Maguire swings for the fences: REIT's deal for portfolio has entrepreneur's flair.

After missing his chance to buy three high-profile properties last year, Rob Maguire wasn't about to let the massive 10-building portfolio owned by Common-Wealth Partners LLC slip away.

Insiders said that the veteran downtown L.A. developer was especially aggressive in bringing together Maguire Properties Inc.'s $1.51 billion winning bid.

On price, no competitor was even close, sources said. The company agreed to pay a portfolio average of $320 per foot--a huge gamble on the resiliency of Southern California's office market. And when Commonwealth President Michael Croft wanted assurance that the buyer would be able to close the deal, Maguire plunked down a $30 million, non-refundable deposit--and blew away the competition.

"You have to hand it to Maguire for closing a tough deal like this," said real estate attorney Tony Natsis, a partner at Allen Matkins Leck Gamble & Mallory LLP, who has been opposite Rob Maguire in negotiations several times. "For all his sharp edges, he is a very bright guy. He always comes out OK. You never have to worry about him coming out on top."

The deal is classic Rob Maguire--complicated, daring and seat-of-the-pants. And unlike many of Maguire's previous exploits, before he was co-chief executive of a publicly held company, it requires mollifying a sometimes skeptical crowd on Wall Street.

While analysts have applauded Maguire for buying the portfolio without issuing new stock--which would have diluted existing shareholders' equity--they also note the company is taking on a lot of debt.

It's assuming a $155 million mortgage and borrowing $1.38 billion, which includes a $900 million fixed-rate mortgage from Credit Suisse First Boston and another $480 million five-year loan.

All that borrowing gives Maguire a debt-to-enterprise value ratio of 72.8 percent, one of the highest among publicly held real estate investment trusts, where the office sector averages 42 percent. (Enterprise value is a company's debt plus its stock market capitalization.)

"We are going to reserve final judgment until we ,see final pricing and how the company finances it," said John Perry, an analyst with Deutsche Bank Securities. "Still, from a strategic standpoint, I think it makes a lot of sense."

The deal, scheduled to close in March, will increase the size of Maguire's holdings by a whopping 50 percent in terms of square footage, and by two-thirds in terms of value.

It also gives Maguire Properties development rights for up to 1.5 million additional square feet in markets where the approval process for new office buildings is lengthy and arduous.

The 5 million-square-foot portfolio gives Maguire a dominant presence in key Southern California markets--with trophy buildings in downtown Los Angeles, Glendale, Orange County and San Diego. The latter is a market Maguire executives have long wanted to enter.

It was also partly defensive, according to Banc of America Securities research analyst Ross Nussbaum.

Other bidders on the portfolio, especially publicly traded Equity Office Properties Trust and Trizec Properties Inc., have in recent years gained a large foothold in Maguire's key markets.

If any of those firms won the bidding, Maguire's strength would have been diluted, Nussbaum wrote in a Jan. 31 report on the acquisition.

"While demand for this portfolio raised the acquisition price, we believe an additional rationale for this transaction was to (block) one of its competitors from obtaining the portfolio," he wrote.

Important portfolio

As with bidding last year on Bank of America Plaza and Figueroa Plaza in downtown L.A., and Santa Monica's Colorado Center office park that Maguire developed, competition was keen for the CommonWealth portfolio. But Maguire wouldn't let this one slip away.

"This was much bigger than some one-off purchase," said Bill Flaherty, Maguire's senior vice president of leasing, who worked on the CommonWealth negotiations. "If you look at the markets we are already in, that is where these properties are."

After announcing the deal, Maguire executives outlined their plans to finance the acquisition by selling off properties and taking on joint venture partners for a portion of its portfolio holdings.

Maguire said it will sell office buildings in Phoenix and Austin, Texas, from the CommonWealth portfolio for about $75 million after the deal closes.

A Denver office building in the portfolio with a higher-than-market vacancy rate will be further leased and then sold. Also up for grabs could be developable land Maguire already owned in Orange County and an office park in Cerritos.

The company said it intends to set up a separate fund by year's end to hold properties outside of its core downtown L.A. market, where Maguire is the largest owner of modern skyscrapers on Bunker Hill.

Maguire will place the properties in the fund, and then solicit institutional and foreign investors to purchase 75 percent of the equity. Maguire would be left with a 25 percent stake in the fund and use some of the cash to lower debt load. Maguire would continue to operate and lease all buildings in the fund.

Nussbaum wrote that institutional funds and foreign investors would be more likely to invest in the fund if it included Maguire's downtown L.A. properties, where occupancy is low and rents are on the rise.

This is typical off-balance-sheet funding--not the hidden kind that Enron Corp. used to mask its deteriorating financial condition--and is standard with publicly held real estate companies. Many analysts have given the plan a warm response.

"We commend management for providing a clear, achievable plan to significantly reduce leverage within the next 12 months, without raising common equity," wrote Nussbaum. "While there is execution risk monetizing these assets, we believe the market appetite for (Maguire's) California properties will remain healthy throughout the year."

Flaherty said that in the short-term, the company would hire many of CommonWealth's employees to manage and lease the new buildings.

"Since we're buying nearly their entire portfolio, we're going to engage them for a period of time and work with them," he said. "We actually started the process with them.'"

Maguire executives are already familiar with the California properties it's buying. Maguire co-Chief Executive Rick Gilchrest was a founder and managing partner of CommonWealth Properties. The two companies have also been head-to-head competitors.

"We know each other well," Flaherty said. "If we hadn't, maybe our discussions would have been a little more formal or there would have been a little less joking, but in the end we both had to answer to our bosses, the shareholders and investors."

The key element of the deal that allowed Maguire to pay such a premium for the portfolio is development rights, Flaherty said. Rob Maguire cut his teeth building many of downtown's office towers, and developing Colorado Center in Santa Monica, a 1.1 million square foot office park.

Unlike some of the other bidders, Flaherty said Maguire has the ability to develop the parcels internally and wouldn't need to bring in a third party. "We have development culture in our firm," Flaherty said. "We think we can extract that pipeline maybe better than other bidders thought."

All of Maguire's purchases last year included land with entitlements.

"These guys do have a very good track record on the development front," said Perry, the Deutsche Bank analyst. "Rob Maguire by himself has a pretty strong track record."

Maguire Purchase

Several of the properties in the CommonWealth
portfolio.

                                                 Square
Property                   Location             Footage

777 S. Figueroa St.        Downtown L.A.    1.1 million
700 N. Central Ave.        Glendale             138,500
801 N. Brand Blvd.         Glendale             280,778
Pacific Arts Plaza         Costa Mesa           786,000
Wateridge Plaza            San Diego            272,000
Mission City Corp. Ctr.    San Diego            190,000
Regents Square             La Jolla             312,000