Maguire Properties Office Trust Valuation Analysis

Dec.29.10 | About: MPG Office (MPG-OLD)

I’ve been following the Maguire Properties (NYSE:MPG-OLD) story for a while but didn’t have the time to devote full analysis needed for an investment. I thought the market opportunity had gone away but recently read an updated post that said otherwise. Rather than regurgitate what others have already written, I’ll point you to some good background material written by PlanMaestro (click through to his older blog posts on this stock as well).

My Analysis

The company has done a great job eliminating its recourse obligations, so it lends itself to a bottoms-up valuation based on the sum of the individual parts. You have to love non-recourse debt structures - only the valuable parts count.

My first step in simplifying the analysis was to summarize and adjust the current balance sheet:

Based on the (hopefully) conservative adjustment explained above, the balance sheet can be simplified by separating out the defaulted properties and their debt from the core, wholly owned portfolio. The overview of the property portfolio is as follows:

In order to carve up the balance sheet to focus just on the owned properties, we first need to separate out the defaulted properties:

Using this information, combined with the balance sheet adjustment discussed above, I arrive at the following simplified context for a balance sheet valuation:

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Now that we have a framework to value just the wholly owned portfolio (as well as some other unencumbered assets on the balance sheet), we summarize the properties in this basket:

Now we can combine estimate valuations of the wholly owned properties listed above with the balance sheet framework to build a sum-of-the-parts valuation for the company:

Note – don’t focus on the price per square foot figures in yellow above. They are the drivers of the analysis, but I believe it’s more important to run a sensitivity based on a range of values (provided later) rather than focus on guessing the exact future value (always be approximately right instead of exactly wrong if you have the choice). I picked the example values above that reflect fairly rich market conditions and certainly market conditions that are healthier than the present in southern California. That being said, I don’t think the values shown above are awfully far off from replacement cost, which is an important long-term consideration. I’ve footnoted above where specific assets that were singled out in the valuation (hotel, land held for development, and the JV).

I would love some reader input into current and historical market data to help fine-tune this analysis. I’ve done a lot of digging here and will continue to do so, but I’m holding off on publishing the data I’ve found until I can apply some additional polish.

As another point of reference, I put together an EBITDA-based valuation to compare MPG to its market comps. I believe this is probably an inferior way to value the business but I felt it was worth the time just to see if the results were in the same zip code as the bottoms-up analysis. First, my estimate of current run-rate EBITDA:

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Putting this into the same sum-of-the-parts valuation context results in the following:

Conclusion and Sensitivity Analysis

Based on the analysis framework laid out above, here is the sensitivity of the implied common and preferred stock prices over a range of downside scenarios based on the market price analysis conducted above:

I think this analysis shows that you have to make some really draconian assumptions on market prices to get to a level where you lose money buying the preferred at the current market price of approximately $14. Indeed, if you think that the company can eventually realize $300/sq ft on the downtown properties, the preferred is a pretty safe double. The ultimate value of the common stock is obviously much more volatile, but their appears to be a fairly substantial capital appreciation potential if vacancies and rental rates in the downtown LA market turn.

Disclosure: I am long MPG-OLD, MPG.PA.