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Maguire (NYSE: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 4th quarter 2008 paid a .47 cent a quarter dividend.

In an effort to conserve cash, it decided not to pay the dividend in the 4th 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 4th 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

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