Mathrani's 'Total Shock' Departure From WeWork Drives Investor Confidence To New Low
Sandeep Mathrani was less than two hours removed from meeting with investors and analysts on Tuesday when WeWork issued a press release announcing he was leaving his post as the coworking giant’s CEO in 10 days.
"I was blown away. It was a total shock," Piper Sandler Managing Director Alexander Goldfarb told Bisnow of seeing the announcement an hour and a half after their meeting ended. "There was no telegraphing at all."
Other investors were also taken aback — WeWork’s stock dropped by nearly 25% on Wednesday to 26 cents per share, an all-time low for a company scrambling to avoid being delisted from the NYSE.
In Goldfarb’s note to investors Tuesday night, which he said he had to quickly rewrite after the announcement, he wrote that the resignation so soon after an investor roadshow was “certainly a first” in his two decades on Wall Street. But, the note added, “We believe in the vision and strategy Sandeep laid out. The question is whether the interim and, ultimately, permanent CEO can generate the same trust in execution.”
Mathrani’s departure after just over three years marks the end of WeWork leadership by one of the real estate industry’s most trusted turnaround artists. He officially gave notice to the company May 10 that he would resign as WeWork chairman and CEO effective May 26, according to a regulatory filing.
When WeWork employees come back from Memorial Day weekend, their new leader will be interim CEO David Tolley, who joined the company’s board three months ago. Most recently the chief financial officer at satellite company Intelsat, Tolley has also been a private equity partner at Blackstone investing in media and communications and an investment banker at Morgan Stanley.
Tolley and the board have a tall task ahead of them. WeWork’s stock is down more than 95% this year, the company is still burning through cash — $2.3B of losses last year and another $299M in the first three months of 2023 — and it is trying to execute a recovery as office usage nationally has stalled.
On Wednesday, Mizuho Securities Managing Director Vikram Malhotra downgraded his rating of WeWork’s stock from “buy” to “neutral” after the abrupt departure of its CEO.
“One of the reasons I finally threw in the towel is that I thought the change would be very disruptive near-term,” Malhotra said in an interview Wednesday. “The economic situation has only deteriorated in the last two months, and their ability to hit their occupancy numbers is more challenged.”
Mathrani’s first day as CEO was Feb. 18, 2020, and even before the pandemic hit, he was already dealing with crisis. The company was less than a year removed from the spectacular failure of its attempt to go public with an initial public offering, an ordeal that led to the ouster of its longtime CEO and co-founder, Adam Neumann. It was saddled with $47B of lease liabilities, a bloated balance sheet and was losing billions of dollars per quarter.
Mathrani led the elimination of $2.3B of recurring costs and recently executed on a key restructuring deal that wiped off $1.2B in debt from WeWork's balance sheet — although the deal came with new debt that carries a nearly 15% interest rate, The Wall Street Journal reported. He cut more than 8,000 jobs and reduced the real estate portfolio that Neumann and SoftBank had aggressively built in 2018 and 2019.
When WeWork released its IPO prospectus in summer 2019, it infamously wrote “we cannot predict whether we will achieve profitability for the foreseeable future.” But within months of Mathrani’s tenure, he was projecting the company would generate positive cash flow by the end of 2021, confidently stating there were “a lot of levers to pull to make it profitable.”
He had executed messy turnarounds before. He was hired as the CEO of mall giant GGP in 2011 as the company was emerging from bankruptcy and in 2018 shepherded it to a $15B sale to Brookfield, where he worked as the head of retail until taking the top job at WeWork.
Mathrani’s early projections didn’t take into account the tectonic shift that the pandemic would cause in the office market, and he eventually conceded the company couldn’t hit that ambitious profitability goal. On what turned out to be his last earnings call as CEO, Mathrani projected the company won’t produce positive cash flow until the second half of 2024.
“We appreciate the tremendous work Sandeep has done for WeWork over the past three years. He successfully steered the company through the depths of the pandemic, introduced new revenue streams, and helped put WeWork on a path to profitability,” SoftBank Group International CEO Alex Clavel said in the press release announcing Mathrani’s resignation. “We wish him all the best in his future endeavors.”
Along with his departure from WeWork, Mathrani took a new role as a partner at private equity firm Sycamore Partners, which owns retail brands like Staples, The Limited and Ann Taylor. Malhotra speculated that the abrupt nature of his departure belies a more complicated exit than a simple career change.
“The way he was talking to investors the last three weeks, it just felt too sudden to be, ‘Oh, I just got a new job, I’m just moving on,’” Malhotra said. “He made so many changes. Is he seeing a lot of challenges relative to the business plan as a stretch goal to achieve? It’s almost like, ‘Are you seeing the writing on the wall?’”
A WeWork spokesperson said Mathrani came to the firm to execute a turnaround, and after completing the recent debt restructuring, exiting locations and bringing down costs, the timing made sense for an exit.
Now the question turns to who will lead WeWork in the long term and how the company will approach the next stage of its recovery. It is looking to execute a reverse stock split transaction, which would remove the immediate threat of being delisted from the New York Stock Exchange, and Goldfarb said the debt recapitalization gave the company some breathing room.
But Malhotra said he estimates the company has roughly $400M of cash on hand and less than $500M in further incremental capital, which gives it little breathing room at its current rate of loss. Its largest shareholder, SoftBank, has lost $12B on its investment in WeWork since 2017, the WSJ reported.
“What I’m concerned about is unfortunately all the work that Sandeep did was real, but it’s coinciding with this very harsh economic environment in which things are spiraling very quickly,” he said. “The structure which WeWork is in today is just not right for the current economic environment.”
WeWork’s occupancy was at 73% at the end of the first quarter, it said in its earnings statement, and Malhotra said WeWork’s investor deck after its debt restructuring projected that number to be well over 80% by the end of the year. That growth would appear to make it an outlier in the office market, as many real estate companies foresee muted demand through the end of the year.
Goldfarb took a more bullish perspective, pointing out that WeWork announced signing a company to a 300K SF deal in New York and 100K SF in London in its last earnings release, a sign that occupancy and demand is on the rise. But much will depend on the leadership of the company moving forward.
“It’s on the board, it’s on SoftBank, it’s on the new management to continue to try and make the math work,” he said. “The trust that Sandeep has built up has to be re-established.”