IT IS HARD to imagine such shockingly different financial documents. Two years ago a startup in New York that boosters claimed was worth $47bn issued a flowery prospectus in advance of its initial public offering (IPO). The firm’s mission, it declared, was to “elevate the world’s consciousness”. Such was the backlash against its puffery that it was forced to scrap its flotation. On March 26th a New York firm unveiled a 50-page investor presentation that was rather less effusive, filled with talk of cost savings, efficiency and productivity gains for clients. This humbler company secured a backdoor listing, through a special-purpose acquisition company (SPAC), that would value it at around $9bn.
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Both documents came from WeWork, a trailblazing but troubled pioneer of the co-working industry. After its abortive IPO in September 2019, its lofty valuation came down to earth (see chart). The future looked bleak. Adam Neumann, its flamboyant founder, was discredited and ousted shortly thereafter. It suffered a nasty falling-out with Japan’s Softbank, its deep-pocketed backer. Then came the pandemic-induced recession, which led some clients not to renew their contracts, many of which were short-term. That left the company with a huge global overhang of unviable property leases. At times, bankruptcy seemed like a real possibility.
WeWork managed not only to avoid that fate but, as the new paperwork attests, to convert itself into a viable, if less ambitious, business. A disciplined management team replaced Mr Neumann and his inner circle. Sandeep Mathrani, a seasoned property executive who took over as CEO, is as reassuringly straight-laced as his predecessor was seductive. Jamie Hodari, boss of Industrious, another co-working firm, praises his rival as “the opposite of Adam Neumann in a lot of ways”, who “has helped bring the industry from childhood toward adulthood”.
Mr Mathrani has certainly brought much-needed discipline to WeWork’s finances. By the end of last year the company had dumped more than 100 underperforming or as-yet-unopened offices and wangled rent reductions or amendments on another 100 or so deals. This allowed the firm to cut future lease payments by some $4bn. Only 10% of its customers have month-to-month leases; more than half are signed up for a year or more.
All told, WeWork expects to have nearly $2bn in cash on hand if the SPAC deal closes as expected in the third quarter of this year. Despite the wholesale switch to home-working in the pandemic, global revenues (excluding operations in China, which are run separately) remained roughly flat at $3.2bn. The corresponding net loss actually narrowed, from $3.5bn in 2019 to $3.2bn.
The path to profitability no longer looks as elusive as before for reasons beyond Mr Mathrani’s steady hand. William Rudin, a property developer in New York and an early backer of WeWork, is convinced that as the city starts to recover from covid-19, flexible workspaces “will play a very important role” in supporting the revival of established firms and the rise of startups. In February Mr Mathrani told The Economist that three-quarters of American tenants were small and medium-sized companies (the mix in Europe was more even).
More broadly, the pandemic has led many businesses to rethink the need for long-term leases and fixed headquarters, argues Ben Munn of JLL, a large property-management firm. JLL predicts that the share of flexible offices in all office space, which was less than 5% in big global markets before covid-19, will reach 30% by 2030. A year of self-isolation has led many employees and employers alike to appreciate the value of office banter. Once seen as “window-dressing”, WeWork’s focus on “community”, which was mentioned 150 times in its original IPO prospectus, “might turn out to be an incredible source of strength”, muses Mr Hodari. Its brand, the only one most millennials can name, is strong. It is against this backdrop, Mr Rudin says, that WeWork’s SPAC deal “validates its business model”.
WeWork is not out of the woods. Having been upended by the pandemic, the commercial-property market has yet to find a new equilibrium between landlords, tenants and middlemen like WeWork. Big traditional property firms will increasingly compete with co-working specialists in offering flexible options. On April 1st JLL and Brookfield, a Canadian asset manager with a large property portfolio, were due to open a hip flexible-office space in Brooklyn. Industrious recently secured a $250m investment from CBRE, another large property manager, and has scooped up “a lot” of distressed WeWork leases, says Mr Hodari. Still, WeWork’s chastened comeback story no doubt appeals more to investors than its earlier tale of hubris. ■
This article appeared in the Business section of the print edition under the headline “WeSurvive”