If anyone was wondering whether WeWork can confirm its bankruptcy plan, the answer is yes WeWork can. While a court hearing on confirmation of the plan is scheduled for May 30, its emergence from Chapter 11 is essentially a foregone conclusion at this stage. I say that because I consulted with Eric, who is also a bankruptcy attorney, and has long experience
in reading the extensive documents that WeWork filed with the bankruptcy court.
The building blocks of plan confirmation are now all in place. The court has approved debtor in possession financing in the sum of $50 million to fund operations through confirmation, and an additional $400 million in post confirmation exit financing.
In addition, the potential competing bid of Adam Neumann has been seen off without even being considered. Yardi Systems, a software management company that is a senior secured lender will become the majority owner of WeWork as it emerges from bankruptcy. Informed observers are speculating that Yardi may be looking to flip the company in one or two years, perhaps to Neumann himself.
WeWork’s financial experts will opine at the plan confirmation hearing as to the validity of WeWork’s very optimistic projections that it will reach 85% occupancy at a time when employee attendance in New York City and the United States is in the range of 50 to 55% overall, depending on the source. The court will also consider that in its bankruptcy proceeding, that WeWork has amended approximately 150 leases and rejected or exited approximately 150 more leases. These lease rationalization efforts will result in an over $8 billion reduction in total future rent commitments (approximately $800 million annually), representing an over 40% savings on the rent that would have been owed. This was the point of the bankruptcy case which allowed it to emerge with a streamlined and hopefully profitable portfolio of locations. And let’s also not forget that for every dollar of WeWork gain from its effective use of the bankruptcy laws, there is corresponding landlord pain.
One interesting point that needs to be fleshed out is how many of these leases change WeWork’s traditional formula in which it leases large blocks of space from office buildings and effectively sublets tiny pieces of that space to individual subtenants who are called “members“. There has been discussion that WeWork has altered that structure in some instances to form partnerships or operating agreements with landlords which would reduce its potential obligations, and it will be fascinating to obtain additional detail on this issue.
Here’s the bottom line. At every stage of this case, Bankruptcy Judge Sherwood has indicated by his rulings that he wants to see this company reorganized and out of bankruptcy as is common for most bankruptcy judges, and rightly so. As a result, it is virtually certain that the court will deem that the WeWork plan is feasible and will therefore confirm WeWork’s plan.
But is that plan really feasible and can the new WeWork make it after losing the comfort and protection of the bankruptcy court? Will WeWork’s model actually yield a profit for the first time ever? Are its projections overly optimistic?
While those projections show WeWork becoming profitable in 2025, I am not a prophet. No one knows the answers to these questions for sure. However, one can reasonably conclude at this stage that the fate of WeWork will be closely tied to the fate of the office sector in general. In the past couple of years, that space has effectively been treading water so even though WeWork has done a great job executing its bankruptcy, future success is by no means guaranteed. Draw your own conclusion, and watch this space.
