WeWork CEO steps down

Going forward the company will have severely limited access to capital. The IPO alone was going to provide $3 billion of cash which would be to finance major new commercial real estate purchases. We's major investor Softbank has well over $100 billion which it has been pouring into startups, but even Softbank's investors have stopped the company from giving more capital to We in 2019. We is losing a *lot* of money, so being cut off from capital markets should bring We's buying spree to a complete halt.

The CEO resigned because of corporate governance and serious issues around self-dealing. The company's valuation is nuts - the company is not worth $47 billion. As a banker type who has worked on very large tech IPOs, the valuation is by far the biggest problem here.

It's a joke to value We like a tech company. Unlike WeWork, software & tech companies don't need to buy new buildings as more people purchase the products. Tech companies can become massively profitable as the user base expands. Very different than We. I wonder what will happen to We's financials in a downturn? Imagine how much $ they could lose if occupancy falls significantly. It could get very ugly.

I'm coming at this from a "what's We's stock worth" perspective and would love to hear more of the "impact on commercial real estate in NYC perspective"

I for sure wouldn't buy the stock and I've also been saying this for many years! Agreed it doesn't make sense.

I doubt this IPO gets launched. And shame on all the stakeholders and gatekeepers who let this piece of garbage get near the general investing public.

So call me paranoid, or perhaps I have PTSD, but I can't help but wonder if the issues in the repo market have anything to do with We's issues. Someone is holding the debt that Softbank used to goose its fund, and if anyone takes their honest pills, it is likely in the process of getting written down.

@jas: Re the 'stakeholders and gatekeepers'. The only 'stakeholders' are those with an equity interest in We, and it is in their interests to monetize their holdings and raise capital from investors. The best 'gatekeeper' is the public disclosure process for taking a company public, and I'd argue that in this case it worked just perfectly: The general and professional investing public looked at their IPO docs, saw the confused and conflicted corporate structure, the self-dealing, the absurd long-term control, all wrapped around absolutely ridiculous financials and an unsustainable business model, and ran away screaming.

On a related note, just yesterday I saw a job opening for a valuations specialist in Softbank's New York office...

Professional money managers who invested on behalf of others in later funding rounds should be taken to the woodshed. This is not the only company where they significantly over paid as they wanted a piece of the action after they missed early funding rounds. Public markets did a great job.

Also Equity Underwriters will sell anything which investors are willing to buy as long as they have appropriate disclosures as in how much money the company is losing, which was obvious to every one. They only underwrite what the prospectus says not whether the stock is a good investment.

Having rented single desk office space in the early 90s, I never understood this company or how it got to where it did. This was quite popular in the 80s and 90s, subdividing large spaces into smaller spaces for independent contractors etc. I had thought about doing it myself.

Of course the spaces at wework are much cooler...;)

WeWork is currently the largest lessee of office space in NYC with well over 5 million square feet. What happens to the office market when they vaporize and all that space comes flooding back on the market?

As long as there are people renting it, which is the case, there is no issue.

Nope. The leases people are under with WeWork don't get passed through to the landlords, and they are taking losses on most of them.

I know that the landlord leases are mostly with LLCs set up by We Work. If you are renting from We Work, are your leases with the same LLC as the property lease or with We Work as a company? It seems that you are suggesting latter. The renters still have to go some where if We defaults. The landlord will kick them out unless We makes payment to the landlord via LLC. Bankruptcy court will likely allow this payment. Also, We can stop opening new locations and stop burning cash easily. They do have customers.

To be clear, my main point is that We disappearing does not mean the actual renters disappear. So the net demand for space will remains relatively unchanged.

You just have to take several billion dollars a year out of the income stream which they were pumping into it? And also the tenants who's companies died pretty much as soon as their business model of not having to pay for a buildout or rent ended because they weren't being financed by WeWork's scam anymore. There is a shockingly high percentage of WeWork tenants who no one else will rent to because they have no money, no income history, etc A lot even just existed because they were put up as friends of brokers being paid 100% commissions.

The co-working model is here to stay. Regus is the proof. If WeWorks charges 5-10 percent more rent and stops opening new locations, they will not lose renters and become profitable. Main risk to this model is recession where some percentage of renters (say 10-20 percent) will work from home.

Compass is another Softbank portfolio company that’s been grossly overvalued. They claim to be a tech company when they are really nothing more than a traditional brokerage. The We debacle can’t be great for Compass’ IPO

Indeed. I do not see any difference between Compass and other brokerage firms. Perhaps Compass has some operational efficiencies in administration but consumer experience and cost to the seller is the same. Any of the brokers care to comment as to what is different about Compass?

I think Compass has a great environment for a traditional broker looking for some extra bells and whistles. I've been called a few times by management there, I guess looking to recruit me. Obviously my business model wouldn't fit in there. I've had good experiences doing business with them and the agents I know that work there are very happy.

As an investor I'll be very curious to take a peek under the hood if they do file for an IPO.

Ultimately you know how I feel about real estate, it's a pretty simple business. There's no magic bullet to sell an overpriced property or property with a lot of warts on it. I think too many people overthink the process about buying and selling, KISS. However, that's another conversation.

Keith

WeWork is just the same concept as dividing a studio to host 20+ illegal aliens, with 5 feet ceiling

Don't understand why one got praised, the other got prosecuted

Just visit a we work office to see how wrong your understanding it. There is plenty of space for the people to work and play a little and occupancy is legal.

There is nothing wrong with the concept. It is just not worth what private investors paid.

I wonder what will happen to Lord&Taylor building -

Perhaps Amazon will buy it outright?

Walking distance for Bezos.

I thought Facebook was eyeing it to add to the space they may be taking in the former Farley post office. But that might derail their Hudson Yards play.

I think the biggest difference between Compass and Town was VC money. I don't think Compass is inherently a tech, and I see that as a problem because mostly what they are doing is ensuring that the traditional big brokerage house model will fail and I don't see them having come up with a real alternative (at least yet, anyway).

The rumor is that Compass pays well compared to traditional brokerages, especially given that they can dangle a stock payout as well as splits. So it stands to reason that agents would be happy there if they're doing the same job but making more money. Presumably Compass is making a market-share play -- remember when the firm started it was basically Leonard doing all the lifting -- and the firm will keep recruiting and recruiting until they get enough market penetration to make their IPO sound good.

Are they able to give better split as their admin cost is lower due to better technology, better selection of brokers, or is Compass just making less profit? I suspect mostly the latter just like Uber and Lyft.

I guess all they have to do is stop buying new brokerage houses and cut back agent's splits 5% to 10% ;)

BTW the last thing any well performing agent wants to believe is that them making less money is a possibility so whenever the market turns get ready for lots of agents to blame something going on at their current firm and buy into what someone else is selling as greener pastures.

So from $47B valuation, to $20B to no IPO to...bankruptcy? Meanwhile the former CEO walked away with $750MM. How did Jamie Dimon get so had by this guy? The Vision Fund and the Saudis, I understand. I cannot wait for the book - would love to read John Carreyrou. BadWe?

Remember global crossing?

Dimon was trying to drum up tech banking to compete with Morgan Stanley and Goldman, and JPs Equity investment was at relative low value.

I do not think BK will happen as equity investors will put in some money and dilute investors who are not putting in money. The concept is viable and profitable.

Re: my last post about agents jumping:
https://therealdeal.com/2019/03/11/everybodys-been-poached-inside-a-year-of-agent-moves-at-nycs-top-resi-brokerages/

It will be interesting to see who they take down with them. Out of University I went to work for Arthur Andersen consulting. When accounting and consulting split a lot of us expats gave those left grief for choosing their new name, but after WorldCom they all shot back with "So, how do you feel about Accenture now?"

Who is going down? Softbank. Good luck raising Fund II. And not sure I would accept an invitation to visit the Saudis. They have bone-saws. The lenders to Vision Fund I. Let's not forget the thousands of We Work employees who will be deemed costs and jettisoned.

Not sure why anyone would put more funds into this, as 300 suggests. If I were an LP, and I never would have gotten myself into this, there's no compelling case to throw more money in after bad. Unless you just need to stabilize the actual profitable SPVs. if they're organized that way. There's a workable model out there, and much less expensive and without the legacy issues.

Jas, Depends on what valuation you put in money, board seats you get, and whether you have upward adjustment to the percentage ownership if the company raises more money at lower valuation. Or you do what Buffet did with several banks. Debt with high coupon and warrants. Warrant strike can be pretty low.

I know all of the private equity tools. Doesn't change the fundamental economics.

I guess we differ on the fundamentals of the business. I view that as if they stop the expansion, sell unrelated businesses, and focus on the existing already built locations, they can be profitable quickly.

I guess neither of us has the granular numbers to really know what % of their locations are profitable although clearly not enough of them. But if I were an LP and wanted to keep this type of exposure, why wouldn't I just go buy some IWG?

Even if you look at S1 filing, it is not easy to allocate and amortize sales and marketing costs to existing locations. So one has to the private investor in WE to get more info and make some assumptions about cost allocation.

My guess is that we have only seen the tip of the iceberg as far as "funny business" is concerned. I would be very unsurprised to find out some WeWork tenants were total phantoms, especially since they were paying out ***100% COMMISSIONS***

300, No, it is exactly the SAME concept. The only difference is that, the one got cash to burn can show you luxury spaces and wines, but the one who really serves the community and illegal aliens can only afford the 5 feet ceiling dividers.

Some of care about legality and why the laws for residential dwellings are made - as in fire safety, spread of diseases etc.

I'm with 30. Was the board completely asleep? What numbers were they looking at when they signed off on the private plane?

When people live hand to mouth, they will tell you fvck the laws

Jas/30, I have been following the news and it does seem worse that I thought as they are willing to pay 15 percent on debt instead of taking Softbank package which removes the special voting rights of Neumann. Basically means equity only has some option value.

Unsecured debt at that (because We probably has nothing to act as security), it may not pay all of the coupon in cash -- some of the interest would accumulate and become due at maturity -- and they'll throw in some equity warrants.

Jamie Dimon must be calling in lots of favors with this one.

It is basically raising equity without Neumann leaving control of the firm. Equity investor will likely have him give up control. So Neumann will drive it to ground after having cashed out a lot.

Valuation down by >80%
https://www.bloomberg.com/news/articles/2019-10-18/softbank-is-said-to-eye-wework-rescue-valuation-below-8-billion

If they are issuing or trying to issue PIK bonds at 15 percent, and existing bonds are trading at 75-80 cents, even $8bn is high for equity. But SoftBank is the original dumb investor who needs to justify their previous mistake. $10-15bn would have been completely achievable before all the dirt came out.

I mean $10-15bn equity valuation. The board will make a huge mistake by taking JP Morgan’s debt package which would significantly increase the bankruptcy probability due to debt load.

Lol yep, pride cometh before the fall and so forth. The nutty part too is the conflicts of interests Softbank would now have after layering its Vision Fund LP's below its own new investment!

I haven't been following the details, but I think a shite-show of this magnitude requires some new board members, at the very least. I think they did add one woman some time ago, in response to the lack of diversity on the board.

In the end, I just don't see how the company avoids BK.

WeUsedtoWork -

Haha.

Separately, WeWorks situation reminds me of Lehman 6-9 months before bankruptcy where Dick Fuld had a chance to get equity infusion but wouldn’t agree as the valuation was much lower than he believed. Fundamental reason for his terrible mistake was that he believed that the last couple of large acquisitions (call it 30-40 percentage of Lehman’s book value) were at a fair price but in reality he approved some bad deals after overruling CRO and other senior people in the firm.

And Mark Walsh was the deal maker who got Lehman into commercial real estate dodo in much bigger size than remotely justified by Lehman’s book value.

Love it. Fuld and Walsh get to shrug their shoulders and gripe about the 'perfect storm' that hit them...

Walsh created the prefect storm in Commercial Real Estate by overpaying based on future growth using Lehman’s deep pockets including borrowing, and SoftBank created the perfect storm in Venture Capital / private world, by overpaying for Unicorns based on market share quest which will result into cash flows. In both cases, fundamental business model is viable. All a question of how far you can push it and whether you have liquidity to support it.

And JP Morgan asked for significant additional collateral from Lehman (agreement signed by Ian Lowitt, treasurer, allowed that) effectively pulling their collateralized credit line - a big less discussed reason for Lehman going under.

Now JP Morgan will be at the forefront of arranging 15 percent debt which will cause We bankruptcy.

Dimon legally screwed Lehman Equity holders and will legally screw We equity holders, if they arrange the debt.

Then let Dimon screw them, WeWork is not even worth 1bn, the market should come back to reasonable

Looks like they will take SoftBank equity infusion at 8bn and dilute existing shareholders (CNBC source). If so, good outcome in my opinion

Adam Neumann makes out like a bandit. $1.7bn to get out from SoftBank.

How much of that 1.7bn is softbank's purchase of shares that he owns, vs. a 'get out of here' fee (the $185m 'consulting' fee) mentioned here:
https://www.bbc.com/news/business-50138354. Sadly, you generally can't zero out particularly odious individual equity holders in a buyout/rescue (other than by doing by share class).

Also have to wonder how much the bondholders were driving the terms (We has about $669m outstanding, prior to the proposed new offering). Softbank probably has to save face with them, in order not to shred their reputation for other deals.

$185mm is pure payola. Not sure if he got better price than other sellers due to additional voting rights his shares carry.

So the bankruptcy had been postponed for at least 2 years with $5bn loan. That is a long time to make company profitable.

profitable? how?

You just have to wait. No more new leases from landlords, renegotiate old leases to certain extent, reduce build out cost per location, increase rent for existing locations - too many ways to cut costs and reduce cash burn. New unbuilt locations will be built out or cancel leases with some breakup fee, and leased in the mean time using up $5bn cash raised. Naturally, there is no guarantee of the future.

"No more new leases"
"By my calculations, two years ago, in mid-2017, WeWork had about 2.4 million of space in Manhattan (2.8 million in all of New York City), and therefore added nearly 3 million square feet in Manhattan over the past 24 months.

Total leasing volume in Manhattan during that period was about 55 million square feet, the vast majority of which were lease rollovers or tenants moving from one space to another, as opposed to net new absorption (the difference between space coming to market and newly leased space). Even so, WeWork was itself 5.5% of gross leasing volume, an enormous amount for a single tenant.

But, in terms of net absorption, according to data from industry sources and my calculations, if WeWork were removed from the equation, the Manhattan market would have experienced negative absorption of roughly -700,000 square feet of leased space, as opposed to the just over 2.3 million square feet of net absorption that it experienced over the 24 months ended June. This, folks, means that at the margin WeWork is moving markets - bigly."
https://www.businessinsider.com/wework-new-york-city-real-estate-threat-adam-neumann-ceo-2019-9

Very likely that they over paid for some leases and a few places they own outright. That is why Softbank valuation is less than the actual cash equity raised so far.

They can also beat down on the landlords facing some WE LLC but without credit guarantee. Assuming the deal with SoftBank closes, this pushes any bankruptcy scenario at least two years away. Expect more bad news in the next three to six months as SoftBank marks down the books.

So they have two years to get profitable, but in the meanwhile, that's two years that the completion can build out their brand and do the exact same thing, right? It is a really tough road, and now, at least in my mind, We Work has brand issues. But the concept has merit and others are out there and will see this as an opportunity to gain market share.

So if I'm Adam's advisor, I'm telling him to ramp up his security detail. You have thousands of people losing their jobs when a year ago, they thought they were going to make bank. It would be comical if it weren't for the human cost and anguish.

Softbank is desperate to save their next fund, which they're allegedly in process of raising. I would love to be pitched.

Do not think SoftBank can raise any more money for their fund. It is very sad that Adam is walking out a Billionaire but many employees are losing jobs.

So, let me ask few things for you guys to clarify:
1. So softbank put in more than 8bln so far correct? So they are under water compared to this latest rescue valuation?

2. Didn't Adam but buildings via loans then lease to wework at above market rates? If yes, can wework get out or renegotiate these?

3. What does this say about current fed engineered and global Central Bank policy in general, which imo, allowed wework and other money losing corps like it, to exist in the first place

4. What happens next to jobs and businesses directly related to wework,or, construction, designers, other vendors etc etc

5. What happened next to commercial re in NY and abroad where WE exists?

So, let me ask few things for you guys to clarify:
1. So softbank put in more than 8bln so far correct? So they are under water compared to this latest rescue valuation?

2. Didn't Adam but buildings via loans then lease to wework at above market rates? If yes, can wework get out or renegotiate these?

3. What does this say about current fed engineered and global Central Bank policy in general, which imo, allowed wework and other money losing corps like it, to exist in the first place

4. What happens next to jobs and businesses directly related to wework,or, construction, designers, other vendors etc etc

5. What happened next to commercial re in NY and abroad where WE exists?

My best guess:
1. Yes.
2. I am guessing this was a part of recent negotiation. So nothing more may happen for Neumann owned buildings.
3. In my opinion, it is due to large pots of other people’s money being invested on “exit to greater fool” basis rather than fed.
4. I think they were probably overpaid to build out fast and possibly were related parties.
5. Unclear how much they will exit but you gotta be a fool to build more commercial and high-end new resi in NYC.

If WeWork and other sucker corps such as Amazon, Google, AssBook, etc stop meddling NYC, our RE market would probably return to normal and reasonable soon and rebound in the future

300,
You realize there's a ton of both being built all over. Do you follow YIMBY at all?

New build is for the money already raised more than a couple of years back and oncoming supply is reflected in current market sentiment. I am talking about new money being raised.

On the resi building completion from money already raised, I hear there is not much new coming on after 2020 / early 2021 as new money raised has not been significant starting 2018. Does any one has some data sources on this?

So you're saying you think there are going to be a bunch of incomplete buildings left that way? You know most don't raise all the money up front.
As far as future building let's start with all of Hudson Yards Phase 2 and half of this list:
https://ny.curbed.com/maps/new-york-skyscraper-construction-supertalls

My knowledge of new development money (equity) raising process is limited but I would think all equity is raised or committed before the project starts. Construction loans follow.
Of the buildings in the article you linked, some are already close to completion or in next year or two and some others may not raise money at all.

Are you saying they already secured and reserved full funding for those new developments? Sounds impossible and not reasonable.

If you read, I am saying secured equity.

Picking on single wording is meaningless.

https://therealdeal.com/2019/11/08/wework-execs-face-first-lawsuit-over-botched-ipo/

I still cannot believe that Jamie Dimon associated himself with this mess. I for one cannot wait for the inevitable book - hopefully written by John Carreyrou.

How many times have things blown up when the professionals underestimated risks which in hindsight appeared obvious?

The professionals didn't underestimate anything, they intended to.

https://www.nytimes.com/2019/11/17/business/wework-layoffs.html?action=click&module=Latest&pgtype=Homepage

They lost $1.25 billion Q3.
"A corporate presentation provided to investors revealed that WeWork opened nearly half of its locations in the 12 months that ended in September. Many of these locations are losing money and are likely to be depleting WeWork’s cash, which stood at $2 billion at the end of September."

It will be interesting to see what Q1 2020 is. By that time, the new management should have had some time to start acting on loss reduction. Economy is strong.

https://www.marketwatch.com/story/t-rowe-price-admits-wework-was-a-terrible-investment-2020-02-13

Musical chair game is strong and going

https://therealdeal.com/2020/02/13/adam-neumann-is-asking-37m-for-gramercy-park-triplex/

“Sandeep is basically the anti-Adam Neumann,” said Dror Poleg, a former advisor to flexible office provider Breather and the co-chair of the Urban Land Institute’s Technology & Innovation Council. “He’s older. He has classic real estate experience working for the largest companies in the space. He’s very, very well-liked and experienced in the industry.”

"While experts feel the coworking model is here to stay, Roseman said Mathrani is WeWork’s last lifeline to stay afloat.

“If he can’t get it done then the company’s toast,” Roseman said."

https://commercialobserver.com/2020/02/anti-adam-neumann-sandeep-mathrani-is-weworks-best-hope-for-survival/

How many big companies had made bankrupt by a Sandeep or so in the US?

Ruh Roh Relroy....

https://therealdeal.com/2020/03/17/softbank-may-bail-on-wework-bailout-report/

Looks like they smelled the coffee.

Closer to the brink
https://www.nytimes.com/2020/03/24/business/wework-coronavirus-softbank.html

Remember when I predicted WeWork could bring the whole office market down with it?
https://therealdeal.com/2020/04/16/https-therealdeal-com-2020-04-16-for-kushner-cos-wework-has-become-a-problem-at-dumbo-heights/

WeDie.