Sandeep Mathrani On Why He Decided To Save WeWork And How He Plans To Pull It Off
The company had problems — big problems — but a lot going for it, too.
“I find it invigorating to find solutions. I like the adrenaline, like when you are running a marathon and the endorphins kick in,” Mathrani, the recently installed CEO of the world’s most high-profile flexible office company, told Bisnow in an extended interview last week. “There were a lot of levers to pull to make it profitable.”
WeWork is the most visible, and potentially the most arduous, turnaround job real estate has seen in living memory. Mathrani gave Bisnow the most detailed insight so far into the restructuring strategy that he is implementing, alongside Executive Chairman Marcelo Claure, SoftBank Group's chief operating officer.
There is no silver bullet: Every single one of WeWork's 828 locations is being reviewed, every building analyzed, Mathrani said. Sensitive negotiations with landlords and members are ongoing, some of which Mathrani conducts himself, with a variety of strategies being employed to try and turn around loss-making locations, which he said account for about 15% of WeWork's portfolio.
"About 85% of our buildings are profitable, so there, the model works going forward," Mathrani said. "With the others, we are being friendly and collegiate and trying to find a situation that is a win-win for us and our landlords.”
Rent cuts, lease extensions, management agreements and exiting locations are all in play in a restructuring that is playing out asset by asset. Somewhat surprisingly, Mathrani said he expects the company's footprint to actually grow between now and the end of 2021.
Nevertheless, WeWork has slashed more than 8,000 jobs in the past nine months, reducing its headcount by 60%, all of in pursuit of the one thing people in real estate and beyond never thought WeWork would achieve: profitability.
WeWork has collected 75% of rent during the pandemic lockdown, he said, and it is trying to balance keeping members happy and healthy with bringing in as much revenue as possible. WeWork’s Q2 figures haven't yet been released, but Mathrani said the company is ahead of its 2020 budget, even taking into account the impact of the coronavirus.
The company lost almost $2B in the first three quarters of 2019, despite making $3.5B in revenue, and it burned through $1.4B of cash in Q4. An autumn initial public offering, gunning for a valuation of $47B, was canceled after stock market investors balked at buying shares in a company that admitted it foresaw no path to profitability.
Enter Mathrani in February, fresh from having turned around shopping mall giant GGP, another company that faced problems after a founder expanded it too fast. He came from Brookfield, which bought GGP for $15B in 2018, seven years after he took over as CEO, out of bankruptcy.
Almost immediately after Mathrani took the reins at WeWork, the coronavirus pandemic rendered many of the world’s offices empty overnight. Many, like rating agency DBRS Morningstar, thought the pandemic would be the death knell for a company that already had significant financial challenges.
But in spite of all this, Mathrani confidently predicted that WeWork would be EBITDA profitable at a corporate level by the end of 2021, producing free cashflow, in the event that the coronavirus doesn't cause a severe and prolonged global recession.
The company is not there yet, but, he said, “From this point forward, I feel we are on the right path.”
Mumbai-born and U.S.-educated Mathrani was speaking to Bisnow over Zoom, dressed in a baggy white T-shirt, as he explained the reasons why he stepped into the breach at WeWork.
“No. 1, WeWork is a verb,” he said, describing how it was a brand name that had penetrated the wider public consciousness in a way that few office rental companies achieve.
“I think the vocabulary around the company has changed from being negative to being more balanced in many cases, and specifically in Europe, being exactly where it should be, leading the debate about how we return to work," he said.
He went on to cite the company’s balance sheet, with $4B in cash at the beginning of the second quarter and just $700M in debt.
“There are not many real estate companies that have that amount of cash,” he said.
While that may be true, no other real estate company burns cash like WeWork either, with its aggressive expansion plan fueling the fire. But WeWork's cash outflows dropped from $1.4B in Q4 2019 to $482M in Q1 2020, and Mathrani said spending dropped again in Q2. In a letter to investors earlier this year, WeWork said its cash pile, provided by SoftBank, could see it through until 2024 if necessary. Mathrani told Bisnow that was still the case, in spite of the pandemic.
Mathrani said when he was mulling whether to take over as CEO, he was enticed by the low-hanging fruit he could take advantage of by cutting general and administrative expenses.
“If this was an efficiently run company, with good SG&A costs, then pulling the levers to improve profitability would be hard,” he said. “We committed ourselves to streamlining the company in 90 to 120 days, and we’ve completed that.”
With more than 8,000 roles cut, that streamlining took the number of WeWork staff from 14,000 to 5,600. Some of those cut were central office roles, but it has also cut the number of staff managing its buildings, with some building managers now running more than one site, according to documents seen by Wired UK.
The last element Mathrani mentioned is perhaps the most important for WeWork’s long-term viability: its real estate. Famously, when the company unveiled its IPO prospectus, it disclosed it had $47B in lease liabilities on its books, with an average term of 15 years.
Neumann and SoftBank founder and CEO Masayoshi Son thought of WeWork as a tech company and tried to grow it like one, adopting the "blitzscale" strategy of expanding as fast as possible to try to grab market share and give a company pricing power.
But while this might work well in software, or online sales, in real estate, growth creates liabilities, and WeWork signed long, costly leases in order to meet its growth targets. Thus far that has been a bug, but Mathrani wants to turn it into a feature.
“The company has a lot of assets. It had grown dramatically in the previous 12 months, and essentially it had an oversupply of real estate,” he said. “When you have overbuilding in any sector, like shopping centers or apartments, that creates a problem. We had a lot of supply come online in a very short space of time, so this job becomes a leasing job. You need to fill that space.”
Mathrani and Claure kicked off a comprehensive portfolio review, and Mathrani said there is no specific target for reducing the number of WeWork locations or reducing the rent bill by a certain amount.
Instead, it has reviewed and analyzed every single building from which it operates, and if it is not profitable, it is looking for ways to make it so. Mathrani said that 85% of its mature buildings — those open for around 12 to 15 months — are profitable, a figure which he expects to get to 95% by the end of the year.
The other 15% is where the company's energies are directed right now, and where it is in negotiations with landlords to try and find a way forward. It is no coincidence that 85% is the figure Mathrani gives for the amount of rent it paid in April and May — it is essentially only paying rent on its profitable buildings.
“In any business, there is generally an 80/20 rule,” he said. “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."
The kind of options being examined are diverse, and vary building by building, Mathrani said. At some it is looking to cut its rent or reduce the amount of space it takes while trying to offer something to landlords in return. That might be a longer lease, or an agreement not to open another building within a certain radius of the existing site.
In other cases, it is looking to try and convert leases into management agreements, where like a hotel operator, the landlord would control the space, pay WeWork a fee and the two sides would share in any profit.
The company is willing to walk away from sites if no solution with a landlord can be found, but Mathrani stressed that won’t be common.
“I can count on the fingers of one hand where negotiations are disputed,” he said. “Handing the keys back, there are very few situations where we are looking at that right now. If the site is not profitable, then it has to be done, but we will do it in a friendly, collegiate way.”
There have been plenty of public examples recently of WeWork pulling out of deals where it had signed a lease, but not yet taken occupancy of a building: a 232K SF lease in Dussledorf, Germany, 115K SF at 149 Madison Ave. in New York and 50K SF at the Hyphen building in Manchester, for example.
To put the slowdown of growth into context, data from CoStar shows that WeWork signed for just 10K SF of new space in the first half of 2020 in the U.S. and UK, compared to more than 6M SF in the first half of 2019.
But the portfolio review is not simply about reducing the number of sites. Mathrani said the number of WeWork locations would continue to grow, from the current 828 to about 850 by the end of 2021, as some buildings where it has leases signed, but not yet begun, continue to open.
“We will continue growing, but the focus will be on profitable growth," he said. "It will be a balanced expansion."
As an example of the kind of deal the company will focus on in future, he cites a recent 100K SF lease signed in the New York metro area where the company already had a single large corporate enterprise tenant signed up to take the whole space, which WeWork will manage on its behalf. It has signed a similar deal in structure and size with a tech tenant in Munich. WeWork declined to give location or tenant details.
In terms of filling all of that space the company now has coming online, Mathrani argued the coronavirus pandemic has, in some ways, been positive for WeWork.
“Big companies across the world are looking to de-densify,” he said, talking about the need to spread workers out both within individual offices, and also have them spread out across cities, working close to home rather than everyone coming in to a single central hub, while public transport is not seen as safe.
“Only the flexible providers have the ability to provide the supply solution that these companies need,” he said. “It is ironic, but we have the supply that they need, the demand is there, and that helps profitability.”
The pandemic would appear to be the perfect storm that kills the coworking business model, which is built on packing a large number of tenants into a small space, tenants who can break their lease at very short notice if they are not using that space.
“We get lumped in with coworking, but most of our members have their own office and their own four walls,” Mathrani countered, pointing out that revenue form individual coworking members accounts for just $36M of the company’s roughly $4B annual revenue. “The larger enterprise tenants don’t rent by the desk, they rent by the square foot, so companies de-densifying doesn’t affect our profitability.”
Mathrani brought up some selective leasing figures to highlight his point: June was the company’s best ever leasing month in China and South Korea, he said, and the third-biggest leasing month in London. In Milan, demand for its space exceeds supply by two-to-one.
“All of that demand is coming from enterprise clients,” he said. Those clients account for about 45% of WeWork’s members, the company said at the end of Q1, and Mathrani has said he wants to grow that figure to 70%.
Mastercard, TikTok owner ByteDance, Microsoft and Citigroup have signed new deals with WeWork in the past month, the company said. The company’s financial position is improved by the fact that it is owed about $1.2B in allowances from landlords usually provided to build out space, but which WeWork can now use in lieu of rent payments, Mathrani said.
WeWork has collected 75% of the income contracted from its members during the pandemic, Mathrani said, with the most common form of payment restructuring seeing members defer rents to be repaid later in return for taking longer leases. As is the case with WeWork’s landlords, he handles some of the negotiations directly.
“I’ve done that in the U.S., UK, France. You get to know the pain points, both from the perspective of the staff and the members," he said. “Once they communicate with you they feel vindicated, they want to talk to someone.
"As with landlords, you want to create a win-win. Their businesses have been impacted by COVID, they are not saying they don’t want to pay you, they just can’t pay right now. If we can use the strength of our balance sheet, then we can help them now, and they pay back over time.”
For a period in the fall, WeWork was headline news on the front pages as well as in the business section, so spectacular was the drop in valuation, so galling was the lack of transparency and self-awareness in the IPO filing and so jaw-dropping were some of the tales of its corporate culture.
So, does Mathrani think the name WeWork has become tarnished, with the company being rebranded to move away from its history as a loss-making former tech unicorn? To answer, Mathrani goes back to one of the points about why he joined the company.
“WeWork is a fantastic verb,” he repeated. “If you asked me the main reason why I took the job, it is that. If you talk to our enterprise clients, it is clear that we have created the right product and we can execute it and manage it with our community groups. The only noise is not about WeWork the brand or the product, it’s about trying to create a company that is profitable going forward."
And that is the crux of the matter. Profit. Even the most adamant WeWork naysayers didn't question the impact the company had on the office real estate sector, on the way workplaces look and feel and how companies and people use office space. It took flexible offices to the masses.
But the way the business was run made it hard to make money, and took it toward the brink of insolvency. If Mathrani can meet the objective and make the company profitable, in his estimation by the end of 2021, he will have created something very potent. There is a long way to go in the marathon, and he is taking it one inch, one step, once building, at a time.
"Once you turn the page of profitability, WeWork is a phenomenal brand,” he said.