Maguire Mum as Analysts Ponder Sale Options

LOS ANGELES-Maguire Properties has taken the unusual step of not conducting a quarterly conference call to report its fourth-quarter and year-end earnings. The Downtown L.A.-based company has said it wouldn’t comment on earnings or its efforts to arrange a sale, but analysts who follow the REIT say that its financial performance and other factors continue to present big hurdles for anyone thinking of buying the company and its 35 million sf of Southern California office space.

Maguire is under pressure to sell from at least one major shareholder. Also, it has long been rumored that the REIT’s chairman and CEO Rob Maguire wants to sell. Questions surround the prospect of a sale, according to David Loeb, senior real estate research analyst and managing director for Milwaukee-based Robert W. Baird & Co., who tells GlobeSt.com that the hurdles to a Maguire sale range from tax implications to changes in capital markets to the uncertainties of the Orange County office market to the heavy debt load on Maguire’s portfolio.

Loeb says that the question of when Maguire might be sold is tied to the question of who the likely buyer will be. “The hurdles to acquiring Maguire are substantial. The externalities around this are more than they are for most companies,” he says.

Loeb explains that the tax indemnification agreements that Rob Maguire has on a number of the properties that he contributed to the REIT mean that the tax hit for a third-party buyer would be substantial. In addition, he says “Rob’s incentive compensation plan would probably be triggered and there would be a big payment for that.” Loeb thinks that any group that acquires the company is likely to include Rob Maguire because “that’s really the only way to get around those two big financial costs of acquiring the company.”Loeb and other analysts have long cited the big debt load that Maguire’s properties carry, which would be another obstacle to a sale, especially in today’s uncertain capital markets. Loeb’s guess is the Maguire board is working actively with the company’s CEO and other potential buyers to try to work out something within the next couple months. But, he says “I have my doubts whether that can succeed.”

Maguire’s expansion from the company’s base in Los Angeles into Orange County in recent years “looked pretty interesting at the time and the acquisitions showed some pretty good growth in NOI until the subprime problems,” Loeb says. But the once booming Orange County office market has slowed considerably, posting nearly one million sf of negative net absorption for 2007 as a consequence of the subprime mortgage problems. Loeb believes that vacancy will continue to rise, causing rents to slide.

Maguire has signed leases in the last quarter at substantially higher rents. “I don’t think that’s a sustainable trend. I think rents are going to have to come down,” Loeb says. He cites a UCLA forecast that Orange County office vacancy could approach 20% this year, adding “substantial office construction-in-progress is likely to keep the market saturated for some time.”

Another problem is figuring a price for Maguire. “Measuring the going concern value is very tricky for Maguire because of the amount of vacancy in the portfolio, particularly in Orange County, along with the number of lease expirations that are coming up in the next year,” Loeb explains.The numbers that Maguire presented in its press release and supplemental filings indicate the REIT’s Orange County assets are currently about 30% vacant, including development that is coming on line. The company has another 14% of its leased space in Orange County expiring this year.

Another question is whether certain large tenants will continue to occupy their spaces. Loeb points out that Washington Mutual, the lead tenant in Maguire’s Washington Mutual Campus in Orange County, occupies space where it operates its subprime lending business, an arena that Washington Mutual says it’s planning to exit. “Washington Mutual is a good credit tenant. I’m sure they will continue to pay rent on the space unless they arrange some sort of a lease termination, but that would mean more vacant space would come onto the market to compete with direct space,” Loeb says.

Loeb’s latest report on Maguire points to the REIT’s weak FFO performance of 14 cents per share in the fourth quarter, down from 60 cents a share in last year’s fourth quarter. And, he says the company’s dividend is incompatible with its FFO performance. “If Maguire is to remain public, its dividend is almost certain to be cut. The $18.8 million cost per quarter is simply unsustainable,” according to Loeb’s report.

Despite the weakening financial numbers and the hurdles to a sale, Loeb points out that Maguire has a reputation as a consummate deal-maker. “If there is a deal to be done that involves multiple parties and he walks away with what he wants, then everything is on the table,” the Baird analyst says. “Coming to some kind of agreement that either transfers his tax issues to other assets or even makes a compromise on his incentive compensation plan–all of that might be possible–but it would have to be a deal where he was part of the package.”