Here's What To Expect At WeWork With Sandeep Mathrani In Charge

WeWork employees shouldn’t expect rock star antics from incoming CEO Sandeep Mathrani, but his calmer presence is exactly what the company needs if it is to be salvaged, analysts say.

Mathrani starts his leadership post at WeWork Feb. 18, the company announced earlier this month. The former CEO of Brookfield Properties’ retail group is known for his turnaround of Chicago-based mall owner GGP following its 2010 bankruptcy and overseeing its $15B sale to Brookfield in 2018. 

His experience in that financial recovery, as well as his relationships with landlords, investors and other real estate stakeholders are an asset to WeWork at a time when tenants want the office market to take on a consumer-facing feel similar to the retail and hospitality industries. 

“He’s not a rock star like Adam Neumann, but on the other hand he has those things the company was missing over [the] last few years. He’s very humble and very focused on the bottom line,” said Dror Poleg, Urban Land Institute's Technology and Innovation Council co-chair and author of Rethinking Real Estate. “The employees can learn to respect and appreciate him. I think they’re hungry for some guidance and adult supervision.”

Mathrani left Vornado Realty Trust for GGP in 2010, a year after the mall company filed for bankruptcy after failing to refinance $27B in debt. By the time Brookfield bought GGP eight years later, the formerly struggling mall owner had become one of the leading U.S. retail operators with roughly 123M SF of retail across 120 properties. He took home $189M in the sale.

His ability to repurpose the portfolio, much of which suffered from shuttered big-box stores at the start of his tenure, into retail destinations customers wanted to repeatedly visit will be key in boosting WeWork’s own appeal following its financial collapse in late 2019. 

“If anyone can convince someone to enter into a partnership, a revenue-share arrangement or try a franchise deal, it’s [Mathrani],” Poleg said.

Following its failed IPO and Neumann’s departure in 2019, WeWork released a five-year strategic plan in November that focused on its core workspace business. That included continuing long-term leases in top markets while taking an “asset-light” approach in other markets, such as revenue-sharing joint ventures, franchising and management agreements, a WeWork spokesperson told Bisnow Friday.

WeWork had $47.2B in lease obligations at the end of June 2019, according to its IPO prospectus. Some of that rent burden stems from the company’s willingness to pay above-market rents — sometimes at a 20% premium — in order to grow as quickly as possible.

But while debt restructuring and lease renegotiations may seem similar to the GGP turnaround, Mathrani’s prior success isn’t guaranteed to work the same way with coworking, said Todd Sullivan, the author of the ValuePlays investment blog and a GGP investor during its bankruptcy. 

GGP’s balloon loans that came due during the financial crisis spurred the Chapter 11 bankruptcy filing, Sullivan said. Had they been due a few years later, the loans may have been better candidates for refinancing. 

“Maybe Mathrani can shrink WeWork’s operation, but I don’t view it and the GGP scenario in the same way. It was a very specific set of circumstances that caused that, and I don’t think that set of circumstances was at WeWork,” Sullivan said. “WeWork got way ahead of its skis and he has to find a way to get under the skis.”

Increased cash flow can’t come soon enough for WeWork, according to Sarah Travers, the CEO of Workbar, a Boston coworking company.

“The only solution to turn this ship around and to get it on a path toward profitability is to close the locations that do not have a chance to become cash positive,” Travers said. “There’s literally no other way to do it.”

Coworking is all about margins and, to become cash-positive, Travers said Mathrani needs to fulfill WeWork’s pledge to offload non-core businesses, clean up its corporate governance and start charging members full-price rent. As recently as August, Travers and multiple broker sources said WeWork was promising customers as much as 24 months of free rent along with moving and cancellation fees if they left Workbar or other companies to move to a WeWork space in Boston.  

“They were basically buying revenue, so there’s no place to go but up,” Travers said.  

Mathrani needs to find more than one way to boost cash flow, as WeWork came close to running out of money until SoftBank took control in October with a $9.5B bailout. The easiest way to generate income is a mix of shedding assets, restructuring WeWork’s debt and renegotiating leases, analysts interviewed for this story said. 

WeWork has already started to sell its non-core assets like investments in tech startup Teem and female-focused coworking operator The Wing. While the company maintains it will continue to grow in 2020, it was also reportedly reconsidering as many as 100 newly signed leases at the end of last year. 

Sullivan said if anyone can keep the coworking company afloat through its current set of circumstances, Mathrani would be that person. WeWork is the market leader in an office industry sector still expected to grow in coming years due to tenants preferring shorter-term leases and more services.

But Mathrani will also need to tap into his institutional experience with Brookfield. Overseeing GGP’s transition from struggling company to an institutional investment target enabled Mathrani to understand various stakeholders’ interests and how to balance them in a sustainable way, Poleg said.   

“I don’t think you need to have lightning strike twice,” Poleg said. “It’s a game of skill, not a game of luck, and there are plenty of things that can still be done. I mean, it’s still in the hole, but WeWork also [has] a lot going for it.”

The office sector is doing what the hospitality industry did years ago by splitting into specialized entities that do specific things, with different investors and different expectations, Poleg said.

REITs own hotel assets that aren’t consumer-facing or have distribution. Hotel brands typically don’t own buildings or spend money on build-outs, rather they own franchises, have their own distribution and design capabilities, and tell landlords what to do. 

SoftBank still controls WeWork, and its chief operating officer and international CEO Marcelo Claure will remain WeWork's executive chairman. While SoftBank has billions invested in making sure WeWork remains a market leader, Mathrani is also expected to be the key decision-maker going forward.  

"I don’t think they were hoping to get another superstar who makes a lot of noise and wears cool T-shirts," Poleg said. "I think they’re happy to have someone who knows what he’s doing because, at the end of the day, everyone wants to have a nice job and feel like they’re being appreciated."

Mathrani will have to be careful to keep WeWork’s brand appeal. Neumann proved there was demand for an entity like WeWork to fill the gap between landlords who didn’t want to take on the risk of short-term leases and tenants who only wanted shorter deals, and he filled it with style.

But the company’s new leader will have to carve a path toward profitability, a goal Neumann didn't take seriously, as evidenced by the IPO prospectus that admitted the company had no timeline for bringing in more money than it spent.

“At the moment, we have it where people are experimenting with different models,” Poleg said. “There is no standard yet on what is correct, but what is very clear is using venture capital money in order to sign leases and pay for construction is not correct.”