Chunk of L.A. Skyline Could Be for Sale

by KW Calabasas on General September 19th has no comments yet!

After years of struggling with too much debt and too few tenants, the largest office landlord in downtown Los Angeles is considering selling itself to the highest bidder, according to real-estate executives with direct knowledge of the planning.
MPG Office Trust Inc., MPG 0.00% formerly known as Maguire Properties Inc., has tapped real-estate adviser Eastdil Secured to search for firms to buy the company or make a significant cash investment, those executives said. A company spokeswoman didn’t respond to requests for comment.
With the potential to pick up a large chunk of the downtown Los Angeles skyline in one fell swoop, real-estate-investment giants including Brookfield Office Properties Inc. BPO.T -1.32% and Colony Capital LLC are considering bids, as are midsize companies such as Piedmont Office Realty Trust Inc. PDM -0.22% and Thomas Properties Group Inc., TPGI -2.36% the executives said.
Still, a sale isn’t certain. MPG has previously sought so-called strategic alternatives without striking any deals. But if the company is sold, the move could reshuffle ownership of some of the most iconic office towers in the nation’s second-largest city.
MPG owns six towers in downtown Los Angeles, including the angled brown granite KPMG and Wells Fargo towers, as well as the 73-story U.S. Bank Tower, the tallest building west of the Mississippi River.
“The timing to raise equity or sell the company is very good,” said John Guinee, an analyst at Stifel, Nicolaus & Co. Because MPG has downsized significantly from its sprawling 2007 size—it has handed numerous buildings in the suburbs as well as downtown over to lenders—that makes the remaining buildings centered in the downtown more appealing to would-be buyers, he said.
MPG’s advisers have indicated to potential buyers that they want the company to sell above the share price. That price recently has hovered around $3 a share, down from more than $44 in early 2007, with a market capitalization near $160 million. In addition, any buyer would likely have to take on the heavy debt load tied to the downtown towers, which MPG earlier this month reported was nearly $2 billion.
Real-estate executives who have considered investing in the company say they expect any buyer would have to put significant money toward leasing costs and debt reduction. They expect a total investment including the purchase price would range from $400 million and $800 million, which doesn’t include the existing debt.
During the financial crisis, MPG became a high-profile example of what can happen to real-estate companies that are closely tied to one industry and relied heavily on debt to expand. Its founder and then-chief executive, longtime Los Angeles fixture Robert Maguire, had taken the company on an ill-timed buying spree in 2007 and many of its tenants were subprime lenders and other financial firms. Mr. Maguire was ousted as CEO but still owns a stake in the company. After the values of its properties declined in 2008, the company struggled to manage its huge debt load at a time when the financial industry was sharply contracting and rents were falling.
The company announced last month that one potential roadblock to a sale had been lifted. Under a prior agreement, the company would have needed to make significant payments to Mr. Maguire if it sold certain of its marquee properties. But Mr. Maguire’s stake in MPG was reduced recently after Wells Fargo WFC -0.54% & Co. collected on a personal loan, the company reported in recent weeks, freeing MPG of those penalties starting next June.
Any sale will be viewed as a proxy for investors’ views on the future of the downtown Los Angeles office market, a poorly performing district that has struggled to find tenants for its gleaming office towers. While entertainment and technology firms like Google Inc. are growing in areas like West Los Angeles, downtown is heavy on financial-services firms and law firms, which have been contracting.
“The tenants that are in downtown L.A. are not the types of industries that L.A. does well,” said Ryan McCullough, an economist at real-estate research firm CoStar Group Inc. “So far, we’ve seen no evidence that greater downtown is able to attract different types of tenants.”
The result is a game of musical chairs, as tenants hop from one downtown building to another, often taking less space. That has led to vacancy rates in top-quality buildings downtown increasing to 14.5% in the second quarter, the highest rate since 2005, according to CoStar, even while overall Los Angeles saw its vacancy rates stay flat for the past two years around 12.5%.
Still, there are some reasons for optimism. The residential population has been on the rise lately, spurring new apartment development, and there are plans for a new football stadium, among other developments, making for a changing character that owners hope will attract new office tenants to the area.
By ELIOT BROWN – Wall Street Journal

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