Via Wolf Street

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

By Nick Corbishley, for WOLF STREET:

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 ($493 million) and is the sole tenant in three properties ($69 million). Due to the corporate structure of Regus, RGN’s bankruptcy does not involve all Regus locations.

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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.

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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.

This is not an option for many clients of IWG, which has proven to be a lot less flexible than its marketing may suggest. Whereas many of its rivals, including WeWork, have offered rent reductions to many struggling tenants during the lockdown period, IWG has allowed its 7 million tenants only to defer rather than reduce their rent payments. It has also been far from flexible regarding downsizing or termination of contracts.

Around half of the landlords have agreed to renegotiate, but not everyone has buckled. Legal & General, one of the UK’s largest insurance firms, has decided to stop leasing buildings to Regus altogether. Many landlords are incensed at the fact that IWG extracted a £635 million dividend last year from Regus plc, leaving the subsidiary with just £14.6 million in assets after the value of its guarantees quadrupled to £758 million in a single year.

“Any well-capitalized company using insolvency rules to simply walk away from lease commitments is abusing the system at the expense of property owners and the millions of people whose savings and pensions are invested in commercial property,” said Melanie Leech, chief executive of the British Property Federation.

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While IWG uses bankruptcy proceedings to renege on rental contracts or the threat of non-payment of rents to pressure landlords to slash the rents it pays, it has refused to treat its own tenants in kind.

But some of its tenants are fighting back: 26 tenants, represented by UK law firm Aria Grace, are taking a leaf out of IWG’s book. Instead of continuing to pay their rent, these businesses, on the verge of financial ruin, have been counseled to run down the assets in their companies and then set up new trading companies to continue their businesses, much as IWG has done with its landlords.

Lindsay Healy, founder of Aria Grace Law, told the Times of London: “Our clients want to be released from their leases, otherwise they are exposed to financial ruin. Regus, on the other hand, won’t allow it. Regus wants to be insulated from any risk so that they can pay their exorbitant salaries and shareholders — and they want these small businesses to do the insulation.” By Nick Corbishley, for WOLF STREET.

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