At the height of the real estate boom in 2006, Robert Maguire announced plans to build a $300 million skyscraper, the first new office tower in downtown Los Angeles in two decades.
The Figueroa Street parcel remains a vacant lot today, and Maguire Properties Inc. now plans to sell the property.
What’s more, that parcel is only one of several new properties that the beleaguered L.A. real estate investment trust is trying to unload, including an existing downtown high-rise and a Santa Monica entertainment campus that sources said is close to being sold for $160 million.
It’s part of a strategy to pare down debt, boost cash and ultimately save the company – all the efforts of Nelson Rising, appointed chief executive in May 2008 after the ouster of founder Maguire.
“Shortly after I came here, in the risk factor section of our (earnings report) I put down that the inability to survive could happen. That’s a true statement,” Rising told the Business Journal last week. “(But) we are going to pursue all alternatives, and we are optimistic about the course we are following.”
The REIT’s shaky finances made headlines in August when it announced it had defaulted, or was on the brink of default, on six Orange County office properties and one in Los Angeles, cumulatively valued at $1 billion. The company took a $345 million impairment charge and recorded a $380 million loss in the second quarter. The company has since given one property back to a lender and remains in talks on the others.
The company narrowed its third quarter loss to $42.1 million, but raised eyebrows again last month when it hired attorney Robert White, a restructuring expert and retired partner at O’Melveny & Myers LLP. Rising has said no bankruptcy filing is imminent, but the company wants to explore all options.
‘Financial zombie’?
Maguire remains the largest landlord in downtown Los Angeles with 9.1 million square feet of rentable space, including the U.S. Bank Tower; Two California Plaza; and One California Plaza, the other downtown property on the market.
But Michael Knott, an analyst for Newport Beach-based Green Street Advisors Inc., said the REIT will likely end up much smaller, perhaps just as a downtown property owner. Its total portfolio spans 33 properties and 18 million square feet.
“They will survive for a least another year. They are giving back properties that are hopelessly underwater,” said Knott, who terms the company a “financial zombie.”
“They do have plenty of cash so they are clearly going to continue surviving. But it is not a very glamorous existence and it’s not very pretty,” he said.
The REIT reported $61.7 million in cash or cash equivalents on hand at the end of the third quarter, down from $80.5 million a year earlier.
Maguire acquired the 58,000-square-foot parcel at 755 S. Figueroa St. in 2005 as part of a $1.5 billion portfolio purchase from CommonWealth Partners LLC. The site has entitlements for about 800,000 square feet of development.
The 2006 announcement of the planned 50-story office building, showcased in a sleek rendering, was received with much fanfare, including a glowing endorsement from Mayor Antonio Villaraigosa. It was to be the first new high-rise office building since the 1980s downtown office boom petered out. However, the economy quickly cooled, demand for new office space in downtown Los Angeles dried up and the project never got off the ground.
The sale of the parcel is being handled by Carl Muhlstein, an executive vice president at New York-based Cushman & Wakefield Inc. He believes the property could fetch more than $15 million.
“We’ve had strong interest,” said Muhlstein, who hopes to close a deal soon. “The property lends itself to a variety of uses, including residential, retail, office or a hotel.”
The other downtown building the company is trying to unload, the 42-story One California Plaza, is co-owned by Maguire and Sydney, Australia-based Macquarie Office Trust. It has been previously reported that Metropolitan Real Estate Investors LLC of New York was in talks to buy the tower, but a Maguire spokeswoman would only confirm that it is negotiating with a potential buyer.
Apparently closer to sale is Maguire’s Lantana Entertainment Media Campus in Santa Monica, which has about 535,000 square feet of space and a tenant roster that includes Dick Clark Productions, Larry David Productions and IMAX Corp.
Maguire purchased the 12-acre property from Hines Properties Inc. for $137 million and has debt payments due in January and September. Rising said the company has been in discussions to get extensions on those maturities, but those talks may be rendered moot.
According to sources, the company is close to selling four of the complex’s five buildings for about $160 million to Lionstone Group of Houston, a commercial real estate investor. Lionstone did not return calls or e-mails seeking comment and a Maguire spokeswoman would only say that the REIT is in negotiations to dispose of the property.
In addition, the company is trying to sell two parcels in Orange County.
Walking away
The sales have analyst John Guinee of Stifel Nicolaus & Co. referring to the company not as an REIT, but as a “liquidating trust.” Still, Guinee upped his rating on the company to a “hold” Nov. 16, noting that as the credit markets loosen the company may be able to pursue its recovery. Two other analysts rate it a “hold” and two a “sell,” according to Bloomberg News.
Meanwhile, the company is saddled with six properties still in or near default. Maguire reported accruing $4.6 million in default interest during the third quarter.
Four of the properties – Stadium Towers Plaza and 500 Orange Tower in Anaheim, 2600 Michelson Drive in Irvine and 550 S. Hope St. in downtown Los Angeles – were acquired by the company with its 2007 purchase of a $3 billion real estate portfolio from private equity firm Blackstone Group LP of New York.
The ill-fated purchase was not only timed poorly, coming at the top of the market, but the buildings had many tenants who were part of Orange County’s subprime mortgage industry, which later imploded.
“In hindsight, that deal was instrumental in sinking the Maguire battleship,” Knott said.
Rising, who assumed his position before the financial markets melted down, said he never imagined times would be so tough.
“I think the economy is going to recover, but the world is certainly different than I anticipated,” he said. “I wish I had a crystal ball to tell you when the market is going to come back. We are in very challenging economic times.”
