WeWork could face a cash crunch as soon as February. Industry watchers think SoftBank, its lenders, and the entire industry has too much at stake to let it go under.
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- WeWork could face a cash crunch as soon as February and possibly even sooner.
- At the rate the company was burning cash in the first half of this year, it doesn't have enough on hand to last it another year.
- But analysts who spoke with Business Insider doubted the company will go out of business.
- WeWork's new co-CEOs are already moving to sell off extraneous businesses and assets, and the company's partners and investors will likely pony up more cash to help it survive, they said.
- Read all of Business Insider's WeWork coverage here.
With its planned initial public offering in trouble, WeWork could face a cash crunch in the first half of next year. But real estate industry experts doubt the company's partners will let it go out of business anytime soon.
At the rate it burned through its stash in the first half of this year, the coworking giant could be out of cash by the end of February. Even making generous assumptions about the amount of money to which it already has access, WeWork could be out of cash by July at current burn rates.
"The business model to date is losing money," said David Erickson, a senior fellow in finance at the University of Pennsylvania's Wharton School of Business. He continued: "They need a significant amount of capital."
But Erickson and other industry experts expect WeWork will get that capital, whether from previous investors such as SoftBank, from its lenders such as JPMorgan, or from the landlords to which WeWork has committed tens of billions of dollars in lease payments in coming years.
"I don't think they're in a liquidity crisis, because they have a lot of deep-pocketed partners who have a vested interest in WeWork not going to 0," said Scott Galloway, a former startup founder who, as a professor of marketing at New York University, has been sharply critical of WeWork's business and planned IPO.
WeWork representatives did not respond to an email seeking comment.
WeWork's finances are precarious
The coworking giant wasn't supposed to be in a position where it was running short of cash.
As recently as three weeks ago, the company was marching toward an IPO. The offering promised not only billions of dollars in cash from new investors, but also a $6 billion credit line from lenders including JPMorgan. The company looked like it would have enough in its coffers to last it for years to come, even at its prodigious burn rates.
But WeWork's offering went off the rails two weeks ago. In the face of resistance from Wall Street to its offering, WeWork postponed it, at first, just for the immediate future. Now, though, following the ouster of CEO Adam Neumann and the shakeup of its management team, WeWork's offering has been delayed to some indefinite future date.
That's a problem, because unless its lenders change their terms, the company's $6 billion credit line is contingent on it raising $3 billion in an IPO by the end of this year. Instead of seeing a windfall of $9 billion or more with that event, it now may get nothing.
Because of WeWork's copious cash consumption, that setback has the potential to be more than just a public relations black eye; it could threaten its ability to continue as a going concern.
At the end of June, WeWork had $2.5 billion of cash on hand. In the first six months of this year, it burned through $1.5 billion in cash, between its operations and investments in property and equipment for its offices spaces. At that rate, the company would run out of cash in a little more than 10 months from June 30 - or sometime in May.
But that may understate the precariousness of WeWork's finances. About $536 million of the cash it lists on its balance sheet is actually held by its partially owned subsidiaries, such as those that run its Chinese and Japanese operations. It's unclear how accessible that cash would be to WeWork's parent company in the case of a cash crunch. If it couldn't tap that cash, it could be out of funds in less than eight months from June 30 - or late February.
The company has big rent bills coming due
And things may be even worse than that for WeWork. The company's operations have consumed relatively little cash in recent years. In the first six months of this year, its day-to-day operations burned through only $199 million of the $1.5 billion it consumed in total.
Courtesy of WeWork
The company was able to reduce the outflow of cash from its operations by deferring $1.3 billion worth of rent in 2018. Due to an accounting change, it didn't disclose a comparable number in the first half of this year, but it's likely of similar or greater magnitude.
But the company has some big bills coming due. It owes about $869 million on property leases for the rest of this year and another $2.2 billion on such leases next year.
WeWork's new co-CEOs are taking steps to raise and save cash
To be sure, WeWork's new co-CEO's are already moving to shore up its financial position. They're planning to sell some of its non-core operations and its jet, which it purchased for $60 million last year. They're also reportedly planning to cut thousands of jobs and are putting on hold new lease agreements.
While such steps will likely reduce WeWork's cash burn and put more money in its coffers, they likely won't be enough to stabilize it for the long term, given that it owes $47 billion on leases going out into future years. But the new co-CEOs could take more dramatic steps, such as walking away from some of those leases.
Most of WeWork's leases are held by so-called special purpose entities, essentially legally independent subsidiaries. To preserve cash and protect the corporate parent, WeWork could have those entities default on their leases and send them through bankruptcy.
"They can walk away from some of those leases and not cause a corporate default," said Jeff Langbaum, a real-estate analyst with Bloomberg Intelligence. "They some have remedies," he continued, "to kind of keep things operating."
And if cash still gets tight, WeWork will probably be able to lean on its partners, none of which is likely to be eager to see it go under. Already SoftBank, which has invested $10.65 billion in WeWork and its subsidiaries to date, is reportedly considering giving it another $1 billion to help shore it up.
WeWork's partners will likely come to its rescue
SoftBank and WeWork's other investors have a lot at stake in its future and that will likely spur them to act, Langbaum said.
"There are probably ways for them to keep the company afloat," he said.
And WeWork's investors aren't the only players who will likely be motivated to come to its aid. The company is the biggest tenant in New York and London. Its landlords almost certainly don't want to see it default on its rents. There's no guarantee that they'd be able to turn around and release those spaces at the same rates they were charging WeWork, Erickson said.
"The landlords - they want WeWork to succeed," he said. He continued: "They're very important to the commercial real estate market."
Indeed, Erickson thinks there's a good chance WeWork's biggest landlords - which include Beacon Capital Partners, Nuveen Real Estate, and the Moinian Group, among other real estate companies - will pony up funds to help keep the company in business. Each one might be expected to invest $250 million or $500 million, he said.
And the big banks might well join in too, he said. Many of those landlords have taken out loans to purchase their properties. If WeWork were to go out of business, that event might imperil its landlords ability to payback their loans. So, even if particular banks haven't loaned money to WeWork, their finances might be tied anyway to its health.
"It's very important to the commercial property market" that WeWork gets new financing, Erickson said. Banks and the companies landlords might bail out the company, he continued, "just to save their own skin."
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