WeWork warns of possible bankruptcy: Here’s how Singapore office REITs may be impacted

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By Beansprout • 22 Aug 2023 • 0 min read

WeWork’s share price has plunged by more than 80% this year with rising concerns about its financial position. We analyse how the woes faced by WeWork could affect Singapore REITs with US and Singapore office assets.

wework possible bankruptcy singapore reits

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What happened?

WeWork recently released its earnings for the first half of 2023

While it was expected that the co-working company would report continued losses, WeWork also made a shocking announcement that ‘casts substantial doubt over its ability to continue as a going concern.’

This means that WeWork could face possible bankruptcy if it is not able to improve its financial position.

Unsurprisingly, WeWork’s share price has also crashed by close to 90% year-to-date to end at just US$0.13 , a far cry from its peak of around US$13 back in April 2021.

Let us analyse the challenges faced by WeWork, and understand how these issues could affect Singapore REITs with US and Singapore office assets.

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Source: Google as of 22 August 2023

 

What you need to know about WeWork’s financial challenges

#1 - WeWork’s debt far exceeds its cash holdings

WeWork appears to be caught between a rock and a hard place.

The business cannot generate sufficient revenue due to member attrition, while costs and expenses are ballooning because of inflation.

For 1H 2023, revenue for the co-working firm came in at US$1.69 billion but a net loss of US$696 million was incurred.

WeWork Earnings 2023.png
Source: WeWork

Interest expense clocked in at US$223 million and took up 13% of revenue for the half year.

Free cash flow for 1H 2023 remained negative at US$646 million, just slightly better than the free cash outflow of US$710 million a year ago.

WeWork’s balance sheet held just US$205 million of cash with its long-term debt at US$2.9 billion. 

The company has been losing members and needs to renegotiate its lease terms with its landlords to stay in business.

It also said that it needs to control expenses and limit capital expenditure as it tries to stave off further losses.

Meanwhile, WeWork is also seeking additional capital to boost its balance sheet via the issuance of (more) debt, equity securities, or through asset divestments.

#2 - WeWork’s challenges exacerbate challenges in US office market

WeWork’s admission that it could go bankrupt comes at a bad time for landlords who are already struggling with a weak US office market.

The company is a major tenant and occupies more than 6.8 million square feet of space in Manhattan.

Should the business fail, it could leave landlords struggling to fill up the space vacated by tenants who are still hooked on hybrid work even as the pandemic recedes.

Furthermore, the sharp surge in interest rates[6]  over the past 18 months has put further pressure on highly-indebted landlords as finance costs steadily head higher.

This development may have further negative ramifications for the US office market, affecting the trio of Singapore-listed US office REITs.

Manulife US REIT, or MUST, has the lowest physical occupancy of the three at 30%.

Keppel Pacific Oak US REIT and Prime US REIT have physical occupancies of 64% and 56%, respectively.

US Office REIT occupancy

MUST’s manager was recently quoted as saying that he was “surprised” by the sharp decline in portfolio valuations for the US office market.

Because of the sharp fall in valuation, the REIT has breached its loan covenants and this event has caused it to halt its distributions for the first half of 2023.

The US office REIT’s aggregate leverage has also shot up to 57% as valuations declined, surpassing the 50% limit set by the Monetary Authority of Singapore and putting the manager in a difficult position.

#3 - WeWork’s challenges could also impact the Singapore office market 

WeWork’s troubles could also ripple through the Singapore office market as the company is a tenant for several locally-listed REITs.

The co-working company has 14 locations around the island but a WeWork spokesperson has reiterated that it has “no plans” to exit any of these locations.

Its largest space is at 21 Collyer Quay with around 213,000 square feet leased from CapitaLand Integrated Commercial Trust, or CICT.

WeWork also owns three floors of space at Funan along North Bridge Road.

City Developments Limited, or CDL, has WeWork as a tenant at two of its properties and the latter has been prompt in paying its rent thus far.

WeWork also occupies space at Suntec Office Tower 5, which is part of Suntec REIT’s  portfolio.

Should WeWork fail to garner sufficient support from its landlords and be forced to declare insolvency, these REITs and real estate companies could see their vacancy rates rise.

What would Beansprout do?

Unitholders of CICT have less reason to worry as WeWork accounted for just 2.4% of gross rental income (GRI) for the retail and commercial REIT as of June 2023.

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Source: CapitaLand Integrated Commercial Trust

 

For CDL, WeWork makes up 2% to 3% of the GRI for its entire Singapore office portfolio and around 9% of the GRI for its UK office portfolio.

ARA Trust Management, the manager for Suntec REIT, assured investors that WeWork’s co-working offices at Suntec have “very high utilisation” and are “performing well”.

Shareholders of these CICT, Suntec REIT and CDL should also be encouraged as the portfolios are sufficiently diversified and are likely to be able to withstand the hit should WeWork go bust.

For example, Singapore office represents just about 33% of CICT's gross revenue in the first half of 2023, with its office assets in other countries and retail assets contributing the rest of its gross revenue 

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Source: CapitaLand Integrated Commercial Truist

 

On the other hand, the problems in the US office market appear more structural in nature and are unlikely to go away anytime soon.

As such, there may be less reason to add REITs with US office assets on your watchlist even after  their significant price decline.

Check out Beansprout’s REIT tool to compare office REITs and find the best REIT for your portfolio. 

Join our Beansprout Telegram group and Facebook group to get the latest updates on Singapore REITs, stocks, bonds and ETFs.

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