Robert F. Maguire III Sends Open Letter to Maguire Properties' Shareholders

The following is an open letter by Robert F. Maguire III sent to Maguire Properties’ shareholders:

October 10, 2008

Dear Fellow Maguire Properties Shareholders:

Today’s irrational, take no prisoners market has devastated some of the greatest names in American business—Bear Stearns, Lehman Bros., AIG, Merrill Lynch, Washington Mutual and Wachovia—and not necessarily on the fundamentals, though each had its share of problems. The fatal blow in each case, however, resulted from a crisis of confidence in the safety and long term viability of their respective businesses. Some have claimed that this crisis of confidence was created or contributed to by misleading information and innuendo in the marketplace, although at this stage whether that is true or not remains to be seen. However, in my view the greatest damage to these formerly great companies came from widespread fear and panic in an investing community facing unprecedented uncertainty.

I write these words as I watch like a nervous father from the sidelines while a company I founded, nurtured and once ran as CEO, Maguire Properties Group, struggles each day with a Wall Street that seems to have lost its confidence in the resilience of the American economy and its workers, and is seemingly oblivious to the significant progress that I believe has been made to right the Maguire Properties ship.

Maguire Properties Group is a commercial real estate company that over the past decades was a leader in fundamentally reshaping the skyline of downtown Los Angeles and across greater Southern California. I’m no longer involved with this company day to day, nor am I even a director, which makes me something of an outsider and spectator with respect to the company. (In full disclosure, I am still the largest individual owner of the Company). Despite my absence from the boardroom and day to day management, I believe I know the company intimately and fear that even with talented employees and managers under Nelson Rising, solidly structured debt and prime real estate assets, Maguire Properties could unnecessarily find itself on the corporate junk heap thanks to today’s unforgiving market, along with any number of other companies who have been swept up in the current financial maelstrom and are not deserving of such an ignominious fate.

As someone who has lived through numerous panics before, the best advice I can give to those who want my advice is this: don’t blink. If history tells us anything, indecision and hesitation can be your worst enemy in times like these, and may cause you to miss out on a recovery which I believe is a matter of when, not if.

Maguire Properties was one of the first companies to feel the pain of the subprime mess, not because it invested in mortgages, but because many companies that specialized in that type of lending were significant tenants of the company in Orange County. Rather than panic, the company worked tirelessly to replace those former tenants who operated in an unstable boom or bust-type business with more stable tenants like Raytheon, CitiGroup and Hyundai which as of approximately two weeks ago is now a Maguire Properties tenant. As a result, a recently constructed Maguire Properties building which had a major tenant go into bankruptcy is over 50% leased with what I believe to be better, more creditworthy tenants who are willing to pay what may be some of the higher rents in the Orange County market. Likewise, the company has recently decided to forge ahead on a major Pasadena project financing and the sale of two Orange County assets. As a result of this hard work and sticking to its long term business goals and strategy, the company should now have an additional $150 million cash liquidity, which together with existing cash should in my view be sufficient for the company’s foreseeable needs.

I believe that Maguire Properties’ fundamentals are strong. It seems to me that a company like Maguire Properties, with prime real estate holdings, reasonably predictable income streams, very favorable fixed-rate debt with no near term maturities and adequate liquidity—has all the things sophisticated investors would seemingly want. The company could choose to simply ride it out and should have adequate liquidity to do so.

How crazy has this market become? Here is just one example which I think you would find applies to any number of other companies. Based on the $3.70 trading price of Maguire Properties’ (NYSE: MPG) stock on October 10, 2008, the entire company’s market capitalization is approximately $203 million. Even in this market, I believe that just one of Maguire Properties’ approximately 30 buildings, Lantana, could be readily sold and produce net proceeds of $200-$220 million. Assuming such a sale, the net proceeds from selling just this one property would approximately equal the present market capitalization of the entire company.

In fact this could be done very quickly. I just sold a downtown building not in the REIT at below a 5% cap rate and gave my equity investors a 5 times return on capital. There were 19 bidders and it closed from start to finish in 60 days.

Not surprisingly, some knowledgeable observers believe that the private market value of Maguire Properties is much higher than the current public value; certainly I do.

I believe the analyst report from John Guinee at Stifel Nicolaus gives one valuable perspective. He stated in his September 30 report that the net asset value or private market value of Maguire Properties is $22 a share. John has followed the company for a long time and in my opinion is knowledgeable in real estate and development matters. He makes several points in his report with which I concur:

• Los Angeles County is now viewed by major real estate investors as the best in the country with the decline in the Manhattan market.
• Maguire Properties does not have near term liquidity issues.
• The company has no significant near term debt maturities and excellent fixed rate, long term debt which is non-recourse on individual properties.
• The company has very balanced lease expirations and no significant expirations in the next two years. It also has remarkably little exposure to tenants connected to the Wall Street meltdown.
• The company is selling most of its Orange County property and the wind-up range will be ($100 million loss) to $50 million profit. The ability to predict the range is because the debt is non-recourse so the company can walk away from individual properties if necessary.

In addition, I would make the following points:

• All of the company’s debt is non-recourse, attached only to a particular building. Therefore, problems with any particular asset cannot infect other assets or the company as a whole. If issues exist with one asset, the company is free to renegotiate, or just walk away. Neither is the company burdened by debt covenants that could cause difficulties in this troublesome market.
• When the company concludes its Orange County strategy, it would have a portfolio of 13.7 million sq. ft., (87% leased) of which 10.3 million sq. ft. is located in Los Angeles County (which is 90% leased). The Los Angeles County properties are trophy quality with predominantly strong credit tenants and I believe have very little exposure to the Wall Street fall-out. The remaining Orange County properties are first-rate as well.
• The company will have irreplaceable long term debt of $4 billion (5.45% interest only 7 year average maturity, $218 million annual cost). Net operating income should be around $275 million in 2008 which could and should grow to over $395 million by 2011. That should produce cash flow after $218 million debt service of $77 million in 2008, growing to over $175 million by 2011, providing adequate margin to pay preferred dividends, and G&A. If this is achieved, the company could resume a common dividend no later than 2011.

As you can see, there are steps that can be taken in these turbulent markets to shore up liquidity and positively impact the position of a company.

My biggest concern is that the current panic in the markets is masking the merits of companies such as Maguire Properties and that Wall Street investors are so busy blinking that they can no longer recognize intrinsic value. I am sure that smart investors will emerge who understand these merits and have the courage and conviction to invest in undervalued companies, despite the tumult in today’s markets. I believe that chaos can give rise to significant opportunity. I also believe that in this market there are any number of companies that have been unfairly punished and in hindsight will prove to have been unbelievable bargains for those who do not blink. In my view, the current market presents some of the best opportunities that I have seen in more than 40 years of investing, for those who do not succumb to the paralysis of fear.

Robert F. Maguire III is chairman and chief executive of Maguire Investments, a Santa Monica company with real estate, energy and aviation holdings. Maguire Investments is not affiliated in any way with Maguire Properties Group. The opinions expressed in this open letter are his own, not those of the company. The economic information contained here is approximate and designed to be illustrative only. No person should make any investment decision regarding Maguire Properties or any other company based upon these statements, but should review the relevant public information and SEC filings of the company in question (including, in particular, the risk factors identified buy such company in its SEC filings) and consult with his/her own independent investment advisors prior to making his/her own independent investment decisions. This open letter contains forward looking statements which by definition are speculative and are subject to risks and uncertainties which could cause actual results or outcomes to differ materially from those predicted or described in such forward looking statements. Readers are cautioned not to unduly rely on any statements made in this open letter in making investment or other decisions.