No Reason Given In Termination of Maguire Official

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No Reason Given In Termination of Maguire Official

By PAT MAIO

Staff Reporter

The senior executive credited with building up the downtown Los Angeles commercial leasing portfolio for Maguire Properties Inc. has been unexpectedly fired, triggering a severance package worth at least $500,000 that caused the company to take a charge against its earnings.

Wall Street analysts have received little clarity on the departure of Tony Morales, who was senior vice president in charge of leasing.

When Lehman Bros. analyst David Shulman asked about the circumstances surrounding Morales’ firing during a first-quarter conference call, co-Chief Executive Richard Gilchrist responded that it wasn’t the company’s policy to talk about personnel matters.

“So we won’t go into great detail except to say, simply that, shortly after the Maguire Properties Investor Day, several things came to our attention concerning Tony which in our view were (so) compelling that we needed to make a decision to terminate the employment relationship, so we did,” Gilchrist said.

Investor Day took place on March 11-12, and included tours of Orange County and Los Angeles County properties, including detailed briefings made by Morales.

“Tony played a very prominent role in presenting Maguire’s story to investors and analysts,” Jim Sullivan, a principal at Newport Beach-based Green Street Advisers, said in remembering the meeting. “It was quite a surprise that a few weeks later he was shown the door.”

Sullivan said he found the abrupt change a cause for concern.

“Anytime you see a key member depart, there is a transition risk,” he said. “That’s especially true of Maguire, which has a small, very talented senior management team.”

Morales is being replaced by William Flaherty, who worked with Maguire Properties for more than a decade in Texas.

Company founder and co-Chief Executive Robert Maguire III, along with Gilchrist, is expected to play a stepped-up leasing role during the transition. Rob Maguire has set up a lunch meeting this week to introduce Morales’ replacement to senior brokers in town.

Ron Heckmann, a spokesman for Maguire Properties, declined to elaborate on Gilchrist’s remarks, or a company filing stating that the termination was “without cause.” He said that Morales’ termination was not related to anything that occurred on Investor Day.

“It did not involve the Investor Day event,” Heckmann said.

Morales said he has been advised not to discuss the matter. “I really can’t say, although I’d like to,” he said.

Key player

Morales ran leasing operations for Maguire Properties, which is downtown L.A.’s largest Class-A office landlord. He played a critical role in bringing the company public last June and landed several large tenants. He is also credited with getting the Los Angeles Unified School District to stay in the KPMG tower, and he helped get US Bank into the former Library Tower.

Analysts said Morales was considered the architect of Maguire’s “blend and extend” leasing strategy. This allows most stable commercial tenants, regardless of size, to execute an early renewal closer to current market rates. Essentially, a blend-and-extend lease lowers the rental rate immediately for the tenant, and then ratchets it up in the out-years, which is good for the landlord and makes cash flow more predictable.

News of Morales’ departure also came as a surprise to local brokers. “He is a truly talented businessman,” said Doug Marlow, senior vice president of CB Richard Ellis. “I’m sure he’ll pop up somewhere else.”

Marlow represented Western Asset Management Co. in a 10-year lease worth an estimated $55 million at the Pasadena Plaza Las Fuentes II. Morales represented Maguire Partners, the predecessor to Maguire Properties, in the 2002 deal.

Rob Maguire, known in L.A. real estate circles for his mercurial personality, has had his share of run-ins with associates, although there is no indication that he had any responsibility for Morales’ departure.

His rocky partnership with Jim Thomas ended with a 1996 breakup. In an interview last June, Thomas called their relationship “excellent. “It’s probably improved since we’re not there to talk to each other every day,” he quipped.

Termination without cause

According to a prospectus filed April 28 with the Securities and Exchange Commission, the company sent a written notice to Morales of the termination of his employment without cause, effective on May 27.

The employment agreement provides that, if Morales’ employment is terminated without cause, then the executive is entitled to receive a lump sum cash severance payment consisting of his annual base salary and bonus. The filing said this payment would total $500,000 for Morales should his termination occur prior to June 27. It also contained confidentiality provisions that last indefinitely.

Morales would have received $2 million worth of restricted stock had he been employed with the company through June 27, the filing said.

In its first quarter results released on May 4, Maguire Properties lowered its projected cash flow guidance for 2004 due to a $1.5 million charge attributed to the severance and recruitment costs associated with the replacement of Morales, and the impact of the early renewal of a major lease in downtown L.A.

Dallas E. Lucas, executive vice president and chief financial officer of Maguire Properties, said on the conference call that about $1 million of the charge was made in connection with the Morales termination, with the remaining amount related to Flaherty’s recruitment and the early renegotiation of the lease.

The $1.5 million charge forced Maguire Properties to lower its cash flow guidance.

Cash flow, referred to as “funds from operations,” is a financial measure used by real estate investment trusts to gauge their operating performance. It is considered by investors as a better gauge of earnings than net income.

For 2004, Maguire Properties reduced its guidance range for funds from operations by 4 cents, now at $2.07 to $2.17 per share, from $2.11 to $2.21.

Since hitting its 52-week high of $26.51 on April 2, the company’s stock has dropped 17.8 percent to its close of $21.78 on May 13.

“The REIT sector is down a little bit, though Maguire appears to be performing better than its peer group,” said Peggy Moretti, vice president in charge of investor relations for the company.

By comparison, the Bloomberg REIT Office Property Index, which includes Maguire Properties and 24 other office REITs, fell 15.5 percent between April 2 and May 13.

David Copp, analyst with RBC Capital Markets, said the collapse in REITs is attributed to the fear of rising interest rates. “The entire sector is taking a real beating,” he said.

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