COMMERCIAL REAL ESTATE August 10, 2009, 6:50PM EST

Maguire Defaults on Seven California Properties

The Los Angeles-based REIT surrenders a batch of office buildings as the commercial real estate market continues to suffer

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It's one of the nation's largest real estate investment trusts, but these days Maguire Properties (MPG) looks like just another heavily indebted homeowner trying to renegotiate loans and cope with foreclosure.

The Los Angeles-based company announced on Aug. 10 that it was handing over the keys to seven of its office buildings in Orange County and Los Angeles to lenders because it could no longer afford to carry them. The news followed other moves the company has made in the past three months to shore up its balance sheet, including renegotiating the terms of another large loan.

Since the burst of the housing bubble roughly two years ago, investors have been speculating about a wave of foreclosures in commercial real estate—shopping centers, office buildings, and warehouses. The market research firm Real Capital Analytics figures that the owners of some $127 billion worth of office buildings could ultimately lose control of those properties because they are carrying too much debt in this weak market for leasing.

Boston's Hancock Tower Taken, Too

The Federal Reserve is expected to take a hard look at commercial real estate starting on Aug. 11, when the Federal Open Market Committee meets. Some members of Congress have been asking federal regulators and bankers to extend the Term Asset-Backed Securities Loan Facility (TALF), which aims to create liquidity in the market for real estate-related securities.

Elsewhere in commercial real estate, property owners have already given up. Among the more prominent foreclosures, the St. Regis Monarch Bay resort in Southern California was turned over to lenders. And the John Hancock building in Boston was given up by the investment firm Broadway Partners.

Maguire Properties is unusual both because of the quality of its assets and the magnitude of its debt problem, notes Michael Knott, an analyst at the real estate investment firm Green Street Advisors. The company has assets of $4.4 billion and outstanding loans of $4.6 billion. Many of its current woes trace to Maguire's $3 billion purchase of office buildings from Blackstone Group (BX) in 2007. That deal, made at the market's absolute peak, included some office buildings populated by mortgage brokers in Orange County. As the housing market collapsed and lending dried up, vacancies in those properties soared. They were among the buildings Maguire turned over to lenders.

Second-Quarter Loss More Than Tripled

The company was founded by Robert Maguire III, a gutsy developer who built several prominent skyscrapers in downtown Los Angeles, but who also had to cope with setbacks that included Playa Vista, a major development near the ocean in Los Angeles that took years to get construction approvals. Last year, with his company's stock in a tailspin, Maguire tried to raise money to take it private. Having failed, he stepped down as chief executive in May.

The company's revenues—at $135 million—barely budged during the second quarter. Maguire was forced to take charge-offs on its properties, producing a $384 million loss for shareholders, That was a significant increase from the $110 million in losses it reported in the same period last year.

"We remain sharply focused on our liquidity issues," Nelson Rising, the company's chief executive, said in a statement. The plan, he said, "will eliminate the adverse effect these assets have had on the company's cash position."

Funds from operations, an important measurement for REITs, amounted to a loss of $339.7 million, or $7.10 per share, compared with a loss of $56.4 million, or $1.18 per share, a year earlier. Funds from operations adds items such as amortization and depreciation back to net income.

Excluding one-time items, the company reported FFO of 8¢ per share.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. The Associated Press contributed to this report