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REAL ESTATE

Maguire Properties to default on 7 prime office buildings

The REIT will give up prime assets in L.A. and Orange counties in a bid to stay solvent. It posts a loss of $375.7 million.

August 11, 2009|Roger Vincent

Maguire Properties Inc., one of the region's largest commercial landlords, posted widening losses Monday and said it was about to default on seven prime office buildings in Los Angeles and Orange counties.

The real estate investment trust lost $375.7 million, or $7.95 a share, during the second quarter, more than twice the $105.9 million lost during the same period in 2008.

It is defaulting on loans worth more than $1 billion.

Maguire Properties hopes that by giving back the keys to properties for which it overpaid at the peak of the last boom, it can reduce debt enough to keep the company solvent, Chief Executive Nelson Rising said in an interview Monday.

The huge second-quarter loss reported Monday was largely due to the decision to dispose of those properties, as the company posted a one-time write-down of $345 million.

Analysts interpreted the move as an anxious attempt to save the company, saying that if Maguire no longer has to make payments on the seven buildings, it might be able to hang on until the real estate market turns around.

Despite the bad news, the company's shares rose 15 cents to $1.04 as investors took hope that Maguire would be stronger going forward.

Craig Silvers, president of Bricks and Mortar Capital, said that by dumping some of its financially upside-down properties the company will burn less cash and may get through the real estate downturn.

"It looks like they will survive," said Silvers, who bought Maguire stock on Monday.

But Michael Knott of Green Street Advisors called the company "a zombie . . . with no intrinsic value."

"They are not immediately headed for bankruptcy," Knott said. "But they are on life support and it's going to be hard for them to ever leave the ICU."

Rising said the dramatic move to cut loose prime office buildings did not mean that Chapter 11 was imminent.

"We are not considering bankruptcy," he said. "We think this move will materially strengthen the company."

Maguire's decision to default on its loans is also a sign of worsening trouble in the commercial real estate market.

Properties continue to decline in value and more steep losses for landlords and lenders are coming, industry observers said.

As some brace for a wave of foreclosures like those that have engulfed the housing market, the pain could spread far enough to be a drag on the nation's economy.

"We will certainly see further large-scale events like this," said investment banker Ryan Krauch, a principal at Mesa West Capital. "It gives everyone pause in the context of this recovering economy."

More companies, Krauch said, should write down the value of their buildings because that would enable them to set more realistic prices, helping to free up the frozen commercial real estate market.

Most of the buildings Maguire is giving up are in Orange County, where departed company founder Robert F. Maguire bet heavily in 2007 when he led a $3-billion acquisition of 24 office buildings in Orange and Los Angeles counties.

Borrowing money for the heavily leveraged purchase was fairly easy at the time, when capital markets were still flush with cash.

The $3-billion deal greatly expanded Maguire Properties' presence in Orange County, but the obligations turned into a financial millstone. The hot Orange County market cooled dramatically, leaving Maguire and other landlords to struggle with high vacancy and falling rents.

Rising replaced Maguire as chief executive in May 2008.

The Orange County buildings Maguire Properties will give up are Stadium Towers Plaza in Anaheim; Park Place I and II in Irvine; 2600 Michelson in Irvine; Pacific Arts Plaza in Costa Mesa; and 500 Orange Tower in Orange.

The company is expected to announce today that it has completed a deed-in-lieu-of-foreclosure sale of Park Place I, and has sold adjacent parking lots and development rights for $17 million.

Also on the list is 550 S. Hope St., a 28-story high-rise next to the Central Library in downtown Los Angeles. The company acquired the property as part of the big 2007 deal.

Layton Belling & Associates of Irvine took title to Park Place I. Loans on the other properties are held by pools of investors who bought commercial mortgage-backed securities.

Maguire Properties is downtown L.A.'s largest office landlord and considers the city's financial district its primary market. Other holdings there include U.S. Bank Tower, the tallest building in the West.

Monday's higher Wall Street price marked the first time Maguire stock closed above $1 since June 19. Shares had sold for $19 when the company went public in 2003.

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roger.vincent@latimes.com

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