Now