WeWork’s Bond Debt Is Trading At Sub-Par Value, Here’s Why That Matters

Published on January 7, 2019 - By Cecilia Amador de San José

• WeWork’s bond trading value has dropped and it could very well be due to the market’s lack of long-term confidence in their success and ability to repay their debt.
• It’s a potentially serious knock for WeWork, especially if the coworking giant wants to issue additional bonds in the future.
• It’s also a concern for the company’s ongoing expansion, as it could limit its ability to have access to some buildings.

Bloomberg’s article “WeWork Keeps Pushing. Now Landlords, Rivals Are Pushing Back”, published last month argued that WeWork was stepping on the turf of landlords and brokers, and that they were starting to push back. Some, by delving into the flexible workspace industry themselves and others by partnering with flexible workspace operators.

Suggested reading: Top 5 Ways CRE is Crossing into Coworking

Speaking to Bloomberg, Cedrik Lachance, director of research on real estate investment trusts at Green Street Advisors, said that WeWork’s branching out might “limit their ability to have access to some buildings.”

According to Bloomberg,

“Few in the property business are willing to talk openly about the company, given its clout. Privately, more than a dozen real estate and banking executives interviewed by Bloomberg expressed misgivings about working with the closely held startup. The question is whether WeWork can keep up its breakneck expansion — and its lofty valuation — if friction grows.”

This last sentence raises another, more concerning point; one that’s already negatively impacting the coworking giant: its bonds have been trading subpar.

“Wall Street investors are cautious on WeWork as well, with its bonds struggling since they were issued in April. The $702 million of 7.875 percent notes dropped below par almost immediately after the sale and now trade at 92.75 cents on the dollar.”

These are “junk bond” yields and valuation, and WeWork’s trading bond value has dropped most likely due to the market’s overall lack of long-term confidence in their success. One example is Michael Emory, CEO of Canadian office owner Allied Property REIT, who isn’t willing to lease space to the coworking giant, arguing that he can’t be certain if the tenant is credit-worthy and if it’s going to be there tomorrow.

Suggested reading: Why WeWork is Scaring Off Cautious REITS

Having bonds trading subpar is bad news for WeWork, especially if the coworking giant wants to issue additional bonds in the future.

To date, WeWork isn’t yet profitable, and it has strongly relied on external investment in order to power its expansion. It’s a cash-negative company and being in the “junk bond” range can lead to more cash flow stress. Furthermore, it will be harder for the coworking giant to raise more money in bonds in the near future. Even if they do, they could possibly get less capital for the cost of servicing the new and existing debt.

This is especially worrying following the news that key investors in SoftBank Group have questioned SoftBank’s intention of taking a majority stake in WeWork, and this could stop the coworking giant from receiving an additional $16 billion from the Japanese conglomerate.

A new era for flexible workspaces

The entrance of property owners and brokers into the coworking industry has marked a new era for flexible workspace. With more landlords and brokers in the playing field, flexible workspace operators will have a harder time getting new space in new buildings.

REITS and property owners are mostly concerned about the yield of their portfolios. Property companies’ valuations have shifted over the past ten years from covenant based to yield based valuation models. This means property companies, especially REITS, can take higher risk tenants at a higher rate without slashing their property’s value.

Flexible workspace operators, property owners, and brokers are all searching for this high yield. Flexible workspace operators have a competitive advantage over property owners and brokers: they are familiar with the service industry. However, the industry has grown significantly over the past 10 years and there is now enough senior level talent out there for property companies and brokers to hire in order to manage their flexible space operations.