WeWork’s Planned Pre-IPO Debt Issuance Raises Significant Red Flags for Landlords
WeWork Companies, Inc. is reportedly seeking to raise up to $4 billion in debt before its initial public offering (IPO), according to a Wall Street Journal article published on July 7, 2019. As of the publishing of this post, WeWork has not raised the additional debt, but the article outlines terms indicating that WeWork would service its debt using cash flows from existing locations. This is problematic, if true, in several ways for WeWork’s current landlords. First of all, the value of any corporate guarantee that a landlord may hold on a WeWork lease would effectively be devalued. This could be grounds for potential landlord legal questions if the debt deal goes forward, which would likely dog the company and pose further cash flow strain on its already fragile operations (Standard & Poor’s: B; Fitch: BB-) and ongoing cash burn.
The second and equally troubling implication of the proposed debt raise is that WeWork would be funding its capital needs by effectively borrowing against its existing landlords at its stabilized locations. The company would be using as implicit collateral the tenant improvements and underlying debt that its existing landlords have on their fixed assets. This means that WeWork is collateralizing its growth with its landlords’ assets.
The debt raise would almost certainly weaken WeWork’s credit profile, and it would come on the backs of its current landlords. If WeWork does raise the debt, landlords will need to be proactive in requiring more security on their existing space as allowed in the lease agreements, and should seek alternative means to compensate for the increased risk. TRA will continue to watch the situation and advise further as it unfolds. Reach out to us to see how we can help you navigate through this complex and evolving situation.