High-Rise Owner Finds Portfolio Deal Tall Order

43
MPG’s US Bank Tower in downtown Los Angeles.

With downtown L.A.’s office market still struggling, it seems there’s not much interest in buying nearly 6 million square feet of prime downtown office space from MPG Office Trust Inc.

MPG, formerly Maguire Properties, reportedly gave up last week on finding a buyer for its entire property portfolio: a package of five downtown high-rises – including the 72-story US Bank Tower, the tallest building west of Chicago – and one in Pasadena.

The company would not comment on the status of its portfolio and, in fact, has never publicly acknowledged plans to sell its remaining properties. But last week’s news was picked up by equity analysts and sparked a sell-off.

MPG shares fell nearly 19 percent Feb. 13 to close at $2.64. Shares closed the week ended Feb. 13 down 18 percent overall, making the company the biggest loser on the LABJ stock index. (See page 24.)

The publicly traded real estate investment trust, saddled with nearly $2.5 billion in debt, hired an adviser in July, it said, to seek a capital partner for its portfolio. But analysts who follow the company say MPG was really looking for a buyer. Last week, industry newsletter Real Estate Alert reported that the company was unable to find one and will instead sell its remaining properties one by one.

John Guinee III, an analyst who follows MPG for brokerage Stifel Nicolaus & Co. in Baltimore, said investors fled because they were hoping for a portfolio sale, which would likely be quicker and more lucrative than selling buildings individually.

“The ownership of Maguire is primarily hedge funds looking for quick execution of a company sale,” he said. “The news that the company sale is likely not to materialize – and that an asset-by-asset transaction is more likely – definitely extends the time frame by six to 12 months and raises questions about the ultimate pricing and execution.”

Real estate brokers familiar with MPG’s properties said it is likely the buildings could fetch a better total price if sold individually. But Guinee said depending on the structure of the deal, shareholders might have a smaller tax burden on the sale of the portfolio or the whole company.

What’s more, selling off MPG properties individually could be a complex process. Each property carries its own debt, but some properties might have been put up as collateral for debt on other properties, which could make it difficult for a buyer to acquire a single building, said a real estate broker familiar with MPG’s portfolio.

In either case, the company needs to sell quickly. It has loans totaling nearly $900 million on three downtown properties – KPMG Tower at 355 S. Grand Ave., US Bank Tower at 633 W. Fifth St. and 777 Tower at 777 S. Figueroa St. – that will mature in the second half of the year.

In a November filing with the Securities and Exchange Commission, MPG said it might have to hand those properties over to their respective lenders if the company cannot raise additional capital or sell assets by the time the loans come due.

MPG has been on a selling spree over the past few years, disposing of properties in Orange County, Glendale and other markets as it has sought to cut debt. It has thus far held off on selling its trophy properties in downtown Los Angeles, in part because of a complex tax deal with former founder and Chief Executive Robert Maguire that could have cost MPG millions.

Before Maguire’s 2008 ouster, he and the company struck a deal through which MPG agreed to pay Maguire’s share of capital gains taxes if the core downtown buildings were sold before 2015 as long as Maguire maintained at least 50 percent ownership in those buildings.

But Maguire cashed in part of his stake in those properties in July, and MPG was released from the agreement. It can now sell the properties as early as June 27 without paying Maguire’s taxes. That’s just four days before a $260 million loan on the US Bank Tower comes due.

Staff reporter Jonathan Polakoff contributed to this report.