WeWork’s turnaround star will need a new script

New CEO Sandeep Mathrani rebuilt one real estate giant, but faces more daunting problems this time

TRD NATIONAL /
Feb.February 25, 2020 07:00 AM
WeWork CEO Sandeep Mathrani and Adam Neumann (Illustration by Zach Meyer)

WeWork CEO Sandeep Mathrani and predecessor Adam Neumann (Illustration by Zach Meyer)

Sandeep Mathrani carved a slight figure as he took the stage to explain why he had just become CEO of a company with huge financial problems and uncertain prospects.

“I decided to take the role because, one, it had great assets,” he said, during the Global Retailing Conference at the University of Arizona. “And two, it had great people.”

The year was 2012, and Mathrani was a year into his job at General Growth Properties. GGP was the country’s second largest mall-owner but was better known for having just suffered the largest real estate bankruptcy in U.S. history.

Eight years later, Mathrani faces a familiar challenge as the new CEO of WeWork, the office-space company that last year endured the largest real estate corporate collapse since, well, GGP.

This time, however, he will need a different speech.

Instead of great assets, WeWork has more than $40 billion in liability from hundreds of leases. Offloading them won’t generate capital, as Mathrani did by selling dozens of GGP’s malls.

As for its people, few of WeWork’s executive-level employees remain from the team co-founder and CEO Adam Neumann led until his ouster last summer, and four board members have recently left or are on their way out. Thousands of staff are being laid off as the company attempts to get costs under control.

In addition, unlike with GGP, Mathrani might be arriving toward the end of the business cycle; WeWork’s office-space empire has yet to be tested by an economic downturn. It is unknown whether a recession would prompt an exodus of customers or if WeWork could parry the blow by catching enterprise firms seeking short-term, flexible leases.

WeWork lost more than $3 billion last year. Its valuation plunged by $40 billion. And its number of profitable locations remains low.

To clean up the mess — and save its $10 billion investment in WeWork — its largest stakeholder, Japanese conglomerate SoftBank Group, installed a new chairman last fall at the New York-based firm. Marcelo Claure, a former CEO of Sprint and COO of SoftBank, has taken a hands-on approach.

But with the company looking to reposition itself as a real estate business, and Claure lacking experience in the industry, a veteran of the field was needed. Mathrani was first approached to join as a board member, a person familiar with the situation said, but the discussions quickly evolved.

“He is a proven leader with turnaround expertise in the real estate industry,” Claure said in announcing Mathrani’s hiring.

Real estate leaders have lined up to echo that message.

“It’s a brilliant move by WeWork to make him the CEO,” said Charlie Kushner, chairman of Kushner Companies. “He is one of the most brilliant and talented real estate people in the industry.”

Marty Burger, the CEO of Silverstein Properties, deemed Mathrani “as good as anyone to right the ship for WeWork.”

And Ric Clark, the chairman of Brookfield Property Group, said at a Manhattan real estate luncheon that Mathrani is “the perfect guy for WeWork at this time.”

The blessing of the real estate industry is essential but not sufficient for Mathrani to succeed. With WeWork’s downtrodden workforce, tattered reputation and no clear end to quarterly losses, he faces a challenge more daunting than the one he met at GGP.

WeWork declined to comment, or make Mathrani or Claure available for an interview.

EARLY RISER

Mathrani’s path could hardly skew farther from that of Neumann, who co-founded WeWork and became a billionaire after a checkered academic career and failed ventures.

Mathrani, who is 57, was born and raised in India, attended high school in Philadelphia and earned business and engineering degrees from Stevens Institute of Technology in New Jersey. He ditched engineering for real estate after making $20,000 flipping his apartment, joined Forest City Ratner in 1994 and quickly built a reputation as a savvy retailer.

“At a very early age he was a sophisticated real estate investor,” said Anthony Orso, president of capital market strategies at Newmark Knight Frank, who met Mathrani in the early 1990s and has since done multiple deals with him.

Mathrani later turned down a job with Related Companies, according to Burger, a former executive there, and was lured to Vornado Realty Trust, where his salary reached $1 million in 2005. The following year he leased more than 1.2 million square feet of retail, according to a company filing.

Meanwhile, another company known for its retail portfolio was on a path to bankruptcy. Chicago-based GGP, under a mountain of debt, filed for Chapter 11 in 2009. Mathrani was named CEO the next year, his work at Vornado having caught the attention of the newly appointed board.

“Because [GGP] didn’t have any capital, they had not done well, and were failing, [employees] kind of accepted it as status quo,” said Mary-Lou Fiala, a former GGP board member who recommended Mathrani’s hiring. Mathrani “had to change the mindset to ‘yes, we can do this.’”

Mathrani’s moves helped raise GGP’s value by $2 billion. In his first year he sold 40 non-performing malls, generating $3 billion. Mathrani restructured a wall of debt, giving the company another decade to pay it off. He doubled down on Class A malls, sold a stake in the $5.5 billion Ala Moana mall in Hawaii, and acquired more than a dozen Sears stores.

He also turned GGP toward high-profile deals in Manhattan and away from low-slung malls. In 2014, GGP partnered with Thor Equities to acquire 685 Fifth Avenue for almost $500 million. The following year it purchased the iconic Crown Building with Wharton Properties for $1.8 billion.

In negotiations, Mathrani maintains a humble presence, say those who have done deals with him. In his first meeting with developer Michael Shvo in 2015, on a Friday afternoon at GGP’s Manhattan offices, Mathrani urged him to redevelop a section of the Crown building.

“The first sentence out of his mouth was, ‘I want you to buy the upstairs floors of the Crown building,” said Shvo.

In three hours they had drafted a $500 million deal. “We managed to get it done on a handshake,” said Shvo, “before shabbat.”

The developer called Mathrani among the “most direct, big-picture guys I’ve met in real estate.” And he was tough in the deal room. “When he got pissed,” said Shvo, “you knew he was pissed.”

By the time GGP made a splash on Fifth Avenue, Mathrani had already achieved near-celebrity status in the commercial real estate world. He earned a $39 million salary in 2015 and became a fixture of Burger’s fabled annual ski trip to Vail for real estate executives.

Kushner, a longtime friend, recalled running laps in Central Park with Mathrani before work, though he said those sessions have become less frequent with age. Kushner said Mathrani was a mentor to his son Jared, who has led multiple deals for the family business.

“Jared definitely did look up to Sandeep,” Charlie said. “Very often he called Sandeep for advice.”

At one point Mathrani even considered joining Jared — a senior adviser and son-in-law to President Donald Trump — in politics. In November 2016 he met with the president-elect at Trump Tower to discuss joining the future administration as U.S. trade representative, Women’s Wear Daily reported.

Nothing came of the meeting. But Mathrani was busy tying a bow on a refurbished GGP. In 2018 he sold the company to Brookfield Property Partners for $15 billion, a victory for a firm that had restructured $27 billion of debt. Mathrani’s personal stake in the transaction was valued at $189 million, and he joined Brookfield as CEO of its retail group.

But having tasted life as the face of a company, Mathrani resigned from Brookfield in January, in time for his next challenge.

CULTURAL REVOLUTION

Mathrani arrives at WeWork as it attempts to shed its reputation as a fast and loose startup where anything goes — and often did.

With Neumann largely controlling the company through a unique shareholder structure, his inner circle seemed to function as enablers, reaping rewards for staying in his good graces rather than protecting the company’s interests. Neumann was allowed to lease buildings he owned back to the company, sell it the trademark to the word “we” for $5.9 million and have the firm buy a $60 million private jet.

Some executives — including board member Lew Frankfort, co-CEO Artie Minson and chief legal officer Jen Berrent — received millions of dollars of low-interest loans that were later repaid with bonus payments. About $600,000 owed by Minson was forgiven.

Neumann’s self-enriching deals were undone, and the company began tamping down its notorious party culture. Last year WeWork canceled free beer and wine at its locations and ended booze-soaked corporate retreats.

Mathrani must still deal with the legacy of Neumann’s tenure, though. Business Insider reported last week that inappropriate sexual relations among WeWork’s ranks had been rampant, that its real estate division ran up huge expenses and that the company paid $2 million to a woman who made claims of drug use, sexual harrassment and pay discrimination.

It is also assessing dubious real estate bets made under Neumann. In addition to reviewing dozens of leases signed in recent months, WeWork is discussing a potential sale of its iconic Lord & Taylor building with Amazon, The Real Deal reported last week.

The property, which WeWork acquired last year for $850 million with the intention of moving its headquarters there, has divided employees; some believe WeWork overpaid by $200 million. The layoffs of thousands of employees has diminished the need for a new headquarters, and a potential $1 billion sale to Amazon would generate much-need cash.

WeWork’s changes have extended to its largest investor, SoftBank Group, which has been on an apology tour. Masayoshi Son, its enigmatic CEO, said “my own investment judgment was really bad.” And this month, he told investors in Tokyo that SoftBank has all but abandoned its $108 billion goal for a second Vision Fund after investors burned by their WeWork bets refused to commit.

Claure has installed new lieutenants to save SoftBank’s investment. In addition to Mathrani, he appointed to WeWork’s board another SoftBank executive, Kirthiga Reddy, who will be its first female member. And last week Shyam Gidumal, a former partner at EY, was announced as COO.

The new executives signal a changing guard at WeWork. Three board members left the company at the start of the year, and Frankfort is expected to leave in coming months. Co-CEOs Sebastian Gunningham and Minson are also leaving.

“Now we are a lot more involved,” Claure told CNBC this month. “What we’re not saying is that this business is a mistake.”

CAVIAR DREAMS DASHED

Mathrani must now inspire whiplashed workers whose expectations of riches gave way to a dire threat of bankruptcy. Morale was eroded further when thousands of their colleagues were sent packing.

In a notice sent in December, seen by TRD, WeWork shareholders were notified of an option to reprice their stock options at $4.13 a share — a bitter pill to swallow for those with options priced at many times that amount. Those who agreed to the option are barred from selling their shares back to WeWork at $19.19 in an upcoming tender offer.

Some shareholders also have expressed concern for the five-year plan released by Claure this month. It involves scaling WeWork up to 1,000 locations and becoming “free cash flow positive” by 2022. The measure — which WeWork defines as “adjusted EBITDA excluding non-cash GAAP straight-line lease cost” and “amortization of lease incentives” less “net capital expenditures” — is more standard than the ones investors mocked ahead of WeWork’s failed public offering last year, but it is nonetheless the kind of thing companies talk about when they do not have actual profits in sight.

Some shareholders also question why the plan is devoid of key metrics, such as occupancy rates and whether the percentage of enterprise clients is increasing or declining. The most recent figures, released in October, show WeWork’s global occupancy rate at 79 percent; enterprise companies made up 43 percent of its client base.

Just as importantly, two unmeasurable factors that gave rise to WeWork — its brand and uniqueness — have since evaporated: Its image has become a liability and it competes in an even more crowded market with newer office-space companies, including Knotel and Industrious. “How do you plan to rebuild the image of the brand?” one shareholder wondered.

Mathrani is likely to be systematic in his bid for a second turnaround. During his speech in Arizona eight years ago he told the audience that on his first day at GGP he presented a 100-day plan for the company, but was soon disabused of such ideals.

“You can’t have a 100-day plan — it just can’t exist,” he said. “No plan is done in 100 days.”

Eddie Small contributed reporting.


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