WeWork Forerunner IWG/Regus Restructures its Business, Unleashing Mayhem on Landlords and Investors

Regus’ U.S. subsidiary, RGN Holdings, has already filed for Chapter 11 bankruptcy.

IWG — for “International Workplace Group,” previously known as Regus, the serviced-offices and coworking giant whose business model served as inspiration for WeWork — announced plans this week to close some of its city-based locations in Australia, in order to refocus its attention on the suburbs and rural areas. The move forms part of an aggressive global restructuring program that is causing all kinds of headaches for its landlords and investors.

IWG accounts for roughly 11% of the entire global flexible workspace market, around six and a half times times more than WeWork. In 2019, it had revenues of £2.7 billion. It operates 3,392 centers globally, including over 1,000 in the United States. Those US offices are operated by RGN-Group Holdings, LLC (RGN), a U.S. subsidiary of Regus Corporation, which operates the brands Regus, Spaces, HQ, and Signature by Regus, is a subsidiary of IWG.

In the US, RGN Holdings has already filed for Chapter 11 bankruptcy protection. The bankruptcy filing means that Regus can seek to have its rents dismissed. This affords it a great deal of leverage in its negotiations with landlords, from whom it hopes to extract deferred rent payments and improved lease terms, including in some cases a turnover-based model.

US commercial mortgage-backed securities (CMBS) have considerable exposure to Regus. Kroll Bond Rating Agency found 157 properties that served as collateral for $13 billion in loans with exposure to an affiliate or franchise of Regus. Regus is the largest tenant in 30 of these properties and is the sole tenant in three properties. Due to the corporate structure of Regus, RGN’s bankruptcy does not involve all Regus locations.

The Kroll analysts warn that although IWG has sought to extract rent deferrals and lease modifications from its landlords, the bankruptcy filing means the company can walk away from its rental obligations. IWG tends to sign leases and file bankruptcy petitions through single-purpose limited liability companies. That means that part of its portfolio can enter bankruptcy and tear into landlords without impacting other locations.

In the UK, the company has threatened to plunge Jersey-based Regus plc into insolvency. As a result, up to £790 million of lease guarantees could be dissolved, leaving landlords in the lurch. The only way for the landlords to avoid such a dire outcome, IWG says, is to agree to sharp rent cuts across 500 centers.

Unlike WeWork, IWG made a profit last year. But in the first half, IWG booked a pre-tax loss of £176 million, compared to the £145 million profit in first half of 2019. IWG has already warned that it expects to lose substantially more in the second half, despite slashing costs by £300 million. Its shares are currently down 43% year-to-date.

The shift to work-from-home (WFH), sparked by the pandemic, has taken a big toll on the flexible workplace market.

The crisis has also exposed the deep-seated flaws of its business model, which hinges on signing long-term leases on buildings and then sub-letting the space in smaller sections on shorter terms. Now, many of its tenants want out while many of its landlords still want to be paid.

As the ongoing virus crisis sows mayhem and uncertainty in office rental markets across the globe, IGW is seeking to downsize its global network. New York, for instance, stands to lose 20% of all of its IWG-leased locations.

Many operators are hoping that that the so-called “new normal” economy being ushered in by governments’ pandemic response will create a surge in demand for flexible workplace spaces, particularly in the suburbs, as workers seek out spaces that offer alternatives to large crowded office buildings, while providing employees a simple, cost-effective solution to their work-home boundary dilemmas.

For the moment, though, the sector remains in a state of limbo, as countries across Europe and in North America announce new lockdowns amid a resurgence of Covid-19 cases. Some co-working members are taking advantage of the advertised contractual flexibility of co-working spaces to cancel their contracts, in a last-ditch effort to control their cashflow and reduce liabilities.

Continue reading the article on Wolf Street

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