WeWork Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the WeWork First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And finally, I would like to advise all participants that this call is being recorded. Thank you.

Operator

I'd now like to welcome Kevin Barry to begin the conference. Kevin, over to you.

Speaker 1

Thank you, Gavin, and good morning, everyone, and welcome to WeWork's Q1 2023 earnings conference call. During this call, we will refer to our earnings release and investor presentation, Which have been furnished with the SEC and can be accessed at investors. Wework.com. This discussion will include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Annual and quarterly and periodic reports filed with the SEC.

Speaker 1

We will also discuss certain non GAAP financial measures, which we believe are meaningful in evaluating the company's performance. Additional disclosures regarding these non GAAP measures, including a GAAP to non GAAP reconciliation, Are included in our earnings release and supplemental presentation and will also be included in our Form 10 Q to be filed tomorrow. I'd like to introduce Sandy Matrani, Chairman and Chief Executive Officer and Andre Fernandez, Chief Financial Officer. With that, let me turn it over to Sandy.

Speaker 2

Thank you, Kevin, and good morning, everyone. I'll review the trends we're seeing in the Flex industry, our quarterly results, recent restructuring and then Andre will provide further comments on the First, I want to talk about Flex industry trends and about why I think this is WeWork's moment. WeWork is all about flexibility across cost, Time and space. At a time where the commercial office industry is in flux and fundamentally changing for the long term, WeWork is not only solving for the needs of businesses Of all sizes, seeking a turnkey flexible solution, but we're also working to cement our product offerings as a long term alternative To traditional office. Ironically, as I walked this morning down Fifth Avenue, I bumped into a CEO of a retail company, Who actually looked at me and said, aren't you glad you're in the right space in the commercial sector?

Speaker 2

The trend is coming your way. It is all over the industry that flexibility is the key for turnkey solutions and immediate occupants. More than ever before, businesses are seeking a solution that is unique, complete and doesn't require any capital investment. Pre pandemic, HR departments could predict 10 years out what the headcount growth could be and CFOs were okay taking on real estate to accommodate that growth. Today, that is unknown.

Speaker 2

Occupiers need to be able to manage agile decisions as their headcount and in office plans change. WeWork offers the flexibility to them on an immediate basis. We continue to read how different types of companies are either entering new markets, Growing in their existing markets where they have a return to work policy starting in May or June this year to space their employees now. But why you don't realize and why and what we see and feel firsthand is that in each cases, these companies are turning to WeWork for their solution. One recent example is we signed in April 2 separate locations in New York City Totally 310,000 square feet for a large enterprise company that needed the space within 2 weeks In order to house employees by their mandatory return to office, this same client is now taking over 100,000 square feet With us in London.

Speaker 2

This is the kind of flexibility we're able to offer that sets us apart from legacy commercial real estate. We provide turnkey solutions for immediate occupancy. As the trend continues, In New York, our first quarter debt equated to 23% of the total square footage leased in the traditional market, While our portfolio accounts for only 1% of the total office stock, over the last few quarters, our share That we have taken of the market has steadily increased. Similarly, in Boston, our market share was 16%, Chicago 9%, Miami 17%, San Francisco 21%, Dublin 27%, Paris 12% and Berlin 9%. We can now see over the last 4 quarters, each quarter we continue to take market share, Demonstrating the trend towards flex and co working.

Speaker 2

The other side of the equation that is important to remember is that we work as a tenant, Which is a critical element of our business model that I think is sometimes underappreciated. We don't own the building, so we're not handicapped by mortgages and lender covenants. In addition, we're not required to give concessions and allowances to grow occupancy. While there's undoubtedly uncertainty in the market, this creates opportunities as flexibility and agility become even more important as companies consider their office footprints. I believe this is our moment more than ever.

Speaker 2

Turning to our Q1 results. Revenue in the quarter was €849,000,000 which is in line with our guidance range. Occupancy increased 6% from the Q1 last year and was down slightly from year end. As we said on the call for the last quarter, we typically see higher churn in December, resulting in a slower start of the year. This quarter, the decline in memberships was a function of known enterprise churn, the planned closure of some of our locations And franchising of South Africa.

Speaker 2

The known enterprise churn was to be replaced, which fell From the end of March to the beginning of April with the 300,000 square feet enterprise client I mentioned a little earlier. In April, we saw a reversal in enterprise demand as we saw net sales in the U. S. Turn positive for the first time in 12 months. International has been carrying the day as I've mentioned over and over again on these calls, and we are pleased to see the U.

Speaker 2

S. Finally turn the corner. As we move forward, we continue to see demand pick up, particularly as I mentioned more companies are executing mandatory return to office dates So employees that need space immediately. Again, as I have mentioned in the past, with all the headlines of all the layoffs, Many of these companies still have more employees today than they did pre pandemic and our need for space to house their employees. Adjusted EBITDA attributable to WeWork was negative $70,000,000 an improvement of €59,000,000 over the Q1 last year due to continued revenue growth and expense reduction.

Speaker 2

Free cash flow was negative $343,000,000 in the quarter and also came in $18,000,000 better than we expected. ARPU picked up a little bit to $4.90 All Access memberships increased to 75,000. The trend continues As we've mentioned over and over again, we do increase our all access by about 1,000 members or so a month. And this time around, it's up about 5,000 over the last quarter, so slightly over 1,000 a month. While all office memberships are not included in either our membership or our occupancy total, it represents an additional utilization and monetization of our space And contributed $59,000,000 of revenue this quarter.

Speaker 2

The trend of the All Access membership also has A tremendous impact on our ancillary revenue as our utilization of conference rooms and private offices improves. Our workplace solution, which we launched in partnership with Yardi, continues to grow with 63,000 licenses sold Since launch to approximately 370 companies throughout the world. For the Q2, we expect revenue to be between $840,000,000 $865,000,000 and adjusted EBITDA to be between negative $10,000,000 and positive 15,000,000 Our 2nd quarter projected adjusted EBITDA made in connection with our debt restructuring was better than this range, Partially due to approximately $30,000,000 of lower costs on a GAAP basis. We will realize the benefit of the same $30,000,000 On a cash basis, again, I'm running this business for revenue and increase in cash flow. We expect our cash and cash equivalents at the end of the second quarter to be consistent with or slightly better than our original projections.

Speaker 2

Activities and decisions to reduce our expense structure have been occurring since I became CEO in early 2020 and continue. We've been very diligent in rightsizing the organization and streamlining the portfolio. This process never ends. We're grateful to our landlord partners for agreeing to reduce our rent obligations for the near term, which is what's assisted in providing It begins on a cash basis through the Q2 and through the end of the year. In addition, as part of our restructuring, We've guided to approximately $620,000,000 of SG and A and indirect location operating expenses this year.

Speaker 2

We expect that to come in closer to $575,000,000 Turning to the global portfolio. As of quarter end, WeWork had 781 locations system wide, 617 consolidated. Memberships as of quarter end was 664,000 system wide, 527,000 consolidated. As mentioned earlier, occupancy increased 6% from the Q1 last year and was down slightly from year end. Looking at our major regions, both the United States and Canada and international were up 5% year over year.

Speaker 2

And interestingly, Japan finally rebounded and was up 16% year over year. As mentioned previously, we are Constantly reviewing the portfolio in the interest of increasing its overall quality. Since the beginning of this year, we have agreed to exit or partially An additional 8 locations in the U. S. And 6 outside the U.

Speaker 2

S. Of those additional locations, All members of those spaces have been notified. We continue to pursue asset light growth Opportunities throughout the world. In March, we signed a franchise agreement with C. C.

Speaker 2

Benza, A Pan African real estate investor for our South African business. Throughout this partnership, C. C. Benza will operate WeWork's in 16 locations in South Africa And have hold exclusive rights to grow and operate WeWork franchises in Ghana, Kenya, Mauritius and Nigeria. Additionally, we continue to see growth across our portfolio with 9 new locations including a few expansions Closed so far this year, primarily outside the U.

Speaker 2

S. Turning to our balance sheet. We are very pleased with the tremendous support from my investors to strengthen WeWork's balance sheet to provide the company with a sound financial footing aligned with its outlook. The restructuring significantly improved our liquidity by providing $1,000,000,000 of cash, reduced outstanding debt by $1,200,000,000 Reduced annual cash interest expense by $90,000,000 and extended the maturities to 2027. We now have the runway we need to grow our business and go on the offense versus being on the defense.

Speaker 2

This transaction is evidence Investors' strong conviction in the WeWork business model and on behalf of my colleagues, we're grateful and humbled with a strong showing of support. Andre will now provide some additional perspective on the quarter and our financial condition. Thanks, Sandeep, and good morning, everyone. Consolidated revenue in the Q1 was $849,000,000 which was up 11% year over year, Essentially flat to the Q4 of last year and at the high end of our guidance range.

Speaker 3

Revenue was also helped by foreign exchange, namely a stronger euro and stronger British pound. As Sandeep mentioned, occupancy increased 6% from the Q1 of last year, So it was down sequentially due to higher than anticipated customer churn. Consolidated physical membership ARPU rose to $4.90 Also helped by FX and marking 2 consecutive quarters of pricing growth. And year over year, ARPM was 1% better than the Q1 of last year. Our first quarter building margin of $138,000,000 Was up $104,000,000 year over year, though declined slightly versus the 4th quarter due to higher operating costs associated with a few building openings in Europe and FX.

Speaker 3

Despite this increase, we continue to mitigate the overall increase in our location operating expenses through planned building exits. Of the building exits we announced last fall, We've been able to retain approximately 70% of our revenue through member relocation efforts. On the earnings line, adjusted EBITDA in the Q1 was negative $29,000,000 slightly lower than the 4th quarter And just outside of our EBITDA guidance range. Excluding non controlling interests, adjusted EBITDA attributable to WeWork Was negative $17,000,000 While our rent reduction conversations to date with our landlord partners have been fruitful and are yielding material cash savings on a cash basis for 2023 2024. The impact on EBITDA in the Q1 was minimal As the cash savings we are achieving are straight lined over the life of the lease.

Speaker 3

As a result, while we remain confident in our full year savings assumptions On a cash basis, which is in excess of $100,000,000 the full year EBITDA impact is expected to be less due to the straight lining of leases. We'll continue to quantify this impact as we get deeper into the year and have a greater number of these reductions Executed. Our adjusted EBITDA also benefited from sequentially lower SG and A helped by the headcount actions we took at the end of January. Since many of those actions, particularly internationally, were not effective until March, we expect to see further sequential improvement in SG and A

Speaker 4

for the remainder of this year.

Speaker 3

And we in SG and A for the remainder of this year. And when comparing the Q4 of last year to the Q1 of this year, Recall that Q4 of last year's SG and A benefited from a partial reversal of incentive compensation due to lower annual bonuses as well as known terminations. So on a normalized basis, a sequential SG and A decline From the Q4 to the Q1 was even greater. Below the EBITDA line, our net loss for the Q1 was $299,000,000 Driven by several significant non cash items, including impairments of leasehold improvements of buildings we are exiting and D and A, partially offset by restructuring gains on those same exited buildings as we wrote off previously impaired assets and their related liabilities from the balance sheet. Moving on now to cash and liquidity.

Speaker 3

We ended the Q1 with $306,000,000 of consolidated cash on the balance sheet, which included $82,000,000 of restricted and held for sale cash. Free cash flow for the quarter Was negative $343,000,000 which beat our plan published in connection with the debt restructuring and was helped by lower net CapEx. 1st quarter cash burn was higher than the 4th quarter Due to the payout of our annual bonuses, the timing of cash interest payments and other working capital, all of which were planned. And consistent with our published projections, we expect our free cash flow to improve in the second quarter as revenue and earnings continue to improve, As cash rent reductions are achieved and as net CapEx continues to decline to a more maintenance level of spend. As Sandeep mentioned, we couldn't be more pleased with the results of our recently closed debt restructuring transaction and the support received throughout Both from SoftBank, our largest shareholder, as well as our bondholders.

Speaker 3

As we disclosed last week, as part of the exchange offer, 75.8 percent of the aggregate principal amount of old 7 7 8ths notes outstanding And 98.3% of the old 5% notes outstanding were tendered. We've included pro form a debt and equity cap tables On Pages 2020 1 of our investor presentation. As Sandeep mentioned, the transaction reduces our net debt, Provides us with additional capital, lowers our annual interest cost, cash interest cost and extends the bulk of our debt maturities to 2027. As you can see on Page 19, we prepared a simple pro form a view of our cash and commitments As if the debt restructuring had closed on March 31. And on that basis, you will see our as adjusted cash and commitments We're just under $900,000,000 at the end of the Q1 and providing us with sufficient liquidity to fund the business plan we produced in connection with the transaction.

Speaker 3

In addition, the cleansing materials we published on March 17 in connection with the launch of the debt restructuring Contain additional assumptions, including cash projections, pro form a for the new capital structure. And while certain assumptions and exclusions are footnoted in the same, we provide many key metrics, including free cash flow, Net CapEx, cash interest and other relevant data. Regarding the second quarter, we expect consolidated Q2 revenue be in the range of $840,000,000 to $865,000,000 and adjusted EBITDA in the range of negative $10,000,000 to positive $15,000,000 Our revenue estimate is tempered by higher than expected customer churn we've experienced in the 1st few months of the year, So we are likewise encouraged by positive net sales growth realized in our U. S. Business in the month of April.

Speaker 3

And on the earnings side, our Q2 EBITDA guide will be impacted by the lower book rent savings that I mentioned previously As the cash savings are straight line. Overall, we'll continue to see sequential reductions in our cash rents, SG and A and CapEx as we outlined in the debt transaction. That concludes our prepared remarks. Once again, thanks again to all of our investors for your continued support and of course to our employees for your tireless dedication to our success. With that, I'll turn it back to the operator to open the line to questions.

Operator

Your first question comes from the line of Vikram Malhotra from Mizuho. Your line is open.

Speaker 5

Maybe just to start off, Sandeep, can you talk about the occupancy trajectory into April? It dipped obviously sequentially, But you've talked about higher sales in U. S. And Canada, but the dip was sort of more broad based in the U. K.

Speaker 5

And Europe as well. So can you give us some flavor on what's going on in those markets and how the occupancy trajectory is likely into the second quarter

Speaker 2

Chile, in the month of April, occupancy ticked up in the international markets to above 80% From 79%. So again, that's a function of timing. Again, as I mentioned, the large enterprise predominantly one client in one building in London took the occupancy down, which was an enterprise client. And that's being replaced in the month of May, as I mentioned in my comments with the 100,000 square feet enterprise lines. So the good news is it's more Off by a month in timing, then it is something a change in market sentiment.

Speaker 2

So It's more timing related than demand related.

Speaker 5

Okay. And just to clarify, so are you based on the business plan, are you still hoping the trajectory trends towards that 82% at year end?

Speaker 2

Again, as I've mentioned, I'm not going to we have a projection for each quarter. We feel pretty comfortable that on a sequential basis, occupancy will continue to improve With Q1 being the floor, so we do see a trajectory from here to have occupancy improve Sequentially quarter over quarter from year to year end.

Speaker 5

And we

Speaker 2

are obviously achieve that 80% golden number by year end.

Speaker 5

Makes sense. Just so one on just cash flow or EBITDA and ultimately free cash flow. If I heard you correct, the Adjustment between EBITDA and cash EBITDA is about $30,000,000 or so, if I heard that correct. And can you sort of bridge The cash you have on hand today relative to sort of the burn assuming occupancy remains flattish, is there a Need for additional cash earlier than anticipated, meaning to draw on the delayed notes?

Speaker 2

We don't anticipate Any of that, we anticipate achieving The revenue numbers and reducing the operating expenses, even if we took our revenue Down by $25,000,000 to $50,000,000 in the second and the third quarter third and the fourth quarter, sorry, and ran the sensitivity. There will be no need to draw the Okay. Great.

Speaker 5

Sorry, go ahead.

Speaker 3

Yes. We had assumed about starting the second quarter about $30,000,000 in the cleansing materials, about $30,000,000 of both cash and EBITDA savings a quarter. So I think the point that we're saying is, hey, we're achieving the cash savings, but we're getting a cash savings, only over 2023 2024, more or less. When you straight line that, you get a lower EBITDA impact than 30, but the cash is there. So we're feeling confident about the cash.

Speaker 5

Okay. And then just last one to clarify the ultimately the cash, you're obviously close to hitting EBITDA, At least adjusted EBITDA neutral, but ultimately the free cash flow or cash flow breakeven positive. Is that based on your business plan, it sounds like that is a year end 2020 Core objective now, can you just clarify that?

Speaker 3

Yes, I would say if you look in the cleansing materials, you'll see a projection of the pro form a Cash flow, so you get close to it briefly at the end of this year, but that a lot of that is just timing of interest payments. But then you get to free cash flow breakeven in the second half of twenty twenty four.

Speaker 5

Great. Thank you.

Speaker 2

Your next question comes

Speaker 3

from the line

Operator

of Omotayo Okusanya from Credit Suisse. Your line is open.

Speaker 6

Yes. Good morning, everyone. Sandy, I guess, when you kind of look at Coast, The debt restructuring event, you have a stock that kind of dropped below $1. Clearly, the transaction was dilutive to current shareholders. I mean, what exactly Is the message to that group of shareholders, you've kind of gone through this now, this kind of dilution?

Speaker 6

And When they ask you questions about again the stocks have already done worse like and kind of what they should expect going forward, What exactly is the message to them?

Speaker 2

Good morning. One, I would sort of sit back and say that I don't think we all contemplated that the stock would drop below $1 or more importantly drop below where it was Free transaction because effectively what you are doing is replacing the equity value The debt of the equity value, right? So effectively, if you took $1,200,000,000 of debt off, it should really reflect back in $1,200,000,000 of equity. So it is I don't think we expected it because our business continues to perform. And at this moment in time, the volatility in the stock is driven by a very small float.

Speaker 2

I mean the float is about 40,000,000 shares. You only have about 143,000,000 shares That are not owned by either SoftBank or the what I would say the insiders or people who are in the pipe. And so you only have 143,000,000 shares and up 143,000,000 shares, about 100,000,000 shares are owned by large institutional investors. The float is very small and the volatility is very high. But I don't think it's representative of where the business is Or what the anticipation of the equity to debt conversion would have done to the stock price.

Speaker 6

Okay. That's helpful. And then, Arndi, just kind of going back to the 5 year business plan That was kind of put in the documents back in March. There's full year EBIT Adjusted EBITDA of almost $250,000,000 in fiscal year twenty twenty three. First half of the year based on your 1Q Your projected 2Q numbers are basically flattish.

Speaker 6

Could you just kind of talk about this kind of delta that needs to happen in the back half Of 23,000,000 to kind of get to this $247,000,000 projected adjusted EBITDA in the 5 years. Again, I'm just

Speaker 2

I would echo the words of Andre and my words and my commentary. The adjusted EBITDA is a GAAP basis, Okay. This is a cash basis. So we will bridge the gap on cash, which is really because of the reductions in tenancy costs and operating costs in 2023 and 20 24. In tenancy costs and operating costs in 2023 2024 get straight line.

Speaker 2

So again, GAAP straight lines are over the term of the lease. Cash is current, so we feel fairly good on our cash basis that we will achieve. We will be better than The cash and cash equivalents we projected through 2023.

Speaker 6

Okay. That's fair. One more for me, if you may indulge me. Again, the delisting notice from the stock exchange, could you just talk a little bit about what you intend to kind of Do you over the next 6 months to kind of address that and prevent the stock from being possibly delisted?

Speaker 2

Well, one I can assure you that we will make sure the stock is not delisted. There are alternatives as we have for the last For the next 6 months, we'll see how the stock reacts based on our performance over the next quarter. We have filed a proxy to be able to do a reverse split. And I'm often reminded of Great companies like PayPal who did a reverse split and we all know what happened to that company. And so there is obviously the option to do a reverse split and be able to Not be in violation of the rules of the New York Stock Exchange.

Speaker 2

Okay. Thank you.

Operator

Comes from the line of Alexander Goldfarb from Piper Sandler. Your line is open.

Speaker 7

I just want to go back to the free cash flow, Sandeep. In previous calls, it's been sort of a steady question for me and others on pace of free cash flow and breaking even. And a few calls ago, there were some FX headwinds. So instead of being sort of middle of this year, it was going to be towards the end of this year. But now you guys are laying out that it's going to be second half of twenty twenty four.

Speaker 7

I just want to make sure that we're talking apples to apples because Yes. I think our expectation and what we have forecast for over a year has been early 2024. You guys have Continuously been emphasizing that you'll be ahead of that, whether initially it was middle of 2023, then it was late 2023 because of FX. But now you're saying it's second half of twenty twenty four. So I just want to make sure we're talking apples to apples.

Speaker 7

And also if it is the case, Why is free cash flow being delayed that far if you're saving $90,000,000 of cash interest?

Speaker 3

Okay. So this is Andre. Yes, listen, I think we've had these projections out For at least for 2 months, at least for the last 2 months, we've been consistent that the free cash flow breakeven point is Sometime in the second half of twenty twenty four. Recall, listen, I think you've seen there we've got some pretty significant Uses of cash just below EBITDA. Obviously, we're getting some cash interest savings, but nonetheless, the interest is a pretty significant A burden on the company.

Speaker 3

We also have, as you know, we've got cash lease expense in excess of book expense It's also a considerable use of cash burn. So as you can see, I think that's been pretty consistent. I think it's Difficult for us to time it, but we've always known it's been more or less sometime in 2024 midyear 3rd quarter. And then we've also got some restructuring because we're as you know, we're exiting a number of leases and that requires cash payments to Get out of those leases, but on a cash basis, it makes sense for us. So I think we've been at least certainly for the last couple of quarters, I think pretty consistent about when we believe The cash flow the free cash flow breakeven point is?

Speaker 7

Okay. So Andre, I'm going to just go back. It hasn't been consistent. This has been a topic that you guys know I regularly ask and focus on. And this is the first earnings call since the recap.

Speaker 7

So it's the first time we've had a chance to publicly ask about the free cash flow. This is a change from what you guys laid out before And it's a little troubling because the $90,000,000 of cash interest savings was supposed to be an acceleration. As far as paying to get out of leases, you guys have said That you would exit leases when your corporate guarantee, the the, you know, the letters of credit burned off. I hadn't really heard much Conversation of you guys paying to terminate those. So I'm a little bit confused on that point.

Speaker 7

Maybe you can elaborate.

Speaker 2

Yes, I can answer the question. I think let me go back and say what Andre got to was you do get to free cash flow, Okay. Towards the end of this year, okay, then you have additional costs in Q1 and Q2 and you get back into free cash flow. So yes, we could sort of answer the question and see you get to free cash flow. The point is that you're going to be consistently free cash flow quarter over quarter and that you start to see more towards next year, but you do get The part of being free cash flow at the end of this year, I might just add.

Speaker 2

Just to say Alex, let me just finish, I'll ask you a second question. Okay. We're not paying for the terminations in the sense what we said is that we will pay on a monthly basis As if we were paying rent, okay, and we've generally exited the deals with about 12 months or less of rent payment. It's still a payment. It goes from being in the rented tenancy line item, okay, to below the line.

Speaker 2

So effectively, It is still the cash to be projected, okay. So you are paying to get out of leases and generally paid No more than 12 months rent to exit leases. So if I actually look at just Q4 as an example of this year, okay, The below the line termination fee, which is nothing more than the rent payment, so it was always in cash, it was up to $40,000,000 If I take the $40,000,000 out, which is a one time cost, I'm just focused on, hey, what does this recurring business look like, you'll be in free cash flow back.

Speaker 7

Okay. So Sandeep, let me ask you this. Going back to Vikram's question on the delayed term draw, what you guys are saying is Even with this negative cash and on and especially in the 1st part of next year to exit some of these things, even with that, this new projection, Which is new from what was previously outlined. You guys do not see a need to access additional term loan or additional capital, right? Correct.

Speaker 7

Okay. So basically, investors can rest easy that you guys can achieve this cash profitability breakeven Without the company increasing the debt that it's already taken on?

Speaker 2

Correct.

Speaker 3

Okay. When you look at the cleansing deck, It's laid out and we're saying we're confident we're going to hit the projections in the cleansing deck. You'll also see when we exactly plan to draw And even at the low point of free cash flow, which we're saying is sometime in the second half of twenty twenty four, what's still the available liquidity is at that point, which is still North of $400,000,000 at the low point.

Speaker 7

Right. But hopefully you guys can appreciate how us on the outside who have heard one message, now it's being pushed out of here. So hopefully You know that also

Speaker 2

I think the bigger message is and I appreciate you feeling that it's been pushed out of here. The bigger message is You'll have variations in quarters, okay, just like any industry does. And so like I said, Q4, you'll actually See daylight and then Q1 and Q2 because of the cyclicality of The churns in December and then the lower occupancy in January, which happens every year, you're going to start to see a dip and you start to see it come back. Your next question comes

Speaker 3

from the line of

Operator

Tom Catherwood from BTIG. Your line is open.

Speaker 8

Thank you and good morning everybody. Kind of sticking with that the OpEx topic there, A little confused on some things, so see if you can just help me understand it. Andre, it sounds like, and correct me if I'm wrong, You came up with agreements with landlords to lower rent. That's cash basis and it's being straight line. So GAAP, it's not reflected necessarily.

Speaker 8

But it sounded like that was shorter term, just a benefit in 2023 2024. So kind of first question is, does that then step back up in 2025? And then the second part to it is, Sandeep, what you were saying about paying for the year's worth of rent as the de facto termination fee, You had previously commented that that rolls off at the beginning of 2024 for those leases you exited in the 4th quarter. Is that still the case? So you kind of effectively some of it comes out in cash, but some of it just rolls off completely because those leases are no longer there.

Speaker 2

Correct. Your answer to your second question is correct, which is why 2020, 2023 will be the year that we continue to pay for the 40 terminations we did In December of 2022, we did exit some locations in the beginning of 2023, as I said in my prepared remarks. But the bulk of the termination fee, if you will, which you're paying monthly, rolls off by year end. All that is correct.

Speaker 3

And Tom, on your first question, the savings are not just some of the savings go beyond 23 24. They just don't go for the full life of the lease. And so there is some point at which the savings drop, but it's more than just a

Speaker 4

2 year savings on a number of

Speaker 2

And I'll add one more thing. As I've mentioned over and over again, what I do like about the business is that the expense line item will continue to decline over time. And the reason for that is, albeit that you get these And the reason for that is albeit that you get these cash savings in 2023 2024, over time The corporate guarantees and the letter of credits continue to decline. We've now been in business for over 10 years and so our leases are coming towards Renewals and when they do come towards renewals, we do believe that we will be able to Decrease our rent and tenancy costs going forward just simplistically because our corporate guarantee letter credits Continue to burn down and our lease terms come to an end.

Speaker 8

Got it. Appreciate that. Can you give us a magnitude of the savings when the expenses on those 40 locations burn off?

Speaker 3

It's too early because we've only concluded about maybe a quarter of these. So I think once we're deeper in, I think I said that from prepared remarks, we'll give you a sense for exactly what the savings you can expect over the next few years. But Again, only a small portion have been concluded. Yes. So they'll go out beyond.

Speaker 3

Again, we said, assumed in the model as $100 plus 1,000,000 of Savings in each of 2023 2024. Once we get deeper, we'll update that and also give you a

Speaker 4

sense for what goes beyond 2024 as well.

Speaker 8

Got it. Appreciate that, Andre. And then last one for me. Kind of struggling to align some of the positive Commentary you have on demand with occupancy and desk sales. And Sandeep, I know you said it's more of timing related than demand related.

Speaker 8

But

Speaker 4

Maybe

Speaker 8

is our occupancy gains from here primarily going to be driven By leasing with enterprise members or how much can you pick up with your small and medium business members from here and how has demand been trending with that segment?

Speaker 2

So again over the last three quarters, the SMB small medium businesses have been driving Occupancy, not enterprise. Enterprise is actually, as you know, and I've said it over and over again, has created churn in 2022. So finally in the month of April, that was I think the 1st month almost we had a fifty-fifty split between enterprise and SMB. And that's the first time we've seen enterprise clients come back, and we're seeing it globally. So But I do think in the near term, it's the SMB clients, okay, that will drive occupancy.

Speaker 2

And why do I feel that? You can think of and I often give this comparison, the 1% to 9% office or 10% to 49% office is a commodity And you can price to clear like an apartment. And so we can drive occupancy in the SMB sector pretty aggressively From now to the end of the year, because it's more, like I said, a commodity driven price aspect. And the combination of that We're now watching NetEPS sales positive in the U. S.

Speaker 2

In April and we're going to continue to see that same momentum In May, we do see the enterprise client base in May to be again almost an all time high that we've ever experienced in the history of this company in the U. S. Well, it gives us confidence that sequentially, you'll continue to see occupancy gains from now till the end of the year.

Speaker 8

Got it. Appreciate the commentary. Thanks everyone.

Operator

Your next question comes from the line of Brett Knoblauch Erf Cantwell Fitzgerald, your line is open.

Speaker 4

Hi guys. Thanks for taking my question. I guess similar to the last line of questioning, I guess can you just help me parse through your next quarter guide kind of Flat sequentially on a growth perspective despite U. S. Turning in quarter, despite a lot of large enterprises Pretty much executing these return to office initiatives.

Speaker 4

It seems like demand for FlexBase based on prepared remarks is only accelerating. Yes, we're not quite seeing that flow through in your guidance.

Speaker 2

Again, as I mentioned, You are seeing sequentially occupancy gains. I might just add, and I'm very appreciative of the conversation. When you look at how many square feet was leased in this quarter, Okay. It's about 8,000,000 square feet. And I think we should take a little acceptance of that number.

Speaker 2

8,000,000,000 square feet is I think more than most companies combined in the office sector. So what you are seeing is you are seeing a shift towards Flex. One other point I'll make is that the denominator is not getting bigger. We're taking market share, So even if you look at New York City, as I mentioned in my remarks, I think last quarter we took 16% or 18% market share. In Q1, we took 23%.

Speaker 2

We continue to take market share. So there's a continuously shift From traditional to flex store working. And we do view Q1 to be the trough And we do see occupancy gains quarter to quarter. So I do think you're going to see that these numbers are quite large When you look at the amount of leasing activity done during Q1 and again we watch April being very strong and May being a follow on.

Speaker 4

And I guess a follow-up to that, I mean your system wide gross and consolidated gross organization sales are down, call 15% to 17% just from the last quarter. So I guess should we expect those trends to reverse or is that more of A function of the kind of weak commercial market at least for the large enterprise side?

Speaker 2

No, actually it's a function of 2 things. We actually think 2 things. Once you get above 80% occupancy, which is where we are in the international markets or Markets like Korea, which over 90% occupied all Southeast Asia in the mid-80s occupancy, you just have less to sell. So fundamentally, it's not a function of demand, it's a function of space. And Where you'll continue to see occupancy gains rapidly is more in the United States because you still have space available to sell.

Speaker 2

So it's more a function of 2 things and more a function of space in the international markets than demand in the international markets. So Just naturally, you have less space to lease and you lease less space. That's fundamentally the More than half the reason of the dip is not a demand issue, it's a space issue.

Speaker 4

Okay. Got it. That makes sense. And then just one follow-up. I just want to clarify here.

Speaker 4

You said you would expect your kind of ending cash balance in the second quarter To be near that $422,000,000 adjusted cash balance that you kind of put in your presentation?

Speaker 3

Yes, I see the exactly. I think you're looking at the pro form a and Q2 cash balance of 4.27

Operator

This now concludes today's conference. I would like to thank our speakers for today's presentation and thank you all for joining us. You may now disconnect.

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Earnings Conference Call
WeWork Q1 2023
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