In a cost-cutting move, WeWork plans to close 40 U.S. underperforming shared office locations while seeking to capitalize on growing global demand for flexible workplaces in a bid to turn profitable.
The 40 locations, totaling about 41,000 workstations, will be mostly closed in November, WeWork said, adding most of the members involved have already been relocated to other sites. The New York-based company said while the closings will hurt its revenue, the decision will be more than offset by lower rent and operating expenses, contributing about $140 million to its annual adjusted bottom line.
WeWork will pay a combined $200 million over the next 15 months in rent to exit its leases in those locations, CEO Sandeep Mathrani said Thursday on a conference call. He said the 40 offices don’t meet “design criteria, have obsolescence or there’s an oversupply” in their respective markets.
The closings add to over 240 full-lease exits and 480 lease amendments that WeWork had taken from the beginning of 2020 through the third quarter as the high-profile company focused on increasing profitability. After growing for almost a decade, the company had to scrap its first attempt at an initial public offering in 2019 amid investor concerns about corporate governance. That led to the ouster of co-founder and CEO Adam Neumann, and subsequent management led the company to go public through the use of a special-purpose acquisition company, or SPAC, last year.
WeWork will have 608 consolidated locations after the closings. That’s down from 631 a year earlier. Including franchised markets, it will have a systemwide count of 762 sites, a reduction of only two from a year ago.
The company, meanwhile, plans this year to open over 20 new locations globally, including about 18,000 workstations, through both traditional office leases as well as new management and revenue share agreements with landlords without it taking on leasing risk, an area of business that’s a focus of growth.
“With this management/revenue share model, WeWork will receive [about] 10% of revenue from effectively licensing its brand to the building operator,” Cantor Fitzgerald analyst Brett Knoblauch said in a report Thursday. “Beyond 2024 this will be an important driver of capacity growth and revenue growth, and further believe these agreements to be much higher margin for WeWork than its traditional lease model.”
Loss Narrows
WeWork’s third-quarter net loss narrowed to $629 million from $844 million a year earlier. Adjusted bottom line excluding items narrowed to a $105 million loss from $251 million. Revenue rose 24% to $817 million, but it would have jumped 33% without the impact of a stronger dollar that hurt translated overseas sales.
Physical occupancy at its consolidated locations, which exclude franchised locations in China, Israel and India, rose to 71% from 56% a year earlier. That was the highest rate in at least two years.
Consolidated gross desk sales rose to 162,000 from 153,000 a year earlier. All-access memberships, which WeWork introduced last year and give access to over 500 locations worldwide, more than doubled to 67,000.
WeWork, which in July introduced its Workplace software, said it has signed over 100 companies making up over 15,000 licenses. The software helps companies, increasingly adopting a hybrid work schedule of employees working some days in the office, manage their space. It lets employees book meeting rooms and other office areas, as well as see where and when employees are using facilities.
“The headwinds in the office space are really benefiting the flex model,” Mathrani said on the call, adding flex offices have taken growing market share from traditional office leasing space. He pointed to WeWork’s two largest markets, New York and London, signing the equivalent of 15% and 35% of the overall office square footage leased in the third quarter each even though WeWork represents only about 1% of total market stock in those cities.
Still, WeWork cut its full-year revenue and adjusted bottom line outlooks in part because of the planned closings and negative impact of currency translations. The company also said growth in its operations in the United States and Japan is moving slower than expected even as the overseas market overall continued to outperform.
Global competitor IWG is also benefiting from heightened demand for hybrid workplaces, reporting 25% revenue growth in the third quarter.
Debt Extension
Against the backdrop of various market wildcards including a looming possible recession and higher interest rates that have seized up lending activity, WeWork signed an agreement to extend the maturity date of $500 million senior secured notes to March 2025 from February 2024, Mathrani said on the call, adding an affiliate of Softbank Group, its majority shareholder, will “continue to provide credit support.”
“We believe this is important as Softbank is the largest holder of both debt and equity,” Fitzgerald’s Knoblauch said. “Its willingness to participate on the debt side reduces the probability that WeWork will face a severe liquidity crisis.”
WeWork also said it had “access to liquidity” of approximately $1.5 billion at the end of the third quarter, including about $460 million of available cash and cash equivalents.
Mathrani noted uneven results by market, showcasing different paces of recovery from the pandemic that has disrupted office use around the world.
“We are seeing no slowdown in activity internationally,” he said on the call, adding the “footfall” in Europe has returned to the pre-pandemic level while in markets such as Paris and Milan, it’s even exceeded the pre-COVID performance. WeWork also “continued to see demand” in Europe from enterprise customers, or companies with more than 500 employees.
In the United States, demand from small- and medium-sized businesses is driving WeWork’s business and has “only accelerated,” Mathrani said.
Those businesses represented about 70% to 75% of WeWork’s U.S. leasing activity, an all-time high, a trend that has taken place the past 15 to 16 months, he said.
While large cities such as New York and San Francisco posted occupancy of over 80% each in the third quarter, others including Boston trailed at below 70% while Chicago, Minneapolis and Portland, Oregon, fared far worse at below 50%, according to a company presentation.
WeWork forecast full-year revenue to be $3.35 billion to $3.37 billion and adjusted earnings before interest, taxes, depreciation and amortization to be a loss of between $515 million to $535 million, more than it had previously projected.