Why Isn't Maguire Properties Buying Back Its Preferred Shares?

MAGUIRE

Maguire (MPG) is an office REIT that operates in southern California. Its shares have struggled dropping about 90% in the last 52 weeks. At the end of 2008 indiscriminate selling created an interesting opportunity in the Maguire series A preferred stock (MPG.PA). The A up until 4^th quarter 2008 paid a .47 cent a quarter dividend.

In an effort to conserve cash, it decided not to pay the dividend in the 4^th quarter. The A is a 10 million share issue so the cancellation of the dividend saved the company 4.7 million dollars, however it is a cumulative preferred so it ultimately still owes the dividend. The market had sold the A preferred as low as 1.15 per share but recently it has recovered to about 2.30 per share. This is a $25 par preferred so it clearly is trading at a massive discount to redemption value. Interestingly, it is trading at a discount to the common stock as well. So if you do the math that Maguire saved $4.7 million in cash flow in 4^th quarter 2008 (by not paying the preferred dividend), you might ask yourself what is a good use for that cash?

The obvious answer is for the company to actively buyback the preferred shares which as I stated above carry a $25 par value. If it paid $4.7 for a million shares, or 4.7 million dollars it could use the cash it saved by not paying the dividend last quarter and retire a $25 million dollar obligation for less than 1/5 of that. The fact that the company is not doing this scares me somewhat - that's why until the company wakes up and starts buying back its preferred A shares, I would short common stock as a hedge. I know there are a lot of distressed assets as it relates to real estate these days, but what more distressed then your preferred shares trading at a 90% discount to par value.

Disclosure: Long MPG-PA, short MPG

Comments

[JNM:]

The Company is amidst a monumental liquidity crisis (hence dividend suspension) and they are simply trying to keep their head over water. While I'm sure they would love to repurchase their preferred shares at ~$2.25 p/s, the annual savings of nearly $20M needs to be reserved for the property portfolio. They have refinancings on the horizon and the LTVs have elevated to unsatisfactory levels for the lenders. In some cases, the cash will need to be deployed towards these troubled properties to lower the leverage.

Aside from that, the Company might be precluded from buying back either common or preferred shares by its bank facility.

Jan 09 11:43 AM

[johnny inca:]

good points jnm. you don't see many preferred buybacks, the one I have seen that is working well (apparently) is primus guarantee. the common is prs and the preferred is PRD.

I have no idea though why the maguire common trades at a premium to the preferred. That is a real mystery, but it has been going on for a couple of months.

Jan 09 12:26 PM

[jimmy46:]

Last august greg weston predicted that MPG would have problems,

bless him.

I shorted the stock & covered after it dropped 50%,
should of stayed longer.

Here's his blog:
seekingalpha.com/artic...

Jan 09 02:07 PM

[acctngnerd:]

The preferred propectus says they are precluded from open market repurchases of the preferred while dividends are in arrears.

Jan 13 03:58 AM

[Jonathan Bl...:]

How about if a holder called the compnay directly and offeres them a block?



On Jan 13 03:58 AM acctngnerd wrote:

> The preferred propectus says they are precluded from open market
> repurchases of the preferred while dividends are in arrears.

Jan 14 12:36 PM

[malach hamo...:]

they haven't bought back their preferred because they're trying to survive; every dime they can save by suspending the dividends will be needed to service or repurchase their debt.

Repurchasing stock is a luxury that few can afford right now, let alone a company that's been in financial straights for over a year.

Jan 14 08:57 PM

[oldroom:]

On 1/21 the trading volume of the pfd. went by 3 times. The price of the preferred should exceed the price of the common.

Jan 22 01:09 AM

[Jonathan Bl...:]

the preferred is finally trading at a premium to the common - wonder if there is a reason????

Feb 02 12:15 PM

[acctngnerd:]

That would not seem to be allowed given the language in the prospectus.


On Jan 14 12:36 PM Jonathan Blumberg wrote:

> How about if a holder called the compnay directly and offeres them
> a block?
>

Feb 03 05:07 AM

[prefstockin...:]

I owned the preferred for a while and had this same argument with many other preferred holders on the Yahoo Finance board. The company cannont buy back the preferred unless they buy it back at par value ($25) - even if they are current on the dividend.

Feb 12 01:50 PM