It seems that Robert Maguire and his shareholders just can’t catch a break.
After a year in which real estate investment trusts were hot Wall Street properties witness Blackstone Group LP’s record-setting $39 billion purchase of Equity Office Properties Trust of Chicago the sector has definitely cooled off.
And perhaps no more so than for Maguire Properties Inc., the REIT founded by Maguire, its maverick chairman. Maguire Properties stock traded up to a 52 week high of $44.69 last month but closed on March 14 at $36.60, just a few dollars from a year ago.
Not only are the company’s investment strategies questioned by analysts but recent acquisitions have landed its portfolio, laden with downtown and Orange County properties, on the wrong side of unexpected new events: the meltdown of the subprime sector and heightened concerns over terrorists attacks targeting downtown Los Angeles.
Last week, news reports regarding Al Qaeda noted that the terrorist group had planned a second wave of attacks to fly a plane into downtown’s 72-story Library Tower the tallest high rise west of the Mississippi River, since renamed the U.S. Bank Tower and Maguire’s marquee property.
Similar reports had surfaced several years ago but without such specificity. Still, even before last week’s news, analyst Wilkes Graham at Friedman Billings Ramsey Group Inc., the only analyst surveyed by Bloomberg News to rate the REIT a “buy,” wrote in a recent report that the company’s geographic concentration is a risk.
“A significant portion of (Maguire’s) portfolio is concentrated within a few blocks of the Bunker Hill submarket of Los Angeles,” Graham writes. “This poses a unique risk for (Maguire), including terrorism and earthquakes.”
Maguire Properties is the largest owner and operator of Class A office buildings in downtown Los Angeles and has more than 15 million square feet of space. As such, the company’s success is directly tied to the success of downtown L.A.
Indeed, that focus was recently beefed up with the REIT’s agreement to purchase a $3 billion portfolio from Blackstone Group that includes 23 buildings in Los Angeles and Orange Counties. The 6.8 million-square-foot portfolio includes downtown’s 52-story Two California Plaza and 555 S. Hope St.
Peggy Moretti, Maguire’s senior vice president of investor relations, puts it simply: The company is bullish on the downtown market. The area is undergoing a renaissance with a condo boom and large cultural and entertainments projects, such as L.A. Live, under construction.
“The (downtown) assets are incredibly important,” Moretti said. “They are all trophy quality and we see the renaissance in downtown under way and believe that as a handful of blocks of space are absorbed we will see rental rate increases.”
Confusing strategy
But Michael Knott, an analyst covering the office property sector for Green Street Advisors Inc., rates Maguire stock a hold and said that it is difficult to make sense of the company’s recent portfolio purchase.
Shortly after Maguire’s purchase was announced, the company put a 17-property portfolio on the market that included 11 properties from the Blackstone purchase. Several of the properties for sale by Maguire include recently purchased buildings in Orange County.
“Maguire seems to be unsure of what they want to be in Orange County,” Knott said. “They bought the portfolio saying how important Orange County was to them. A couple of weeks later they are saying they want to sell half of the Orange County portfolio. It calls into question their real estate strategy and looks like they are still evaluating that.”
That recent change of heart may be related to the sudden collapse of the subprime industry in Orange County troubled New Century Financial Corp. is based there as are other subprime lenders and related companies. The fear? The wholesale closure of companies could dump enough space back onto the market to weaken rents, the key revenue source for any REIT.
Ross Nussbaum, a REIT analyst at Banc of America Securities, writes that Blackstone “may have received the better end of this deal,” adding that Orange County may see “slower job growth” leading to a rise in office vacancy rates and only “moderating rent growth.”
All these red flags are reflected in analysts’ opinion of the company. Among 16 analysts, nine rated the stock a “hold,” five rated it a “sell” and one rated it a “buy,” according to Bloomberg News. Eight of the analysts gave it a composite target price of $41.19 per share.
Another key recent event for Maguire Properties was the possible sale of the company to a private equity firm.
According to industry insiders, Maguire had hoped to get bids in the $50 to $60 per share range when the company was on the market last fall. But, when bids came in below the $50 range, the company was pulled off the market in December.
That news was first reported on Dec. 7 and it had a direct impact on the REIT’s shares, which dipped to $39.32 on Dec. 8 after trading at $42.14 a week earlier.
“It was definitely trading with an imbedded mergers and acquisitions premium,” Knott said. “When people saw that wasn’t going to be the case the stock definitely traded down.”
On Feb. 6 the company confirmed it was dropping plans for a possible sale, noting that it was no longer pursuing “strategic alternatives.” Maguire’s recent earning release indicated that it cost the REIT $3.5 million in the fourth quarter for costs associated with the sale process.
“At the conclusion of the process we felt our shareholders would be best served by Maguire Properties remaining public and continuing to build out the development pipeline and continue to grow the company,” Moretti said.
Maguire noted in a February conference call that the company was undervalued by Wall Street. Maguire believes shares should be valued in the $60 range. Moretti added that the discrepancy between Wall Street’s perception of the value of the company and the company’s own view of its assets should lessen over time.
“I think the disconnect or differential will decrease as those assets in our development pipeline come online and become stabilized, which they are not currently,” she said.
But with Wall Street giving the stock a $41 target price, Knott said $60 a share is “a very optimistic valuation for the company.”
