WeWork Deep Dive

Welcome to the 53rd Pari Passu newsletter.

This is an amazing story we will only get to tell once. Enjoy it.

According to WeWork’s most recent 10-K [1] . . .

At its height in 2019, the company commanded a $47bn valuation and was dubbed the world’s most valuable unicorn (i.e., a private company worth more than $1bn). Four years later, WeWork filed for Ch. 11 bankruptcy with its founder-CEO ousted and a business model proven primarily to incinerate cash.

This article seeks to understand the company’s story; what catalyzed its rise and how it all came tumbling down. 

Chapter 1: The Good ‘ol Days

In the wake of the global financial crisis, Adam Neumann stood on shaky ground. The WeWork co-founder had launched two unsuccessful start-ups (a company focused on selling women’s shoes with collapsible heels and a line of baby clothes called Krawlers) and was at risk of losing his visa [2].

It was in this context that Neumann inadvertently stumbled into the idea that birthed WeWork. Noticing that landlords would need tenants in the post-recession crash and that unemployed professionals would pay to work in a space more dignified than their local Starbucks, Neumann partnered with 34-year-old architect Miguel McKelvey to begin his first real estate concern [2].

Neumann and McKelvey converted an unused floor in Krawlers’ (the baby brand’s) building into a shared workspace and dubbed it Green Desk. After finding success with this venture, the duo would sell the space to Krawlers’ landlord at a $3mm valuation [2]. Following the sale, Neumann and McKelvey founded WeWork and opened their first location in Soho, NYC in 2010.

Founding to Attempted IPO

WeWork’s core business model operated as follows [3]:

1. Find big, centrally located buildings in young, densely populated areas.

2. Sign long-term leases with landlords, renovate and parcel the property, and lease it to short-term clients (during WeWork’s pre-IPO VC-fueled expansion, many of its leases were for as long as 15 years).

This might lead you to think: “Okay, so these guys were just a dressed-up sublessor. How’d they get a $47bn valuation?”

Well, real estate was only one part of WeWork’s story. From the beginning, Neumann envisioned WeWork as a movement rather than a company. According to him, 

What this ultimately led to was a company functioning more as a cult than a going concern. During meetings and company events, alcohol flowed freely, and Neumann would preach about “the dawn of a new corporate culture.” To investors, Neumann was a visionary with an “energy” akin to Steve Jobs. Many of them had grown up in the age of cubicles and Neumann’s vision of a future where “work was play” proved too tempting to resist [2].

An abridged timeline connecting WeWork’s founding to its attempted IPO is as follows [2] [4]:

• 2010: Adam Neumann and Miguel McKelvey founded WeWork and opened their first location in Soho, NYC.

• 2014 - 2016: The company engaged in capital-intensive international expansion, increasing its valuation from $1.4bn to $10.5bn.

• 2017: Neumann met with the CEO of SoftBank Group, Masayoshi Son, at WeWork’s headquarters. The two spoke for 12 minutes and, on the way to his car, the SoftBank founder cautioned Neumann that “he needed to think bigger.”  

• 2017 - 2018: WeWork opened its 200th location in Singapore, adding to its existing portfolio in New York, São Paulo, London, and Seoul. Furthermore, after a $760mm Series G round, the company reached a $20bn valuation.

• 2019: SoftBank led WeWork's Series H financing round, raising $1bn and valuing the company at $47bn. With this, SoftBank brought its total WeWork investment to $10bn.

Chapter 2: The Downward Spiral

SEC Form S-1 is essentially a registration filing for companies intending to go public. According to Investopedia, it “requires companies to provide information on the planned use of capital proceeds, detail the current business model and competition, and provide a brief prospectus of the planned security itself.” [5]

With the tailwind that was its Series H financing round, WeWork intended to IPO in late 2019. However, upon filing its S-1, WeWork had unknowingly begun its slow descent into bankruptcy.

Failed IPO

Having gained access to WeWork’s S-1, there were two things that stood out to investors:

The Financials: WeWork had never posted a year of positive EBITDA. As such, the company engaged in some creative accounting to mask its actual performance. For one, WeWork created a term called Community Adjusted EBITDA and defined it as 

While Community Adjusted EBITDA was roundly mocked, it pointed to a huge structural issue with the firm’s business model: the company was on the hook for $47bn in future lease payments with only $4bn in committed revenue [7]. Further, in the year before its S-1 filing, WeWork had lost $1.9bn on revenue of $1.8bn, losing two dollars for every one it earned in revenue. This showed investors that the company was fundamentally a lossmaker without a clear plan towards eventual profitability.

Corporate Governance: WeWork was a mess of corporate governance issues with Neumann at the center. In no particular order [7] . . . 

1. Neumann and McKelvey had bought the trademark to WeWork and licensed it back to the company in exchange for $5.9mm. Neumann also had an ownership interest in four of the buildings WeWork had leased.

2. Rebekah Neumann, Adam’s wife, was given immense power within the company. For one, in the event of Adam’s death, she was allowed to name the new CEO independent of the board. Further, Rebekah had started a private elementary school (WeGrow) using company funds. While the venture fit within WeWork’s stated goal of “building community,” it pointed to severe conflicts of interest between Adam and his wife along with the former’s complete control over the company. Neumann had also used company money to fund several pet projects (e.g., investing $14mm into a company that made surface-wave pools).

3. Neumann bought a $60mm company private jet and used it to fly around to “London, Panama, the Dominican Republic, Tokyo, Hong Kong, and Hawaii, among other locations.”

4. Neumann had a $500mm line of credit from several banks secured against his WeWork shares. If the IPO failed, he would likely be unable to repay these institutions.

Releasing the S-1 immediately cooled investors’ interest in the company. As if this was not bad enough, the next week would be rife with several articles from the Wall Street Journal and Financial Times detailing Neumann’s eccentricities and the sheer absurdity of its planned valuation. As was covered at the time, WeWork’s IPO was important not only for its employees. A $6bn loan package was contingent on the company successfully raising at least $3bn from its IPO and the cash hemorrhaging company urgently required these funds [7].

The final nail in the coffin was a bombshell Wall Street Journal expose by Eliot Brown which detailed Neumann’s frequent marijuana use along with his propensity for alcohol. This article, combined with the torrent of negative news stemming from the company’s S-1, fundamentally changed the way investors viewed Neumann. A couple of days later, he was out of the company.

Aftermath

While WeWork had gotten rid of its big bad wolf, there were several imminent problems still plaguing the company. For one, Neumann held majority control over WeWork and needed to (somehow) tender his shares so he wouldn’t default on his personal line of credit. To remedy this, SoftBank stepped in with the following solution [8]:

The Japanese conglomerate, which already owns about a third of the company, will also extend Mr. Neumann credit to help him repay a $500 million loan facility led by JPMorgan, the people said. It will also pay him a $185 million consulting fee [for four years of work].”

To remedy WeWork’s short-term liquidity issues and replace the loan package it would have received from its IPO, “SoftBank also [moved] up a $1.5 billion investment it had been scheduled to make [in 2020] and extend the company a $5 billion loan” [8]. This brought SoftBank’s total equity investment into WeWork to $13bn (with a company then worth less than $8bn).

With Neumann out, new management stepped in to take the reins. In 2020, Sandeep Mathrani was appointed as WeWork’s CEO. Mathrani was a senior real estate professional with experience in real estate restructuring; however, he abruptly left the firm in May after disagreements with SoftBank (the company's largest shareholder). David Tolley joined the firm after his departure and remains the CEO to this day.

WeWork’s new management brought with it a fresh vision regarding the company’s future. Investors had roundly, and publicly, rejected the company’s growth at all costs strategy, and leadership was now tasked with reversing years of profligate spending and loss-making leases. However, despite their best intentions, 2020 came with a fresh surprise.

COVID-19

COVID proved to be the antithesis of WeWork’s business model. Work-from-home mandates meant that people no longer needed to go into cities to work and caused WeWork to experience a significant drop in new sales volume / high customer churn (essentially halving its membership numbers from 2019 to 2020). Meanwhile, the company was stuck paying above-market rents on real estate few were willing to sublet. In hindsight, this was the final nail in WeWork’s coffin.

Still, the company chugged along. Management utilized the unprecedented scale of the pandemic to continue their lease rationalization plan; amending over 590 leases to reduce future rent obligations by ~$12bn and cutting SG&A expenses by ~$2bn [9]. 

Due to its progress in cutting costs, WeWork went public in 2021 through a de-SPAC transaction. Long-gone were the high-flying days of its $47bn valuation as the company went public with a market cap of $9bn. Although it was finally able to IPO, profitability would continue to elude the company.

Out of Court Transaction  

While WeWork had made significant improvements in cutting costs, the company was still fundamentally unprofitable. As such, it looked to its capital structure in the hopes of effectuating a restructuring that would allow it to continue its operational turnaround.

In March of 2023, WeWork engaged in an out-of-court restructuring with SoftBank, an affiliate of SoftBank and an ad hoc group of its public bondholders. 

Starting with the former, SoftBank held ~$1.65bn of 5.000% senior unsecured notes due 2025. According to the Exchange Transaction, SoftBank . . . [9]

1. For $250mm in principal amount, exchanged every $1,000 in face value into $750 of 2L convertible notes due 2027 and $150 of common stock. 

2. For ~$360mm in principal amount, exchanged every $1,000 in face value into $750 of 3L convertible notes due 2027 and $150 of common stock. 

3. For the remaining ~$1.04bn in principal amount, exchanged every $1,000 in face value into $900 of common stock. 

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