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Good morning. WeWork, the co-working behemoth that suffered a financial faceplant in 2020 and started hemorrhaging cash like a busted ATM, is now attempting to douse the flames by reshuffling its debt and seeking a fresh cash injection. Meanwhile, investors look to NOI for answers as rental income and operating expenses keep rising.

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WE DON'T WORK

WeWork in Talks With Lender to Restructure $3B in Debt

WeWork (WE), the office space company founded by Adam Neumann, is in talks with investors to restructure its $3B debt and raise more cash.

Keeping a bad thing going: A cash infusion would most likely provide WeWork with hundreds of millions of dollars to keep it operational for a few years, according to two people with knowledge of the negotiations. WeWork burned through over $700M of cash last year, although the coworking company’s performance has gradually improved.

Avoiding dishonor at all costs: SoftBank, WeWork's largest shareholder (and creditor), is involved in negotiations but not expected to provide additional funds. SoftBank has already invested over $10B in WeWork since 2017 and suffered significant losses. The Japanese investment giant provided a $250M loan to WeWork in January and extended the date for repayment of a debt facility to March 2025 from November 2022.

Last chance at redemption? Restructuring its debt would give WeWork executives more freedom to continue reshaping the company without worrying about running out of funds. Yardi Matrix, a real estate software provider, is one of several companies considering investing in the once-famous (now infamous) flex workspace provider.

➥ THE TAKEAWAY

Not much more to lose: There is no guarantee that the WeWork deal will close, and analysts have highlighted the ongoing difficulties in the company's business model, which consists of renting office space from landlords and collecting fees from customers who use it. WeWork’s shares are currently trading around $1, down 90% from its high-flying IPO share price. Shares of the company rose about 5% in extended trading following the news.

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🌐 AROUND THE WEB

📖 Read why some industry observers think the long-term drop in mortgage rates from 18% in the 80s to a low of 2.5% in 2021 may never repeat again—and why it’s bad news for valuations.

🖥️ Watch this WSJ video that explains why the biggest U.S. cities are always ‘littered’ with vacant lots because of how property taxes work.

🎧Listen to Scott Spielvogel talk about the history of the bottled water industry—and how he carved out Nestle Water NA into BlueTriton Brands—on this episode of Private Equity Deals with Capital Allocators.

ARE WE THERE YET?

NOI Takes Center Stage: Why the Rent Growth Narrative is No Longer King

Aggressive rent hikes have brought record-breaking prices over the past two years. But operators need to shift to a new paradigm of expense management to keep up with rising interest rates and asset values.

The good old days: Yardi Matrix reports that average national rents in 2021 reached a new record, rising 15% YoY. In 2022, average national rents increased by over 6%, which is the second-highest increase on record. But the era of double-digit rent growth is already over.

Two steps forward, one step back: With rents projected to trend flat to slightly up this year, many firms have increased allocations in attractive markets, expanding their portfolios in the Sunbelt, mostly. But operators need to pay close attention to expenses to ensure that increased income isn’t eaten away by higher expenses.

When the going gets tough…Without proper asset management oversight, higher income can easily mask rapidly rising expenses. Operating expenses have been steadily increasing nationwide in recent years while interest rates have shot through the roof, resulting in asset values losing 12–18% in some areas.

➥ THE TAKEAWAY

The tough have to get going: Focusing exclusively on income or expenses can cause problems, as interest rate increases have underscored the importance of driving NOI to maintain asset value. As an example, a 25% increase in NOI would be required this year to preserve 2022 valuations in a rapidly rising cap rate environment. But operators can succeed in up-and-down cycles in the coming years by proactively and strategically managing expenses to maximize NOI.

✍️ Daily Picks

• Texas Utopia: Elon Musk is reportedly buying thousands of acres of land near Texas' capital to build his own town, dubbed Snailbrook.

• Another hat in the ring: The Soloviev Group is competing for an NYC casino license with their Freedom Plaza proposal, which includes a marina, a museum, and an observation wheel.

• No thanks, we’ll wait: Despite strong fundamentals, rising capital costs and slow growth have cooled the industrial sector, with investors preferring to hold onto assets rather than sell.

• ‘…longer than you can remain solvent’: More CRE investors and tenants are backpedaling on office plays as average office space usage remains just 50% of pre-pandemic levels.

• Not exactly ideal: Renting has long been argued by some to be a smart choice. But it’s often an economic decision made by markets, rather than individuals, due to a lack of money to invest.

• Stop talking, Powell: Citadel’s Ken Griffin is displeased with the way the Fed has handled our ‘traumatic’ inflation and sees a recession setup in the making.

• On second thought…Many CRE landlords are struggling to make mortgage payments, leading to a domino effect of defaults in the office sector and a re-evaluation of the asset class.

• Two options are better than one: The US housing market is 6.5M single-family homes short of population and household formation growth, creating good economic news for the multifamily market.

• The universal language of risk: Asia-Pacific investors are primarily concerned with pricing uncertainty and unpredictable interest rate policies this year. No surprise there.

• Sticking with the plan: J.P. Morgan (JPM) and Haven Realty Capital just formed a JV to purchase and build more than $1B in single-family rentals.

💼 Talent Collective

In partnership with Bullpen

Bullpen's new contract roles this week include a particularly fascinating development position with hospitality real estate in Texas. Join today for access to the below roles, as well as several other freelance openings.

• Development Manager, Hospitality

💰 Full-time or part-time (Remote) ❗️ Focus on a ground-up project in Texas

• Development Associate, Multifamily

💰 Hourly (Remote) 📍 Emphasis on Miami-area multifamily

• Marketing Specialist

💰 Hourly (Remote) 📍 Emphasis on markets in the Southeast

Looking to hire? Connect with Bullpen 

🤝 Deals & Dealmakers

• In the name of science: Longfellow Real Estate Partners obtained $310M to develop Avia, a 315 KSF lab and research project in Millbrae, CA, amid a slowing economy and growth.

• For leaseback: Ryder System, Inc. (R) sold their Miami HQ for $42.1M and is leasing back the location for up to 12 months as they search for a new HQ.

• The latest convert: A trio of investors bought the 8.4-acre Nordstrom department store in Pleasanton for $16M, with potential plans to redevelop it into homes.

• Well done, Dick: Dick's Sporting Goods (DKS) plans to open up to 100 House of Sport stores in the next five years, with 20 planned for the next two years.

• Competing motivations? Amazon (AMZN) purchased a former Owens Corning factory in Santa Clara for $237.8M, expanding its Silicon Valley footprint despite cutting 524 jobs in the area.

• If the debt is right: Rockrose Development secured a $97.7M debt package from Wells Fargo (WFC) for their 42-story Tribeca Pointe luxury rental tower in NYC.

• Across the pond: Goldman Sachs (GS) sold a 918-single-family home portfolio in the UK for around $226M to PGIM Real Estate, according to sources familiar with the matter.

📈 Chart of the Day

In 2023, the top 10 bank brands with the highest value are equally divided between China and the United States. When it comes to the total brand value, China takes the lead with $262 billion, while America has a brand value of $165 billion.

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