At least one analyst issued a downgrade on WeWork's stock a day after the flexible office provider reported a second-quarter drop in memberships and warned “substantial doubt exists” about its ability to continue as a going concern unless it can turn profitable in the next 12 months.
WeWork shares, trading below $1 since March and closing at 21 cents a share Tuesday, fell about 40% Wednesday. The company said it withdrew $175 million in July of $680 million in liquidity it had at the end of June.
“We were wrong,” BTIG analyst Thomas Catherwood, who on Wednesday downgraded his rating on the stock to neutral after beginning coverage in November with a buy rating, said in a note. “Flexible workspaces have a future in the office ecosystem, but WeWork, in its current state, may not.”
While pandemic-driven hybrid schedules of working just some days in the office are expected to play to WeWork’s benefit, uncertainty in the broader office market is hurting the company, interim Chief Executive David Tolley said Wednesday on a second-quarter earnings call.
The “commercial office environment has become more challenging since the start of the year,” said Tolley, who became interim CEO after former CEO Sandeep Mathrani left in May to join private-equity firm Sycamore Partners. “Even though WeWork is not competing directly with traditional leased office, we aren’t immune to the multiyear high vacancy and weak pricing in the market.”
WeWork’s membership demand has been hit by “unprecedented amount of sublease space available,” including from its own landlords and from increased competition from other flexible space providers, Tolley said, adding “a dearth of available funding for venture and early stage growth companies,” coupled with high interest rates and inflation, ate into demand and the bottom line.
Startups are known to be among coworking space occupiers as some have cited getting amenities without having to shell out for the cost of a traditional office lease.
“Our investment thesis was predicated on a continued occupancy recovery in the flexible workspace sector that could, in turn, allow the company to reach profitability without the need to raise incremental capital,” BTIG's Catherwood said in the report. “We are no longer confident that the company can reach profitability without the need to raise incremental capital.”
WeWork declined to comment beyond what Tolley said in its earnings statement and on the call.
Trailing in US, Canada
Various studies have pointed to record-high sublet availabilities in areas such as New York, WeWork's top market alongside London.
By regions, WeWork's occupancy rate in the United States and Canada trailed other markets by well more than 10 percentage points. The combined occupancy rate in the United States and Canada remains “sluggish” and dropped to 67% last quarter from 69% in the first quarter, as the region has a slower-than-expected return-to-office rate and WeWork is “oversupplied” in some markets, Tolley said. The rate in Europe and the Middle East, meanwhile, dipped to 78% from 79% quarter over quarter while in Asia it was flat at about 83%.
WeWork has recently attracted additional interest from major corporate clients. For instance, Amazon inked some 300,000 square feet of new and renewal space in New York. Tolley, without identifying the name, said one of the world's largest tech giants signed both new and renewal deals at 17 locations in 15 different markets from Vancouver to New York to London.
As demand remains uneven, WeWork, which has exited or amended 590 leases since the fourth quarter of 2019 and cut $12.7 billion in future lease payments, plans to cut more of its rent expenses, which represent 74% of its revenue and two-thirds of its operating expenses, Tolley said.
“Cash rent and tenancy [costs] continue to be the primary challenge and obstacle to [WeWork’s] profitability and free cash flow,” Tolley said, adding “addressing the issue” is “critical” to WeWork’s success. WeWork, like its other coworking space rivals including IWG and Industrious, is focused on what it described as an asset-light strategy by seeking partnerships with landlords without it being saddled with lease costs.