A plan by Maguire Properties Inc. to sell assets and bring on investors to reduce the real estate investment trust’s growing debt burden is in danger of running aground.
Three buildings Maguire is selling to help pay down $2 billion in debt had to be taken off the market, the victim of slow leasing activity in Glendale.
Meanwhile, Australian investors have so far demurred from buying an 80-percent stake in a $1.5 billion portfolio of Maguire’s Los Angeles properties.
This, along with Maguire’s proclivity to keep spending after already tripling the company’s portfolio since going public two years ago, is making analysts nervous. They want Maguire to lower its ratio of debt to market capitalization (stock market value), which at 75 percent is far above the 50 percent norm of its peers.
“We believe this level of leverage is extremely risky for a company that has a relatively short public record,” Smith Barney analyst Jonathon Litt wrote in a recent report. He has a “hold” rating on Maguire’s stock and classifies it as “high risk.”
Others have been downgrading the stock. At $29 a share last week, it trades at a discount of 11 percent to 17 percent compared to comparable office-property REITs.
“We believe (the discount) is appropriate given the company’s higher-risk profile owing to the substantial financing solutions that need to be completed in the back half of 2005,” wrote Wells Fargo Securities analyst Christopher Hartog.
In an unusual move last week, Hartog downgraded Maguire Properties to “hold” from “buy,” three trading days prior to the company’s scheduled Aug. 2 earnings announcement.
Paying later
Maguire’s debt shot up this year after it won a bidding war for a 10-building portfolio of CommonWealth Partners LLC, which included the trophy property at 777 S. Figueroa St. in downtown L.A.
Maguire has promised to sell some unwanted properties, but the company has also continued to be a buyer. After stretching to complete the Commonwealth purchase, $185 million was plunked down for a San Diego office park.
It was also among the finalists for the $360 million downtown skyscraper at 601 S. Figueroa St., which sold to rival Trizec Properties Inc. at a record per-foot price.
Maguire has sold a number of “non-core” holdings including newly acquired properties in Austin, Texas and Phoenix and the company is shopping an 80 percent interest in a $1.5 billion portfolio of its L.A. holdings to Australian investors.
But the de-leveraging plan has met with several complications. A number of buildings marked for sale, including three in Glendale, have been taken off the market because of low occupancy rates. Once the properties are more fully leased, Maguire has said that the buildings will be put back on the market.
Meanwhile, Australian investors who are on a tear investing in Southern California have been lukewarm at the prospect of buying into Maguire’s portfolio.
A Merrill Lynch analyst told the Australian Financial Review last month that at a 6 percent yield or less, Maguire’s portfolio is a tough sell and speculated that the company would be forced to find a U.S. investor.
Maguire spokeswoman Peggy Moretti said this isn’t the case, noting that Maguire executives returned from Australia confident a deal would happen by the end of the year. Because Maguire was in a quiet period before its Aug. 2 earnings release, she couldn’t provide more details.
“Interest is strong,” she said. “They find Southern California, in particular the office market, to be a growth market where they would like to be positioned with a U.S.-based partner.”
Some analysts say that Maguire should have lined up investors first before committing to pay $1.51 billion in the bidding war for the CommonWealth properties, which included 777 S. Figueroa St. downtown.
“(Maguire has) had discussions with several private institutions regarding a joint venture sale of assets in their portfolio,” said David AuBuchon, an A.G. Edwards & Sons analyst. “Our question is why weren’t these potential investors involved in the deal from the very beginning?”
Now analysts worry that Maguire may not be able to get the prices it needs for the properties it has for sale.
A key piece is the three properties in Glendale, one of the few remaining laggards in the L.A. commercial real estate market. After pulling 700 N. Central Ave., 801 N. Brand Blvd. and the Glendale Center at 611 North Brand Blvd. from the market, the company is now trying to fill them with tenants. One clue will be how much Tishman Speyer Properties Inc. can get for 101 N. Brand Blvd. Tishman Speyer is expected to chose a buyer by the end of August.
Risky ventures
Company founder, Chairman and co-Chief Executive Rob Maguire has made a career out of closing risky deals before lining up financing and investors. This time, he’s been paying top dollar for trophy properties he sees as having further development potential.
But that approach isn’t popular on Wall Street. Even if the asset sales end well, and even if Maguire finds an investor to buy into its L.A. portfolio, the company will still be left with a 62 percent debt-to-market capitalization rate.
Maguire is content to operate at around 60 percent leverage, Litt said. While that might be fine for Equity Office Properties, with an experienced skipper such as Sam Zell, Litt said it’s a different proposition for a newly minted company such as Maguire.
Another often-cited concern is Maguire Properties’ concentration of assets and tenants. Even after buying properties in Orange and San Diego counties over the last two years, 50 percent of the assets are in downtown L.A.’s Bunker Hill and the company’s top 20 tenants account for 46 percent of its annual rent roll.
The percentages rank Maguire’s portfolio among the most concentrated in the real estate trust sector and expose the company to well above-average location and tenant risk, Hartog wrote in his July 28 report.
Edwards analyst AuBuchon wrote in a May report that Maguire management faces a “litmus test” on its ability to follow through with de-leveraging the company and integrating a portfolio that has grown so rapidly.
At the same time, he said, most real estate investment trusts go through growing pains as the entrepreneurs and families that ran them adjust to life as a public company. “Rob (Maguire) is earlier in the cycle,” AuBuchon said. “He’s still learning on the job.”
