When WeWork emerges from bankruptcy, it will likely have a surprising new owner.
Yardi Systems, a Santa Barbara-based software company with no experience in real estate management, would run WeWork if the bankruptcy court's plan is approved.
Why would Yardi, a property management software business, want to buy a coworking company that hasn't been able to turn a profit since it was founded?
There's been a lot of speculation about Yardi's intentions. Some speculate that the company, led by the media-shy Anant Yardi, will somehow combine WeWork's real estate with Yardi's software business. It's all Yardi's grand plan. WeWork is finally a tech company. Yay!
But the more likely scenario is that Yardi sees a bargain, wants to recoup its initial investment, and has a degree of familiarity bias after working with WeWork for two years.
Industry sources said Yardi was “putting a penny behind a pound”, meaning the company had already invested in WeWork and so rather than cut its losses it doubled down.
Yardi initially partnered with WeWork in 2022 to help launch the app, and then helped restructure the company through its investment arm, Cap-a-Grimond. (A steak dinner will be awarded to anyone who can figure out the background of this unnamed wholly owned subsidiary.) Yardi was WeWork's third-largest shareholder last year.
Yardi was also a senior secured lender in the bankruptcy, so its agreement to lead WeWork's $450 million rescue was not unexpected.
The expectation is that Yardi will hold onto the company for a year, maybe two. WeWork is valued so low at around $765 million that it can only go up. Then Yardi will combine the two companies, cut overhead, and sell to another flex-space company, probably IWG, that can realize economies of scale. Yardi will then exit and go back to selling software with a little cash in its pocket.
Could that happen? Former WeWork CEO Adam Neumann has claimed the sale of WeWork to Yardi was an inside job, but he's already offered $650 million to buy his old company, meaning there's at least one potential buyer.
The investment firm had previously explored partnering with Industrious to acquire WeWork and had also considered buying IWG, according to the sources.
If you believe the office sector has hit bottom, or that hybrid working at least has a future, buying out bankrupt companies and the attractive leases they held is also not a bad bet.
According to CBRE, roughly 50% of real estate executives believe coworking spaces will account for more than 10% of their office portfolios by 2025. The theory is that companies adopting hybrid work schedules prefer flexible lease agreements with coworking providers over long-term contracts.
Bondholders also believe in the plan, committing $112 million to the project, which is a good sign.
WeWork would be in a better position if it didn't file for bankruptcy. The company has closed about 150 of its 450 locations. It would have zero debt (bondholders' stakes would be converted into equity). The company has reduced its future debt by $8 billion.
“We will have the best portfolio, lease terms and capital structure to sustainably operate this business into the future,” a WeWork spokesman said in a statement.
But profitability is far from certain: The company projects that office occupancy rates will rise to 85% in five years, a figure that Neumann and others say is unrealistic. Office occupancy in New York stands at just 50% in buildings equipped with Kasul Systems' card-swiping technology, but it's higher on weekdays.
WeWork claims that 90% of its leases have a “path forward,” but it's unclear what that corporate jargon actually means. It's hard to value the company because WeWork hasn't disclosed concessions from landlords. The company doesn't plan to add new locations, and membership growth is limited to existing members.
WeWork had been the “it” company in co-working spaces for a while. Under Neumann, it was the largest private office tenant in Manhattan, and even after lead investor SoftBank ousted him, the company maintained it still had brand power.
Other coworking companies like Industrious and IWG also grew, but more carefully. While they continued to expand, WeWork had to do the opposite. Restructuring was essential, but it was that much harder to sell to customers. Gone were the startup cool places with free beer and “hive mind.” In their place were cost-effective flexible workplace providers that operated as trustees to creditors. Sound appealing?
Yardi, meanwhile, has said little about its strategy beyond saying it plans to set up a separate entity to manage WeWork, distanced from its core business.
“Our fundamental value proposition remains intact and we believe it will be successful in the future,” Yardi said in a statement.
WeWork predicts its revenue will more than double by 2028, with net income reaching a record high of $343 million.
But here's the problem: For a company with 24 million square feet of office space, that's not a lot of money, with limited room for upside and a tricky business model of leasing and then subleasing office space.
In the 2010s, Neumann pitched his real estate company as a technology company. Now, tech company Yardi is trying to buy the real estate company. Who wants that?
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