From WeWork to We Don't Work

A wave of demand disruptions is about to bring severe consequences to the company if it doesn’t let go of leases soon

Andrew Willis 29 June, 2020 | 1:28AM

 

 

It’s hard to imagine how things could have gone worse for WeWork. From the market skepticism of the basic business model right before its IPO, to a battle with its biggest investor, to a pandemic not seen in a century. There comes a time when you need to call it quits – at least a little bit.

DBRS Morningstar says it’s questionable whether WeWork is going to recover from the coronavirus, and it’s time to break a few leases. The company already owed 47.2 billion U.S. dollars to landlords before the crisis and had its valuation dropped by SoftBank to the billions in the low single digits. WeWork now faces a new normal of working from home, and the unfortunate possibility that small and medium-sized businesses, making up the bulk of tenants, will be the most affected by ongoing economic turmoil.

The company is going to suffer in 2020, but how bad it gets depends on how many leases they get out of. WeWork CEO, Sandeep Mathrani expects a Hail Mary from public schools, But we believe that even these new customers won’t be enough to curb an existing deficit at its properties. Even if WeWork is willing to let go of a few offices, we fear an overwhelming number of landlords won’t be wanting to renegotiate.

From a credit perspective, DBRS noted that there’s just a few billion dollars U.S. at risk. But the concentration risk for holders of those commercial loans could mean big trouble – 36% of loans are in New York alone. One thing’s for sure. This IPO-that-didn’t-happen could have been a blessing in disguise for us retail investors. For

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Andrew Willis

Andrew Willis  Andrew Willis is Content Editor for Morningstar.ca

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