WeWork, which filed for Chapter 11 bankruptcy protection earlier this month, reported a wider third-quarter loss, hurt by costs to trim its real estate footprint and a decline in its large corporate enterprise memberships. Meanwhile, a number of landlords are voicing objections to its restructuring plan at a time when slow return-to-office rates and economic uncertainty are already hitting the sector hard.
For instance, in a court filing Tuesday, Kato International, which owns the Class A office building housing WeWork’s headquarters at 12 E. 49th St. in Manhattan, objected to the flexible office space provider’s request to “reject or assume executory contracts and unexpired leases.” WeWork first became a tenant in the Midtown East tower in 2016 with a lease for 10 floors before over time expanding to lease a total of 20 floors, Kato said in the filing.
WeWork is the largest tenant with 267,265 square feet in the 705,105-square-foot building, according to CoStar data. It’s the largest tenant with a footprint at least more than 10 times that of the next tenant, CoStar data shows.
“Reluctantly, today, Kato finds itself forced to request that this Court deny much of the relief sought by WeWork because it violates applicable law, is contrary to public policy and threatens to set dangerous precedents that strike at the very foundation of due process and fairness that underlies the bankruptcy process in the United States,” Kato said in the filing. “WeWork (represented by one of the largest law firms in the world) appears to be trying to play a game of “Gotcha” with unsuspecting mom and pop landlords in order to force them into what are effectively new leases that WeWork would otherwise be unable to obtain in any legal or consensual manner.”
In another example, New York landlord Walter & Samuels, a major unsecured creditor in the bankruptcy case, voiced its “limited objection” and “reservation of rights.” The company listed three of its properties — at 419 Park Avenue S, 315 W. 36th St. and 130 Madison Ave. — that are among the 69 unexpired leases WeWork has sought to reject.
A WeWork spokesperson said in an emailed statement to CoStar News the third-quarter results don’t “reflect the substantial progress” WeWork has made since October, adding it’s “confident” that the steps it’s taking will help it “build a financially stronger business.” WeWork didn’t immediately respond to a CoStar News request seeking comment about the landlord objections.
As part of its restructuring plan, New York is bearing the brunt of WeWork’s rejected leases, with 40 among the list publicized so far. The money-losing company has said it’s renegotiating with at least 400 landlords around the world, as its lease burden is the single-biggest obstacle to turning profitable.
The New York-based company also has struck a debt-for-equity swap plan with its lenders led by majority shareholder SoftBank. That plan involves reducing existing funded debt by about $3 billion in exchange for equity in the new WeWork. With that plan, the company aims to come out of bankruptcy with a fraction of existing debt.
WeWork’s headquarters lease isn’t part of the 69 leases it has sought to reject so far.
In a telling sign of the challenges facing WeWork, the company’s third-quarter results, filed with the U.S. Securities and Exchange Commission on Tuesday, showed while its current lease obligations dropped to $906 million from $936 million a year earlier, that amount alone topped what the company booked in revenue.
Net loss widened to $820 million from $629 million, after some $450 million of restructuring costs as WeWork wrote off assets and paid termination and other fees to get out of some locations and markets. Revenue dropped 3% to $794 million from $817 million. Its free cash flow was a negative $235 million, $30 million more than a year earlier even as the amount has declined about half from $441 million two years earlier.
Since 2019, WeWork has amended over 600 leases and executed on 295 full exits, cutting about $13.3 billion in total future undiscounted fixed minimum lease cost payments, the company said.
However, the lease restructuring plan aside, the company looks to struggle in its home market. Third-quarter revenue in the United States fell to $305 million from $360 million even as its revenue in the United Kingdom, Japan and other foreign countries gains, the company’s SEC filing shows. WeWork has said performance in U.S. and Canada markets have lagged behind other regions, hurt in part by increased competition including that from its landlords and an increase in sublet inventory. To be sure, some of the U.S. decline also reflects the fact it’s where WeWork has targeted a big part of its downsizing.
WeWork’s third-quarter physical occupancy rate fell 71% to 72%, hurt by a 5% decrease in physical desk memberships, combined with a 4% drop in workstation capacity, the company said. In a bright spot, all-access and other memberships rose 9%.
Total memberships dropped 4% to 709,000 memberships from 739,000 memberships a year earlier after the rate of decline quickened to 6% since December. WeWork said the “churn” from its enterprise members, referring to companies with at least 500 employees, is a key culprit. A case in point, enterprise memberships accounted for 38% of membership and service revenue, down from 46% a year earlier, WeWork said in the filing.
