The descent of WeWork (US:WE) from world-changing office space provider to a shaky listed entity has cast a spotlight on the whole flexible office sector. On paper, companies that can provide cheaper office space in a work-from-anywhere post-Covid-19 world should be flourishing, but the realities of being a middleman at a time of industry uncertainty have started to bite.
WeWork said last week that there was "substantial doubt about [its] ability to continue as a going concern" without a rapid turnaround in its business. A subsequent bounce from buyers driven by to replicate the 'meme stock' phenomenon seen with other struggling US companies does not hide the fact WeWork has lost 98 per cent of its value since its IPO in late 2020.
There is obviously an appetite for a more successful version, however: in the UK, IWG's (IWG) share price jumped 10 per cent on the morning of its results after management said it was considering a US listing, and investors pondered the potential impact of a WeWork collapse. Similarly, Stifel analysts said a potential WeWork closure would "provide a growth opportunity" for real estate investment trust (Reit) Workspace (WKP).
Losses and debt
Both WeWork and IWG, formerly known as Regus, generate revenue by renting offices and then subleasing them on flexible terms to tenants. The pair have recorded years of losses thanks to Covid driving down the demand for office space, with the cost of providing services to their customers exceeding the amount of cash both have been able to bring in. IWG has not posted a pre-tax profit since 2019, and WeWork has never posted a pre-tax profit.
Their lease-based model means adding significant liabilities to the balance sheet to grow. According to its latest results, IWG is spending over £500mn every six months on leases, and its net debt including leases is £6.21bn, which is 34 times larger than its shareholder equity. But it did register record revenue and an operating profit for the six months to 30 June. By contrast, WeWork, which has a much larger debt pile, negative shareholder equity and billions more in lease payments to manage, posted an operating loss of $555mn for the same period.
WeWork warned investors that its survival depended on its plan to improve liquidity and profitability over the next 12 months". This includes stopping existing members from leaving, bringing in new ones and cutting costs. The warning came as a surprise because the company had pushed back the maturities of much of its debt in March, through a deal with key shareholder Softbank. This also included a $1bn cash injection that was meant to right the ship.
With WeWork on the ropes and IWG’s revenues growing, the latter’s talk of a US listing could be seen as an attempt to take ground while also bringing in more optimistic US investors.
An IWG spokesperson told Investors’ Chronicle a US listing was “something the board has been thinking about and will continue to consider”.
“Approximately two-thirds of our revenue is US dollar linked,” the spokesperson added. “It’s not that there’s a problem with the UK market; it’s that the US may be a more appropriate market.”
Asked if IWG would consider taking on some of the leases of its struggling US rival, the spokesperson said: “This is not about WeWork. It’s about our business.”
The Reit stuff
In recent years, the landlords who WeWork and IWG might ordinarily rent buildings from have also become their competitors. The UK’s two biggest office Reits, Landsec (LAND) and British Land (BLND), have their own growing flexible workspace brands, Myo and Storey.
Meanwhile, Workspace focuses entirely on owning and renting offices flexibly. Workspace is the Reit most likely to grow to compete with WeWork and IWG because of its focus and scale, but the product offering is not exactly the same. Where Workspace offers space for months at a time, WeWork and IWG users can take space for a few weeks or days.
Of course, not all landlords want to create a flexible workspace brand, preferring long leases instead. Indeed, some depend on WeWork and IWG leases for most of their income. In 2017, WeWork rented more office space in London than any other tenant, according to data provider CoStar. Since then, WeWork has attempted to expand its footprint while the market has had to reckon with the fallout from Covid, with central London office occupancy still far below 2019 levels.
As such, many of WeWork’s landlords are in the unfavourable position of deciding between giving it lease incentives to keep going or reletting an empty city centre office building at a time when the future of the office is an open question. As Mike Prew, analyst at Jefferies, put in a recent analyst note: “[WeWork’s] rental obligations have little or no landlord recourse.”
The other thing giving WeWork and IWG the whip hand over their landlords is their model of leasing buildings via subsidiaries that they collapse if they cannot pay their rent, as IWG threatened to do during Covid. The messy practice has upset landlords in the past, but it does offer both companies protection. However, with $14.2bn in lease liabilities, WeWork may be past that point at this stage.
