Maguire Properties (MPG) (MPG)

[B-Money]

Interesting Article:

LOS ANGELES-As GlobeSt.com tweeted back in July, it has been rumored for some time now that MPG Office Trust was looking to sell its entire office portfolio totaling 8.2 million square feet next year. And although a sale isn't certain, a source we spoke with say that the indicators are pretty strong. The WSJ reported that the company has tapped real-estate adviser Eastdil Secured to search for firms to buy the company or make a significant cash investment. Both Eastdil and MPG did not respond to queries for comment on this article.

INDICATING FACTORS

The unidentified industry source with knowledge of the parties involved that we spoke with says that Eastdil has “come to market with a private offering memorandum for a ‘capital raise’ on the entire MPG Office portfolio.” With that said, our source points out that “a majority of potential investors would demand control of the portfolio and would not be interested in just providing capital to MPG, so the portfolio sale seems like the likely end game.”

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Another indicating factor our source points to is the end of the former MPG CEO Rob Maguire’s tax protection. According to a statement put out by MPG in late June, the REIT “received notices of redemption from Robert F. Maguire III and related entities requesting the redemption of 3.97 million operating partnership units. On July 24, 2012, the company issued 3.97 million shares of the company's common stock in exchange for these units. At Maguire's request, the company issued the common stock to a party not related to Maguire. The redemption of these units and subsequent issuance of the common stock to a party not related to Maguire causes Robert F. Maguire III and related entities to fall below the 50% ownership requirement set forth in his contribution agreement. Therefore, all tax protection in favor of him and related entities, as well as all remaining limited partners, will now expire on June 27, 2013. Therefore, pursuant to the terms of the contribution agreement, all tax protection relating to the buildings listed below will now expire on June 27, 2013: Gas Company Tower; US Bank Tower; KPMG Tower; Wells Fargo Tower; Plaza Las Fuentes.”

Our source says that that tax protection “acted as a roadblock to MPG selling ‘protected’ assets or the entire portfolio since his tax protection would require MPG to pay his tax liability if any of the tax protected assets were sold during the period in which the assets are protected.” And while the full extent of the tax liability on the protected assets isn't public information, it is rumored that it will exceed $100 million, “a liability the company could not incur with a sale” the source says.

According to our source, “if the ‘capital raise’ turns into a sale of the entire MPG portfolio, the sale could be scheduled to close on June 28, 2013, without MPG incurring any liability for Rob Maguire'’s tax position. As such, it is now far simpler for MPG to structure a sale to a capital partner/new owner.”

Another point our source tells GlobeSt.com is to look at the portfolio’s loan maturity dates. In July, MPG released a statement saying that it has extended the maturity date of its mortgage loan at KPMG Tower in Downtown Los Angeles for an additional one year, to October 9, 2013. In addition, according to an SEC filing, two other MPG assets, 777 Figueroa St. and 633 W. Fifth St. also have loan maturities in 2013.

According to our source, “Even though 777 and KPMG Tower are on the lower end of the spectrum for MPG’s loan to value on its various assets, the refinancing of these projects could be difficult and could require additional equity.” The firm’s recent one-year extension of its loan at KPMG Tower called for an equity pay down by MPG of $35 million. “With limited cash on hand, MPG would be better off shifting the entire portfolio to a buyer with capital as opposed to trying to work through the refinancings themselves,” our source says.

Earlier this year, GlobeSt.com reported that the company was aiming to reduce its debt, and on an earnings call, David Weinstein, president and CEO of MPG, said that the company ‘continues to make progress’ on that front. At the time, Weinstein expected occupancy in its portfolio to remain flat this year. “Not much has changed from last quarter in Downtown L.A.,” he said, when answering a participant’s query on the earnings call.

According to the L.A. Times, estimated buyers or investors could pay between $350 and $400 per square foot for KPMG, Wells Fargo, 777 or the Gas Co. towers. MPG’s advisers have indicated to potential buyers that they want the company to sell above the share price, according to a recent WSJ article. “That price recently has hovered around $3 a share, down from more than $44 in early 2007, with a market capitalization near $160 million,” the paper said. Our source says that based on market analysts reports, the equity value of MPG's assets ranges on the low end of $300 million to a high end of approximately $600 million.

WHY NOW?

Relative to the timing of the sale, there are a few factors that make this a good time for MPG to sell the portfolio, our source says. “Vacancy in Downtown L.A. is rising and it will top 20% in the very near future. Selling before the story gets a little worse could make for good timing.”

In addition, our source points out that there are a significant number of prospective buyers out there and “given that lower quality assets in Downtown L.A. have achieved ‘good’ recent sales numbers, it’s safe to say that there will be a good number of prospective buyers looking at the portfolio sale. More buyers equates to more competition and upward pressure on the valuation of the portfolio.”

Despite the rising vacancy, you could still put your “bull market” cap on and tell a story about how a new owner of MPG’s portfolio can spike rents, says our source. “Whether it be a current owner in Downtown L.A. or an out-of-market prospective buyer, you can make the case that with MPG’s 37% share of DTLA's premier market that you can feel safe in the knowledge that the other large Downtown owners are doing well and would likely follow suit if the new owner were to try to raise rates across Downtown L.A., similar to how Blackstone raised rates in West L.A.” He adds that the prospect of the NFL team and AEG stadium and the revitalized convention center business that GlobeSt.com has reported on make for a good story of “hope” after the massive investment that has been made to Downtown including its housing, metro rail, L.A. Live and more.

WHO ARE THE PROSPECTIVE BUYERS?

In late July via Twitter, we said that potential buyers could include companies like Hines, Brookfield Office Properties, Blackstone Group. The Wall Street Journal is also reporting that Piedmont Office Realty Trust, Colony Capital and Thomas Properties Group could also be in that mix.

According to our source, an existing Downtown owner like Brookfield and Thomas could be interested buyers because “they can add MPG's portfolio to their existing DTLA portfolio and have a commanding market share.” With such a market share, our source believes they could potentially not only push rates in the MPG buildings, but in their existing buildings as well.

An out-of-market buyer would be interested in the portfolio because of the market share that can be derived by buying into MPG with one fell swoop the MPG assets are world-class assets with world-renowned architects, and each of these buildings would sell for well below replacement cost, says our source. "With really no real office tower construction in Downtown for over two decades, it is safe to say that there will not be a great influx of new supply to the office market.”

Wells maybe taking some off the table $

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