Maguire Properties Inc., the largest office landlord in downtown Los Angeles, could be a takeover target as the real estate boom may have made its properties worth more than the company as a whole.
Shares of the Los Angeles-based real estate investment trust climbed 7% on Monday after an industry newsletter reported that Maguire had hired investment bankers to shop the company. Most of Maguire's assets are top-quality office buildings in Southern California, where such properties have been selling for record prices in recent months.
Chief Executive Robert Maguire had considered taking the company private but concluded that he wouldn't be able to raise enough money to buy it, according to the REIT Newshound, a trade publication. Maguire representative Peggy Moretti said the company would not comment on market speculation.
After surging $2.65 on Monday, Maguire shares fell 50 cents Tuesday to $39.65, putting the company's market value at $1.86 billion. Merrill Lynch & Co. analyst Ian Weissman said Maguire could fetch $43 to $45 a share because of the quality of its portfolio, which includes the elegant Gas Co. Tower and the Wells Fargo Tower in downtown L.A.
Other REIT managers have decided to sell as office prices reach such high levels that buyers must expect smaller returns on their investments than were the norm just a few years ago.
Los Angeles-based Arden Realty Inc., once the region's largest office REIT, cashed out this year in a $3.2-billion sale to General Electric Co. GE quickly sold some of the best Arden buildings to Chicago-based Trizec Properties Inc., which in turn was sold to investment firms Brookfield Properties Corp. and Blackstone Group.
"Now that Arden and Trizec are gone, there aren't many players left" for sale in Southern California, said analyst Craig Silvers of Bricks & Mortar Capital. "So Maguire is a logical and desirable candidate for someone to buy."
Large investors have been drawn to office properties in recent years as the improving economy fills buildings with tenants paying rising rents while growing construction and land costs limit competing developments. Southern California is among the nation's top commercial real estate investment markets.
In a departure from his previous growth-only stance, Robert Maguire had announced in a conference call with analysts this month that he planned to take advantage of the hot market and sell buildings in Glendale and San Diego valued at as much as $900 million and sell stakes in an additional $1 billion worth of properties owned in joint ventures.
The firm also delayed its plan to acquire $700 million in properties this year because of high prices. Analysts generally supported the shift on the grounds that it made little sense to compete with deep-pocketed pension funds and private money managers such as Blackstone.
Such investors and other REITs are the logical buyers for Maguire, said Silvers, who values the company at $37 to $39 a share. A REIT allows individual investors to participate in large real estate ventures. Unlike other public companies, REITs must distribute 95% of their income to shareholders.
Maguire-owned sites slated for future commercial development are also getting short shrift by Wall Street, Weissman said. "We believe that many investors are undervaluing the company's significant land bank, which we conservatively put at $522 million, or just under $10 a share."
Industry observers have mused about whether CEO Maguire could tolerate the strictures of answering to Wall Street and federal regulators since he took the company public in 2003.
Robert Maguire has a reputation as a sometimes volatile maverick developer willing to take big risks, including building the tallest office tower in the West, the 72-story U.S. Bank Tower.
His bid to develop Playa Vista on the Los Angeles coast was less successful, and he lost control of the massive mixed-use project in 1997.
Maguire has retained investment bankers Lehman Bros. and Morgan Stanley to seek a deal, according to the REIT Newshound.
If he sells the company, Maguire hopes to retain ownership of undeveloped sites and projects underway, according to the REIT Newshound report. The 71-year-old Maguire could make millions of dollars from a sale -- his 3.3% stake is worth more than $60 million -- but "it's in a developer's blood to develop," Silvers said. "If people want to give them money, they will do that."
The prospect of Maguire's going after the company's future development assets concerns analyst Michael Knott of Green Street Advisors, who said, "There is no evidence the board would be willing to stand up to Rob" if the price he wanted to pay was below Wall Street's estimates of their value.
Knott said the company's stock was fairly valued after Monday's run-up. Shares could reach $41.50 if the company sells, he said, though an auction for Maguire's desirable portfolio could produce a higher value.