High hopes in a down market
Nearly a year and a half into the recession, downtown Los Angeles’ largest office landlord is getting squeezed by shrinking demand for rental space and struggling under a stack of debt. Maguire Properties Inc., which owns the U.S. Bank Tower, Wells Fargo Center and other signature L.A. buildings, faces a tough road, according to analysts who study the firm’s stock, as the economy continues to pummel the market for commercial real estate.
The company, founded by developer Robert F. Maguire III in the 1970s, said Tuesday that it had lost $53.9 million in the first quarter of this year, capping 18 months of losses.
It’s a situation that Chief Executive Nelson Rising had hoped to turn around when he came on in May 2008 -- so far with little success.
“We are all in a very difficult economy,” said Rising, who was brought in by the board of directors in the hope that he could restore the Los Angeles company to profitability and revive its stock.
As Rising marks his first anniversary on the job, he faces challenges that are well known to those who follow real estate: With the economy contracting, many businesses are cutting back on the amount of office space they rent and sometimes moving to cheaper quarters. All landlords are feeling some pain, but Maguire is also saddled with $5 billion in debt.
“They are overburdened with debt in a bad environment,” said analyst Craig Silvers, president of Bricks & Mortar Capital.
Rising’s strategy has been to focus on keeping the company liquid and shed some assets while hanging on to its prime properties in urban centers that include Los Angeles, Glendale and Pasadena. One of his first acts was to try to sell some of Maguire’s 15 office properties in Orange County and others such as the Lantana entertainment complex in Santa Monica.
But progress has been slow, and it’s not clear whether Rising will be able to turn the company around, said Michael Knott, an analyst with Green Street Advisors.
“They could survive for a couple of years,” Knott said. “By then you’ll need a situation where cash flow is improving a lot and real estate values have really bounced back up. You need both of those to make the case that they can survive as a going concern for a long period of time.”
Rising, Knott said, has a “sterling” reputation but faces a difficult situation.
Most of the company’s debt was picked up during an aggressive expansion engineered by company founder Robert Maguire, who is no longer with the firm.
The company paid about $3 billion for 23 office buildings in Orange and Los Angeles counties in 2007, including a 52-story tower at California Plaza in downtown L.A. around the top of the market. Borrowing money for the heavily leveraged purchase was fairly easy at the time, when capital markets were still flush with cash.
“Debt was plentiful and they got a lot of it,” Rising said in an interview this week.
The deal greatly expanded Maguire’s presence in Orange County, but the obligations turned into a financial millstone that weighs on the company.
The financial trouble led to an uprising of dissident shareholders against founder Maguire as the stock price sank. Maguire had taken the company public as a real estate investment trust in 2003 and then tried to buy it back in 2008.
When Maguire’s efforts to take back control were rejected by the board, he resigned. Rising took his place as CEO.
Rising’s own time at the helm has not been without drama: Eyebrows were raised last year when he appointed son Christopher as a senior vice president.
Rising, 67, worked for Maguire’s company in the 1980s and ‘90s and oversaw many of its projects, notably Playa Vista, the sprawling and controversial development that sprang from property south of Marina del Rey that was once owned by Howard Hughes. Rising also supervised construction of U.S. Bank Tower and the nearby Gas Company Tower in downtown Los Angeles.
The tall former UCLA lineman was recruited away from Maguire in 1994 to take over Catellus Development Corp., and over the next 11 years he supervised the growing company and its Mission Bay project, the largest mixed-used development in the history of San Francisco.
After Catellus was sold in 2005, Rising started a small private real estate company with son Christopher and longtime partner Douglas Gardner. Both of them went with him to Maguire. Gardner is an executive vice president.
As he tries to implement his turnaround plan, Rising has managed to sell three buildings but hasn’t raised nearly enough to change the company’s fortunes. The most recent sale was a $22-million transaction in March in which pharmaceutical company Allergan Inc. took title to a building it leased from Maguire in Irvine.
In the fourth quarter of last year, Maguire took a charge of $50 million to write down the value of 3161 Michelson Drive in Irvine, a 20-story office tower that the company built in 2007 and plans to sell. It is expected to announce today that it has signed U.S. Bank as a tenant to occupy 82,500 square feet there. But in a sign that real estate continues to depreciate, Maguire wrote down the value of the Michelson Drive building an additional $23.5 million in the first quarter.
“It’s disappointing that they had to write Michelson down again, because it hurts investor and creditor confidence,” Silvers said.
Other one-time charges in the first quarter totaled $15.3 million.
Revenue for the quarter was $133.3 million, down 4% from the same period last year. Losses totaled $1.13 a share, more than the $1.03 a share lost in the first quarter of 2008.
The company beat Wall Street’s expectations by a penny, and the stock closed up 12 cents a share at $1.37 on Tuesday. The earnings were announced after the market closed, and shares peaked during the afternoon at $1.65.
The recent growth in residential, retail and hotel business in downtown Los Angeles will give Maguire’s offices a boost when the economy picks up, Rising predicted.
“In the intermediate term, I am very high on the prospects of downtown,” he said.
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