What’s next for WeWork?
WeWork's challenges do not end with its emergence from bankruptcy. Looking ahead, the bankruptcy court has approved a reorganization plan designed to enhance WeWork's profitability in the long term.
The plan is a general framework that does not guarantee exact development, as not all events can be anticipated. It also can be modified with court approval. Since the reorganization plan is otherwise binding for WeWork, it nonetheless outlines key points on how the company should operate in the future:
1. Limiting Expenses
It was primarily overspending that drove WeWork into bankruptcy. During the bankruptcy, those expenses were significantly reduced and the potential for savings on rent and interest payments was largely exhausted.
In the following phase, future expenses are expected to rise at a slower rate than revenues. They shall not exceed an annual increase of 3%, slightly above the expected inflation rate.
Investments mainly limited to current locations
Investments will be primarily focused on maintaining existing locations, with WeWork allocating approximately $300,000 per location annually. It is unlikely that every location will receive this amount per year, as it represents an average value and part of it will also fund software investments.
Otherwise, WeWork will continue to operate with its existing resources. No new debts are planned, nor are capital-intensive expenditures unless they pay off quickly.
The saved expenses will potentially increase profits, which in turn should significantly boost annual cash flow, ensuring a more resilient business operation in future. However, the value of individual locations will decline each year as WeWork initially lives off its substance. Such a court decision is not surprising given the circumstances of a bankruptcy reorganization.
By 2028, the company expects cash flow growth to significantly exceed expected value losses. Cash flow also provides the ability to address issues as they arise. Alternatively, if WeWork's revenues and expenses would grow at the same rate on the new basis, WeWork could remain profitable even without the expense cap described above.
2. Increasing Revenues
One key ingredient for more profits is still missing. Total revenue is expected to grow by about 5% annually through the end of 2028.
Prices remain virtually stable
The reduced expenses will not be allocated for general price offensives. Instead, the plan is to maintain prices at their current levels through 2028, adjusted for inflation. The target is to increase average revenue per member by approximately 2.5% per year. Local price variation will remain.
Occupancy should go up: with more small businesses!
How does WeWork plan to boost revenue instead?
By getting more companies to use its private workspaces. This is WeWork's biggest source of revenue.
Last year, the occupancy rate here was 72%. It is expected to increase to 76% by the end of 2024 and to nearly 85% by the end of 2028.
To do this, WeWork is shifting its focus to accommodate more small businesses in its workspaces. There are many more of them than very large companies, and they often have less prestigious or other cost-intensive requirements. However, smaller companies are also often more price-sensitive when it comes to their own expenses.
The All-Access program (hot desks), the company's other revenue stream, is not planned to expand at this time. Revenue increases are limited to the expected rate of inflation. The All-Access program would also have limited expansion potential if the number of members in private workspaces increases while space capacity remains constant.
➡️ Next page: Will WeWork expand again? And who's now in charge of the new company`?
