WeWork’s Investment Arm Was Supposed To Be A $3B Giant. Instead It’s Selling Assets And Defaulting On Loans
When it was officially launched in May 2019, it was supposed to be a $2.9B office investment giant, with $1B of equity from one of the world’s biggest pension funds. Instead, WeWork’s investment division has turned into something far more complicated.
WeWork Capital Advisors, as the division is currently known, is selling a significant portion of its assets and defaulting on loans. At one of the biggest buildings it owns, its largest tenant has stopped paying rent and wants a lease restructure. That tenant is WeWork itself.
The coworking giant's fund management arm is only a small part of the overall WeWork business, and its issues are secondary to its fight to make a profit and stave off a cash crunch. But it serves up another example of a grand plan in the WeWork empire going awry.
“Those legacy investments and businesses are not the company’s focus and they’re not devoting a lot of resource to them,” said Piper Sandler Managing Director Alex Goldfarb, who covers the companies shares. “Since [CEO] Sandeep Mathrani came in, the company has focused on its primary offering of flexible offices.”
Goldfarb said any expansionary plan put in place by WeWork co-founder and former CEO Adam Neumann should be considered obsolete now. Neumann stepped down in late 2019 after a failed IPO attempt as WeWork came close to running out of cash.
“It’s like something you don’t throw away, but you throw it in a closet and don’t see it again for years,” he said. “Does it affect you? No. And then a spouse or partner tells you to get rid of it. You don’t spend any time on it.”
WeWork declined to comment on the future of its fund management business, whether asset sales were a sign of it being wound down or whether it would look to raise new capital.
"Whilst [WeWork] retains a majority stake in the manager entity, WeWork Capital Advisors is an independent registered fund and as such operates independently from WeWork on behalf of their funds' investors,” a spokesperson said.
“WeWork Capital Advisors operates as a separate business from WeWork's operations and is overseen by a separate management committee that advises on the fund's investments.”
Securities and Exchange Commission filings showed that at the end of March this year WeCap, as the division is known at WeWork, had $886M in assets under management — significant, but well short of the $2.9B promised in 2019.
Another analyst who covers the company’s stock said the current focus of WeWork puts the division in an uncertain position.
“Talking to management, they are not in the market to invest in properties or take on new leases, they want to be asset light,” Mizuho Managing Director Vikram Malhotra said. “Adding any business plan that adds to operating expenditure is not on the agenda.”
Since its founding by Neumann and Miguel McKelvey in 2010, WeWork had bought the odd small property here and there in New York City. But in late 2016, acquisitions took a step up when the company formed a joint venture with private equity firm Rhône. The venture started raising equity for a fund called WeWork Property Investors in 2017, raising $745M by mid-2019.
Initial deals undertaken by the fund included the 358K SF 1333 New Hampshire Ave. in Washington, D.C., bought for $133M in late 2018, according to CoStar data.
The fund also made a big push into London.
It paid £47M ($61M) for the 85K SF 51 Eastcheap in the City of London in May 2017; £43M for the nearby 113K SF 120 Moorgate in September that year; and in May 2018, it made one of its most eye-catching acquisitions, taking a 10% stake in the £580M acquisition of the 13-building, 637K SF Devonshire Square campus in the City. U.S. pension fund TIAA and Danish pension fund PFA provided 45% of the equity each.
That deal was supposed to be an exemplar of the thesis behind WeWork investment deals: The company’s investment vehicles would buy the asset and WeWork would occupy all or most of the office space, paying good rents, often refurbishing and managing tired, older stock, filling it up with companies and individuals paying good membership fees, and increasing the value of the asset. A virtuous circle.
The biggest deal undertaken by WPI was the $853M purchase of the 650K Lord & Taylor department store on Fifth Avenue in New York. The building was to be renovated, with 150K SF remaining as a department store, and 500K SF becoming WeWork’s HQ.
The deal was agreed in mid-2018 and closed in February 2019. WeWork itself directly owned 17% of the equity, according to 2022 company accounts, WPI owned 45%, and another investor, most likely previous building owner Hudson’s Bay Co., owned the other 38%.
A $900M debt facility was tapped to buy and renovate the building, of which $626M was initially drawn down.
May 2019 marked a major coming-out party for WeWork’s real estate investment ambitions. The company announced a joint venture to buy office property with Ivanhoé Cambridge, the real estate arm of Canadian pension fund Caisse de dépôt et placement du Québec, which has $56B of assets under management.
Called Ark Capital Advisors, it would have around $2.9B of equity to invest, with $1B from Ivanhoé and the rest coming from WeWork and Rhône’s investors.
“I think we will complement each other beautifully,” Ivanhoé Chief Investment and Innovation Officer Sylvain Fortier said in a statement at the time.
The pre-IPO S1 filing from September 2019 showed that the management of WPI and Ark had been combined into one overall unit, the investment manager today called WeCap. That business is 80% owned by WeWork and 20% by Rhône, 2022 results showed.
The S1 revealed that WPI was an open-ended commingled fund, whereas Ark Master Fund, the new vehicle, was a close-ended fund first established in February 2019, meaning it has an end date by which it must stop striking new deals, start selling assets and give money back to investors. It did not say when that date was.
According to the filing, the investment management business had secured $2.9B of equity commitments and bought or entered into agreements to buy $3B of assets. But that $3B business never materialised — the JV with Ivanhoé only bought two assets, for a total of $400M.
WeWork had hoped to go public at a valuation of $47B in 2019, but the lack of corporate governance at the company revealed by the pre-IPO filing and worries about whether the company could ever become profitable led to the IPO being pulled. It also brought on Neumann's ouster and biggest shareholder SoftBank having to put up fresh capital to stop the loss-making company from running out of cash.
Incoming CEO Mathrani put the focus on cutting costs: reducing staff headcount, and exiting leases on buildings that were not profitable in order to cut the company’s liabilities.
“In any business, there is generally an 80/20 rule,” he told Bisnow in 2020. “You have 80% great assets, 20% are not so good. It is a real estate analysis, working out which assets are good, which not so good, and which you want to exit.”
Amidst the turmoil of exiting leases, cutting staff and preserving cash, all undertaken while a pandemic was raging, buying new properties was not a priority for the company.
CoStar data showed that WeWork made four acquisitions after the formation of the JV with Ivanhoé: the $57M purchase of the 90K SF 801 Barton Springs in Austin, Texas, in April 2019; the $123M (£95M) purchase of the 99K SF 142 Wardour Street in Soho, London in May 2019; the $85M (£67M) purchase of 99 Queen Victoria Street in the City of London in July 2019; and the $332M purchase of the 363K SF 600 California St. in San Francisco in August 2019.
The building at 801 Barton Springs was a JV with Ivanhoé and other investors, as was 600 California St., an acquisition that is now under stress, and which shows the downside of a company being both owner and occupier.
The deal was made using a $240M loan from Goldman Sachs and Citi that was then securitised, or sliced up and sold on to bond investors. Ivanhoé owns 49% of the building, according to a presale report of the securitised bonds prepared by S&P. A Eurasian sovereign wealth fund owns 29%, WeWork accounts for 3%, Rhône has a 2% interest, and a group of other investors owns 17%.
After a payment default on that loan in February this year, the loan was transferred to special servicing, according to a report from DBRS Morningstar. The special servicer said WeWork had stopped making rental payments on the building, an asset it owned itself alongside a JV it helped establish. WeWork occupies 52% of the building and is seeking a lease modification.
“It is uncertain to what degree the terms of the modification may affect the subject’s net cash flow (NCF) and ultimately the loan’s ability to meet its debt obligations,” DBRS said, noting that there have been interest shortfalls for the past two months. DBRS has placed the bonds under review for a potential negative downgrade.
Ivanhoé did not reply to a request for comment on its JV purchases with WeWork.
The benefits of WeWork as an occupier of a building it owns did not materialise as hoped at Devonshire Square in London either. When the building was bought in 2018, WeWork occupied about 20K SF on the campus, with a plan to increase its occupancy beyond 200K SF, bringing the scheme to fully let.
Rather than take a standard lease, WeWork agreed a revenue-sharing deal with its partners and was the asset manager of the campus. The company did increase its occupancy to about 230K SF, and at one point was paying about a third of the rent, according to filings from loan servicer Mount Street. It has since scaled back, exiting some space, and now only pays about 11% of the rent at the scheme, which sits 25% vacant.
In September 2022, WeWork was bought out of the JV that owns Devonshire Square by TIAA-owned Nuveen and partners. WeWork’s 2022 accounts show that it sold its interest for $46M, a $100K gain.
WeWork’s ownership of the Lord & Taylor building lasted just over a year. In July 2019, it held talks with Amazon about leasing some or all of the building’s soon-to-be-made-over office space to the tech giant. But in March 2020, the JV that owned the building sold it to Amazon for $978M.
WeWork took a $54M impairment loss on the sale, its accounts show, while the other investors in the venture made a $43M gain. At the time of the sale, WeWork agreed a deal to renovate the building for Amazon.
One significant success when it comes to sales was 120 Moorgate in the City of London. Bought for £43M in September 2017, the building was sold to Singaporean investor Sun Ventures for £148M last year.
Now WeWork is selling more of its London assets, a process that will reduce its assets under management further.
It is marketing 99 Queen Victoria Street for £68M, about the same price as it paid for the property in 2019, CoStar reported in February. And React News reported WeWork had found a buyer for its Wardour Street property for about £140M, another significant uptick over what it paid for the building after undertaking significant refurbishment of the asset.
Selling into the current market presents its challenges, although there remains liquidity for good quality smaller assets, Green Street analyst Marie Dormeuil said.
“There have been a few deals that have closed in recent months, but the problem is sellers have not yet agreed to write-downs,” she said.
Where deals have gone through, good-quality assets are trading at 10%-20% discounts to values before interest rates rose last year, with poorer assets trading at 20%-30% discounts.
“It could be more if interest rates continue to rise,” Dormeuil added.
Another seemingly complicated situation for WeWork exists at Waterline, a 74-storey development in Austin, Texas, which broke ground late last year, and will feature 352 luxury apartments, 703K SF of offices and 27K SF of retail. At 1,022 feet, it will be Austin’s first supertall tower and one of the tallest buildings in Texas.
The building is being developed by Lincoln Property and Kairoi Residential, but when the project was announced in 2019, there were several reports that WeWork was one of the owners of the scheme. By 2022, when the groundbreaking was announced, there was no mention of the company at all.
WeWork’s 2022 accounts show that a three-way joint venture with two other unnamed parties does indeed own an 8% stake in the project through a subsidiary called WeWork Waller Creek. Lincoln declined to comment on whether WeWork was involved in the project or would be taking space at the scheme.
For WeWork, the big challenge is making its core coworking business profitable. The company announced this week the expiration and results of a notes exchange offer, a restructuring with SoftBank that sees debt converted to equity and its debt pile reduce by about $1.4B. S&P said that amounted to a selective default on its debt.
All eyes will be on its Q1 results Tuesday, May 9, especially its occupancy and profitability figures. WeWork finally listed via a SPAC in October 2021, with its shares priced at $10. They are valued today at less than 50 cents.
Piper Sandler’s Goldfarb is a believer that Mathrani can turn the company around.
“After Meghan and Harry, WeWork is who people like to throw bricks at most,” he said, pointing to its restructured debt, meaning the company has no significant maturities until 2027, and the fact Mathrani is doing a good job streamlining the company.
But Mizuho’s Malhotra was more bearish. Projections of when the company will become cash-flow positive have been pushed out from 2023 to 2025. And the company’s forecast that it will raise the current occupancy level of 75% to 82% by the end of this year and to 88% by the end of 2024 seems optimistic in a tough job market, he said.
“We’re sceptical,” Malhotra said.
UPDATE, MAY 3, 5:23 P.M. ET: Bisnow has confirmed that the Ark JV between Ivanhoé, WeWork and other investors bought only two properties. The story has been updated.
CORRECTION, MAY 5, 2:09 P.M. ET: An earlier version of this story had the incorrect title for Marie Dormeuil. It has been updated.
