Even before coronavirus struck, WeWork had established itself as a cautionary exemplar of the 21st-century economy: how dreams of being an iconoclastic “disruptor” can turn to dust.
The shared-office space company was forced to abandon a $20bn float last September after investors balked at the eccentricities of its co-founder and then chief executive, Adam Neumann, and expressed doubts about the financial viability of what lay beneath its slick marketing.
Now, some analysts believe WeWork could become a casualty of the current crisis, hit by falling demand from tenants. In a presentation to investors on Thursday, the company said it could not reasonably estimate the impact of Covid-19 on its financial position “but we anticipate that it will likely have a negative impact”.
Analysts were less circumspect. “You couldn’t pick a company that was more impacted by Covid-19 than WeWork,” said John McClain, portfolio manager for US investment firm Diamond Hill Capital Management, pointing to the US firm’s model of taking out long leases from property companies and then parcelling them out on short-term sublets to other companies seeking office space.
“They broke the golden rule … They have fixed costs for a long time while their customers can cancel their contracts. They are just going to go to straight cash-burn mode.”
WeWork expanded rapidly under the stewardship of Neumann, but this was based on a leasing model that deferred the rents it owed landlords in return for higher payments later on. In October, Neumann was forced to leave the company in the wake of the failed flotation, and its largest shareholder, SoftBank, stepped in with a financial rescue package. But despite cutting staff and cancelling expansion plans, it has continued to lose money.
Last week it was reported that SoftBank was reconsidering plans to increase its stake in the business, throwing into doubt the $1.1bn slice of a $3.3bn cash injection that was tied to the purchase.
In a letter to employees, WeWork’s chairman, Marcelo Claure, and new chief executive, Sandeep Mathrani, said that the remaining $2.2bn investment was unaffected. The letter said “there should be no doubt in SoftBank’s support of WeWork”.
But Alex Snyder, at US investment management firm CenterSquare, said that money might not be enough. “Even with SoftBank’s resources, WeWork’s life is finite if this pandemic-induced crisis persists,” he said. “Can WeWork sustain a few months of being shut down? Probably. A year? Probably not.”
WeWork said more than four in 10 of its clients were large businesses committed to contracts averaging 23 months.
However, McClain said its small and medium-sized clients would be a problem for WeWork, as many were struggling and likely to look to cut costs if they did survive. On top of this, he questioned whether people would want to work in the large open-plan offices the company typically provides.
John Colley, associate dean at Warwick Business School, said he did not expect SoftBank to go ahead with the cash injection. “I don’t think they’ve got very long. I can’t imagine that SoftBank will make the final payment and then the banks will be in touch with them,” he said. “I don’t see them making it out of this.”
Colley said the company had two problems. “At the moment they can’t operate but they are still going to be racking up all the rents and premises costs. What’s worse is that people have discovered that working from home is not so bad.”
Snyder said he did expect most customers to return but he acknowledged that “a potentially large subset” had learned to work remotely and would continue.
McClain said the cost of the company’s bonds had fallen to a level that indicated it was likely to default this year, and that this would happen “irrespective of whether SoftBank were going to provide the capital”.
WeWork declined to comment on its financial situation, but said that it had taken measures to protect employees and members from coronavirus. It said its buildings were open across Europe and most of North America, with extra cleaning and hygiene provision in place.