Annual Reports

  • 10-K (Jul 26, 2013)
  • 10-K (Mar 18, 2013)
  • 10-K (Mar 15, 2012)
  • 10-K (Mar 16, 2011)
  • 10-K (Apr 30, 2010)
  • 10-K (Mar 31, 2010)

 
Quarterly Reports

 
8-K

 
Other

MPG Office Trust, Inc. 10-K 2008
Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-31717

 

 

Maguire Properties, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   04-3692625

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

1733 Ocean Avenue, Suite 400

Santa Monica, California

  90401
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code 310-857-1100

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share   New York Stock Exchange
Series A Preferred Stock, $0.01 par value per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ         Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates calculated using the market price as of the close of business on June 30, 2007 was $1,620,760,496.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of February 22, 2008

Common Stock, $0.01 par value per share   47,185,636 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Maguire Properties, Inc. 2008 Notice of Annual Meeting of Stockholders and Proxy Statement or Form 10-K/A, to be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Parts II and III).

 

 

 


Table of Contents

MAGUIRE PROPERTIES, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS

 

         

Page

   PART I   

Item 1.

   Business    1

Item 1A.

   Risk Factors    10

Item 1B.

   Unresolved Staff Comments    26

Item 2.

   Properties    26

Item 3.

   Legal Proceedings    37

Item 4.

   Submission of Matters to a Vote of Security Holders.    37
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   38

Item 6.

   Selected Financial Data    40

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    42

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    73

Item 8.

   Financial Statements and Supplementary Data    75

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    128

Item 9A.

   Controls and Procedures    128

Item 9B.

   Other Information    130
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance    130

Item 11.

   Executive Compensation    130

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   130

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    130

Item 14.

   Principal Accounting Fees and Services    130
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules    130
Signatures    141


Table of Contents

PART I

 

Item 1. Business.

General

The terms “Maguire Properties,” “us,” “we” and “our” as used in this Annual Report on Form 10-K refer to Maguire Properties, Inc. Through our controlling interest in Maguire Properties, L.P. (the “Operating Partnership”), of which we are the sole general partner and hold an approximate 86.4% interest, and the subsidiaries of our Operating Partnership, including Maguire Properties TRS Holdings, Inc. (“TRS Holdings”), Maguire Properties TRS Holdings II, Inc., Maguire Properties Services, Inc. (the “Services Company”) and its subsidiaries (collectively known as the “Services Companies”), we own, manage, lease, acquire and develop real estate located in: the greater Los Angeles area of California; Orange County, California; San Diego, California; and Denver, Colorado. These locales primarily consist of office properties, parking garages, a retail property and a hotel. We are a full service real estate company, and we operate as a real estate investment trust, or REIT, for federal and state income tax purposes.

As of December 31, 2007, our Operating Partnership indirectly owns whole or partial interests in 37 office and retail properties, a 350-room hotel and offsite parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 86.4% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in Maguire Macquarie Office, LLC, an unconsolidated joint venture formed in conjunction with Macquarie Office Trust, our Operating Partnership’s share of the Total Portfolio is 17.8 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office, hotel and retail properties from which we derive our net income or loss, which we recognize in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The aggregate square footage of our Effective Portfolio has not been reduced to reflect our minority interest partners’ share of the Operating Partnership.

Our property statistics as of December 31, 2007 are as follows:

 

    Number of   Total Portfolio   Effective Portfolio
  Properties   Buildings   Square Feet     Parking
Square
Footage
  Parking
Spaces
  Square Feet     Parking
Square
Footage
  Parking
Spaces

Wholly owned properties

  31   71   17,037,557     11,466,653   38,345   17,037,557     11,466,653   38,345

Unconsolidated joint venture

  6   20   3,864,500     2,401,693   8,247   772,900     480,339   1,649
                                   
  37   91   20,902,057     13,868,346   46,592   17,810,457     11,946,992   39,994
                                   

Percentage leased

      83.2 %       81.1 %    
                       

As of December 31, 2007, the majority of our Total Portfolio is located in ten submarkets in Southern California: the Los Angeles Central Business District (“LACBD”); the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the Santa Monica Professional and Entertainment submarket; the John Wayne Airport, Costa Mesa, Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa and Mission Valley submarkets of San Diego County. We also have an interest in one property in Denver, Colorado (a joint venture property).

Our office properties are typically leased to high credit tenants for terms ranging from five to ten years. As of December 31, 2007, investment-grade-rated tenants generated 36.2% of the annualized rent of our Effective Portfolio, and nationally recognized professional service firms generated an additional 24.9% of the annualized

 

1


Table of Contents

rent of our Effective Portfolio. The weighted average remaining lease term of our Effective Portfolio was approximately five years as of December 31, 2007. As of December 31, 2007, our Effective Portfolio was 81.1% leased to 955 tenants. Approximately 8.4% of our leased square footage as of December 31, 2007 in our Effective Portfolio expires during 2008.

We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our hotel property and on- and off-site parking garages. We also receive income from providing management, leasing and real estate development services to our joint venture with Macquarie Office Trust and certain properties owned by Robert F. Maguire III, our chairman and chief executive officer.

We were formed to succeed to certain businesses of the Maguire Properties predecessor (the “Predecessor”), which was not a legal entity but rather a combination of numerous real estate entities collectively doing business as Maguire Partners, an owner, developer and acquirer of institutional-quality properties in the Los Angeles real estate market since 1965. We were incorporated, and our Operating Partnership was formed, in Maryland on June 26, 2002, and our Services Company was incorporated in Maryland on August 15, 2002, each in anticipation of our initial public offering of common stock (the “IPO”), which was consummated on June 27, 2003 concurrently with the consummation of various formation transactions. Those transactions consolidated the ownership of the portfolio of properties and property interests, and a substantial majority of the real estate management, leasing and development business of the Predecessor, into our Operating Partnership and Services Companies. From inception through June 26, 2003, neither we, our Operating Partnership nor our Services Companies had any operations.

On June 27, 2003, we commenced operations after completing the IPO, which consisted of the sale of 36,510,000 shares of common stock. On July 28, 2003, we issued an additional 5,476,500 shares of common stock as a result of the exercise of the underwriters’ over-allotment option. On January 23, 2004, we completed the offering of 10.0 million shares of our 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”).

Our operations are carried out primarily through our Operating Partnership and its wholly owned subsidiaries, including our Services Companies. Pursuant to contribution agreements among the owners of the Predecessor and our Operating Partnership, our Operating Partnership received a contribution of direct and indirect interests in connection with the IPO in certain of the properties, as well as certain assets of the management, leasing and real estate development operations of the Predecessor in exchange for limited partnership units in our Operating Partnership. Our Operating Partnership also acquired additional interests in certain properties from unaffiliated parties, which were paid for in cash. As of December 31, 2007, we held 86.4% of the limited partnership units in our Operating Partnership.

Our management team possesses substantial expertise in all aspects of real estate management, marketing, leasing, acquisition, development and finance. We directly manage the properties in our portfolio through our Operating Partnership and/or our Services Companies, except for Cerritos Corporate Center and certain buildings at the Washington Mutual Irvine Campus, as well as the Westin® Pasadena Hotel.

In addition, we manage an office, hotel and retail property located in the Dallas/Ft. Worth, Texas area, a housing complex and a parking garage in the LACBD, and buildings in West Los Angeles, California, Pasadena, California and Santa Monica, California owned by Mr. Maguire, our chairman and chief executive officer, for which we earn customary fees. The management agreements between us and the entities that own these properties will terminate if and when Mr. Maguire no longer owns an interest in these properties or is no longer bound by his non-competition agreement with us.

Since our IPO, we have paid quarterly distributions on our common stock and limited partnership units at a rate of $0.40 per share and unit, equivalent to an annual rate of $1.60 per share and unit. Since January 23, 2004,

 

2


Table of Contents

we have paid quarterly distributions on our Series A Preferred Stock at a rate of $0.4766 per share, equivalent to an annual rate of $1.9064 per share.

Acquisitions

2007 Activity –

We purchased 24 properties and 11 development sites from Blackstone Real Estate Advisors in April 2007 for $2.875 billion (the “Blackstone Transaction”). The purchase price (before reserves and closing costs) was funded through new mortgage financings of $2.28 billion, a bridge mortgage financing of $223.0 million, and a $530.0 million corporate facility comprised of a $400.0 million term loan which was fully drawn at closing, and a $130.0 million revolving credit facility (the “Revolver”), which was not drawn at closing. We funded our $175.0 million cash requirement to close the Blackstone Transaction with excess proceeds from the Wells Fargo Tower refinancing.

We acquired 130 State College, an office property located in Brea, California, in July 2007 for approximately $11 million.

2006 Activity –

We acquired Pacific Center, an office property located in Mission Valley, California, in February 2006 for approximately $149.0 million using net proceeds received from our transfer of properties to our joint venture with Macquarie Office Trust.

We purchased the building located at 701 North Brand located in Glendale, California and the remaining 50% interest in an adjacent garage, which we did not previously own, in September 2006 for $45.0 million using the net proceeds received from the mortgage loan on the property.

Dispositions

2007 Activity –

In 2007, we disposed of eight office properties and three development sites that we had acquired as part of the Blackstone Transaction: Inwood Park, 1201 Dove Street, Fairchild Corporate Center, Redstone Plaza, Bixby Ranch, Lincoln Town Center, Tower 17, 1100 Executive Tower and the Inwood Park, Bixby Ranch and 1100 Executive Tower development sites. We disposed of these properties shortly after their acquisition. A total of $274.0 million of the debt encumbering these properties was assumed by the buyers upon disposition. Excess proceeds from these dispositions were used to pay down our $400.0 million term loan. We recorded no gain or loss on the disposal of these properties since the purchase price allocated to them at the date of acquisition equaled the value recorded upon disposal.

We disposed of three office properties: Wateridge Plaza, Pacific Center and Regents Square—and recorded a total gain on disposition of $195.4 million. The mortgage loans related to Pacific Center and Regents Square totaling $224.8 million were assumed by the buyers of these properties upon disposition. Excess proceeds from these dispositions were used to pay down our $400.0 million term loan.

We contributed our office property located at 18301 Von Karman in Irvine, California to DH Von Karman Maguire, LLC in October 2007 for an agreed upon value of approximately $112 million, less approximately $2 million of credits and the transfer of loan reserves of approximately $7 million in connection with the joint venture’s assumption of the existing $95.0 million mortgage loan on the property. We retain a 1% common equity interest and a 2% preferred interest in this joint venture. We recorded no gain or loss on the contribution of this property since the purchase price allocated to it at the date of acquisition equaled the value recorded upon disposal.

 

3


Table of Contents

2006 Activity –

We contributed Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, Washington Mutual Campus and Cerritos Corporate Center to our joint venture with Macquarie Office Trust in January 2006. We received net cash proceeds of $376.4 million and recognized a gain on sale of $108.5 million related to the establishment of the joint venture with Macquarie Office Trust. The joint venture assumed the existing mortgage loans on these properties totaling $661.3 million.

We sold the 808 South Olive garage, a parking garage located in downtown Los Angeles, California for $26.5 million in March 2006. Certain tenants of the Gas Company and US Bank Towers are required under their existing leases to purchase monthly off-site parking passes through the end of their lease terms. These off-site parking requirements were historically met through an existing parking easement agreement between Gas Company Tower and the garage. In connection with the sale of the garage, we entered into an amended and restated parking easement with the buyer of the garage, which expires in 2011, in order to continue to meet the terms of our leases with tenants in the Gas Company and US Bank Towers. The gain on sale of this property has been deferred until such time as the amended and restated parking easement expires.

Financing Activities

Acquisitions

2007 Activity –

In connection with the Blackstone Transaction in April 2007, we obtained a new $530.0 million corporate credit facility, which was comprised of a $400.0 million term loan and a $130.0 million revolving credit facility, and a separate $223.0 million, five-year, interest only bridge loan. The $400.0 million term loan and the $223.0 million bridge loan were fully drawn at the time of closing to help fund the Blackstone Transaction. The term loan and bridge loan were completely repaid in 2007 using the net proceeds received from the disposition of properties and the refinancing of KPMG Tower.

The revolving credit facility matures on April 24, 2011 and bears interest at (1) LIBOR plus 200 basis points or (2) the base rate, as defined in the agreement, plus 100 basis points. This facility is guaranteed by certain subsidiaries, and is secured by deeds of trust on the Plaza Las Fuentes, Westin® Pasadena Hotel, 755 South Figueroa and Pacific Arts Plaza West properties and pledges of the equity interests in substantially all property-owning subsidiaries of our Operating Partnership. As of December 31, 2007 and through the date of this report, we have approximately $119.7 million available to be drawn under our Revolver. Approximately $10.3 million of the facility has been used to secure standby letters of credit, none of which have been drawn through the date of this report.

The terms of the revolving credit facility include certain restrictions and covenants which limit, among other things, the payment of dividends, the incurrence of additional indebtedness and liens, and the disposition of assets. The terms also require compliance with financial ratios relating to minimum amounts of interest coverage, fixed charge coverage and maximum leverage, the maximum amount of unsecured indebtedness, and certain investment limitations. The dividend restriction provides that, except to enable us to continue to qualify as a REIT for federal income tax purposes, we may not make distributions with respect to our common stock or other equity interests in an aggregate amount in excess of the greater of (1) 95% of funds from operations, as defined, or (2) $1.60 per common share, during any four consecutive fiscal quarters, subject to certain other adjustments.

The separate assets and liabilities of our property-specific subsidiaries are neither available to pay the debts of the consolidated entity nor constitute obligations of the consolidated entity, respectively.

Of the mortgage loans used to finance the Blackstone Transaction, a total of $274.0 million were assumed by the buyers while $238.9 million were repaid when eight of the office properties and three of the development

 

4


Table of Contents

sites were disposed of in 2007. Additionally, our joint venture partner assumed the $95.0 million loan upon our transfer of 18301 Von Karman to the joint venture.

Of the principal amounts outstanding as of December 31, 2007 for mortgages related to properties acquired in the Blackstone Transaction, $406.8 million are variable rate, LIBOR-based loans with spreads from 1.35% to 1.95% and maturities ranging from 2008 to 2009. Extension periods of from one to three years are available, at our option, to extend the maturity dates of these loans. The other $1,466.1 million are fixed rate loans with rates ranging from 5.50% to 5.93% that mature during 2017.

2006 Activity –

We completed a $121.2 million, interest-only, ten-year mortgage loan for Pacific Center in April 2006. The loan had a fixed rate of 5.76% with a maturity date of May 2016. This loan was assumed by the buyer when the property was disposed of during 2007.

We completed a $33.8 million, interest-only, ten-year mortgage loan for 701 North Brand in September 2006. The loan bears interest at a fixed rate of 5.87% with a maturity date of October 2016. The net proceeds of the loan were used to fund the purchase of this property.

Refinancing

2007 Activity –

We completed a new $550.0 million, ten-year fixed rate interest-only financing on the Wells Fargo Tower in April 2007. This mortgage loan bears interest at a fixed rate at 5.68% and matures in April 2017. The net proceeds from the financing, after repayment of the existing $247.1 million mortgage loan and payment of defeasance costs, closing costs and loan reserves, were approximately $290 million. The net proceeds were used to fund $175.0 million of the purchase price of the Blackstone Transaction and for general corporate purposes.

We also completed a new $400.0 million, five-year variable rate interest-only refinancing for our KPMG Tower property in September 2007. This mortgage loan bears interest at a variable rate of LIBOR plus 1.60%. We entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR rate at 5.564%, resulting in an all inclusive rate of 7.16%. As of December 31, 2007, the amount borrowed under this loan is $368.4 million. The remaining $31.6 million is available to be drawn in future periods to pay for tenant improvements, leasing commissions and debt service related to the KPMG Tower. The net proceeds from the KPMG Tower refinancing, after repayment of the existing $210.0 million mortgage loan and payment of closing costs and loan reserves, were approximately $130 million. The net proceeds were used to repay the outstanding balance on our term loan and for general corporate purposes.

2006 Activity –

We completed an interest-only, ten-year $125.0 million mortgage refinancing for Glendale Center in June 2006. This loan has a fixed rate of 5.82% and matures in August 2016. The net proceeds from this loan were used to repay the existing $80.0 million mortgage and to pay down our previous $450.0 million term loan.

We completed a ten-year, interest-only, fixed rate $458.0 million mortgage refinancing for Gas Company Tower and the World Trade Center garage in August 2006. This loan bears interest at 5.10% and matures in August 2016. The proceeds were used to repay the existing $280.0 million mortgage loans and pay down our previous $450.0 million term loan.

We completed a refinancing for 777 Tower totaling $273.0 million in October 2006. This mortgage loan is an interest-only, seven-year mortgage that bears interest at a fixed rate of 5.84% and matures in November 2013.

 

5


Table of Contents

We used the net proceeds to repay the existing $154.5 million mortgage and pay down our previous $450.0 million term loan.

Repayments and Dispositions

2007 Activity –

We paid down $10.0 million on our City Plaza mortgage loan in October 2007.

We disposed of three office properties: Wateridge Plaza, Pacific Center and Regents Square. The mortgage loans related to Pacific Center and Regents Square totaling $224.8 million were assumed by the buyers of these properties upon disposal, and the Wateridge Plaza loans totaling $62.9 million were repaid upon disposition of this property.

We acquired eight office properties and three development sites as part of the Blackstone Transaction in April 2007: Inwood Park, 1201 Dove Street, Fairchild Corporate Center, Redstone Plaza, Bixby Ranch, Lincoln Town Center, Tower 17, 1100 Executive Tower and the Inwood Park, Bixby Ranch and 1100 Executive Tower development sites. We disposed of these properties shortly after their acquisition. A total of $274.0 million of the debt encumbered by these properties was assumed by the buyers of these properties upon disposition while $238.9 million was repaid.

We contributed our office property located at 18301 Von Karman in Irvine, California to a joint venture with DH Von Karman Maguire, LLC in October 2007. The $95.0 million mortgage loan related to this property was assumed by the joint venture.

2006 Activity –

The remaining balances on our previous $450.0 million term loan and revolver totaling $498.0 million were fully repaid in 2006 using the net proceeds received from the refinancing of Glendale Center, Gas Company Tower and 777 Tower and a portion of the proceeds received from the transfer of properties to our joint venture with Macquarie Office Trust.

We contributed our Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, Cerritos Corporate Center and Washington Mutual Campus properties to a joint venture with Macquarie Office Trust. The joint venture assumed the existing mortgage loans on these properties totaling $661.3 million.

Construction Loans

2007 Activity –

We entered into a $26.8 million variable rate construction loan for our development project at Mission City Corporate Center located in San Diego, California in February 2007. This loan bears interest at LIBOR plus 1.90% and matures in February 2009. As of December 31, 2007, $17.6 million is outstanding under this loan. We can extend this loan for one year at our option, subject to certain conditions.

We entered into an $88.0 million variable rate construction loan for our development project at the Lantana Media Campus located in Santa Monica, California in June 2007. This loan bears interest at LIBOR plus 1.50% and matures in June 2009. As of December 31, 2007, $40.6 million was outstanding under this loan. We can extend this loan for one year at our option, subject to certain conditions.

We entered into a $64.5 million variable rate construction loan for our development project at 207 Goode located in Glendale, California in November 2007. This loan bears interest at LIBOR plus 1.80% and matures in May 2010. The first $25.0 million of this loan has been hedged using an interest rate swap agreement that effectively fixes the LIBOR rate at 5.564%. As of December 31, 2007, $0.5 million was outstanding under this loan. We have a one-year extension available at our option on this loan, subject to certain conditions.

 

6


Table of Contents

We came to terms with our lender to amend the financial covenants of our 3161 Michelson construction loan, which resulted in an increase in the spread from 2.25% to 2.50% effective September 30, 2007.

As of December 31, 2007, we have a total of $164.1 million available for draw under our construction loans to fund future construction activity at our projects currently under development and to fund tenant improvements and lease commissions as we lease space at our 3161 Michelson property that was placed in service during 2007.

2006 Activity –

We entered into a $240.0 million construction loan for our project at 3161 Michelson located in Irvine, California in September 2006. This loan bore interest at LIBOR plus 2.25% and matures in September 2008, excluding three one-year extensions available to us at our option.

We entered into a $39.7 million construction loan for our development project at the Washington Mutual Irvine campus located in Irvine, California. This loan bears interest at LIBOR plus 1.80% and matures in December 2008, excluding a one-year extension available to us at our option, subject to certain conditions.

Investment in Joint Ventures

Maguire Macquarie Office, LLC

Maguire Properties, L.P. and Macquarie Office Trust entered into a joint venture agreement in October 2005 and completed the transactions contemplated in the agreement in January 2006. We contributed Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, Washington Mutual Campus and Cerritos Corporate Center to the joint venture, while Macquarie Office Trust contributed Stadium Gateway and cash. As of December 31, 2007 and 2006, our interest in the joint venture is 20% and Macquarie Office Trust’s interest is 80%.

During 2006, we received net cash proceeds of $376.4 million and recognized a gain on sale of $108.5 million related to the establishment of the joint venture.

We earn management, investment advisory fees and leasing commissions from the joint venture.

Maguire Properties, L.P. is the guarantor on the $95.0 million mortgage loan secured by Cerritos Corporate Center through January 4, 2009.

In accordance with the joint venture agreement, both Maguire Properties, L.P. and Macquarie Office Trust have rights of first offer to co-invest in any Southern California acquisition opportunities meeting certain defined criteria that the other party intends to acquire. In addition, Macquarie Office Trust has a right to acquire up to a 50% interest in our development projects at Washington Mutual Irvine Campus and San Diego Tech Center at 92.5% of stabilized value, which will be determined when the project is 90% leased.

DH Von Karman Maguire, LLC

In October 2007, we contributed our office property located at 18301 Von Karman located in Irvine, California to a joint venture. We retain a 1% common equity interest and a 2% preferred interest in the joint venture. We did not record a gain or loss from the contribution of this property to the joint venture since the purchase price allocated to this property at the date of acquisition equaled the value recorded upon disposal.

Foreign Operations

We do not engage in any foreign operations or derive any revenue from foreign sources.

 

7


Table of Contents

Competition

We compete in the leasing of office space with a considerable number of other real estate companies, some of which may have greater marketing and financial resources. In addition, our hotel property competes for guests with other hotels, some of which may have greater marketing and financial resources than are available to us and our hotel operator, Westin® Hotels and Resorts.

Principal factors of competition in our primary business of owning, acquiring and developing office properties are: the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the relevant market. Additionally, our ability to compete depends upon, among other factors, trends in the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.

Government and Environmental Regulations

Office properties in our submarkets are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our existing properties has the necessary permits and approvals to operate its business.

Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA, and we continue to make capital expenditures to address the requirements of the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we continue to assess our properties and to make alterations as appropriate in this respect.

Some of the properties in our portfolio contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Also, some of our properties contain asbestos-containing building materials (“ACBM”). Environmental laws require that ACBM be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. We can make no assurance that costs of future environmental compliance will not affect our ability to make distributions to our stockholders or that such costs or other remedial measures will not have a material adverse effect on our business, financial condition or results of operations. None of our recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

From time to time, the United States Environmental Protection Agency (“EPA”) designates certain sites affected by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act. Superfund sites can cover large areas, affecting many different parcels of land. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which Glendale Center is located lies within a large Superfund site. The site was designated as a Superfund site because the groundwater beneath the site is contaminated. We have not been named, and do not expect to be named, as a potentially responsible party for the site. If we were named, we would likely be required to enter into a de minimus settlement with the EPA and pay nominal damages.

 

8


Table of Contents

Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties in our portfolio within the last 36 months. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.

Insurance

We carry commercial liability, fire, extended coverage, earthquake, terrorism, flood, pollution legal liability, boiler and machinery, earthquake sprinkler leakage, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy that also covers certain properties owned by Mr. Maguire. We believe the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of management, the properties in our portfolio are adequately insured. Our terrorism insurance, which covers both certified and non-certified terrorism loss, is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical weapons. We do not carry insurance for generally uninsured losses such as loss from riots. Most of the properties in our portfolio are located in areas known to be seismically active. See “Risk Factors—Potential losses may not be covered by insurance.”

The costs and benefits of the blanket policy covering the properties in our portfolio and certain properties owned by Mr. Maguire are allocated pursuant to the Amended and Restated Property Insurance Sharing Agreement, dated June 27, 2003, as most recently amended on February 28, 2008 to reflect business acquisitions, dispositions and joint ventures. The coverage and costs allocated to each of the properties covered by the blanket policy is determined by taking into account the relative insured values for property coverage, relative square feet for casualty coverage and risks related to each covered property and any third-party requirements of lenders, lessees or lessors. In its capacity as “Manager” under the agreement, Maguire Properties Services, Inc. is obligated to procure insurance or amend policies as properties are sold, acquired or developed, present and pursue claims for losses on behalf of us and the entities that own Mr. Maguire’s properties, hire independent adjusters to determine losses, hold undistributed insurance proceeds in trust until distributed, administer the distribution of insurance proceeds and coordinate the payment of insurance premiums.

Employees

As of December 31, 2007, we employed 233 persons. None of these employees are currently represented by a labor union.

Offices

Our executive offices are located at 1733 Ocean Avenue, Suite 400, Santa Monica California, 90401, telephone number 310-857-1100. We own the buildings in which our leasing, marketing, accounting and development departments are located: the Wells Fargo Tower at 333 South Grand Avenue in Los Angeles, California and the KPMG Tower at 355 South Grand Avenue, Los Angeles, California. We believe that our current facilities are adequate for our present needs. We may add regional offices or relocate our offices depending upon our future development projects and alternative uses for available space.

Available Information

We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the SEC. The public may read and copy any materials that we file with the SEC at the SEC’s Public Information Room at 100 F Street, NE, Washington, DC

 

9


Table of Contents

20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

Our website address is http://www.maguireproperties.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. In addition, our board of directors maintains a charter for each of its committees and has adopted a written set of corporate governance guidelines and a code of business conduct and ethics. The public may access on our website, free of charge, these committee charters, corporate governance guidelines and code of business conduct and ethics. Website addresses referred to in this Annual Report on Form 10-K are not intended to function as hyperlinks, and the information contained on our website is not a part of this Annual Report on Form 10-K.

 

It em 1A. Risk Factors.

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

Certain written and oral statements made or incorporated by reference from time to time by us or our representatives in this Annual Report on Form 10-K, other filings or reports filed with the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934), which sets forth the safe harbor from civil liability provided for forward-looking statements. In particular, statements relating to our capital resources, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including anticipated funds from operations, and market conditions, demographics and results of operations) are forward-looking statements. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements. We caution investors that any forward-looking statements presented in this Annual Report on Form 10-K, or that management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

   

Adverse economic or real estate developments in Southern California, particularly in the LACBD or Orange County region;

 

   

General economic conditions;

 

   

Future terrorist attacks in the U.S.;

 

10


Table of Contents
   

Defaults on or non-renewal of leases by tenants;

 

   

Increased interest rates and operating costs;

 

   

Our failure to obtain necessary outside financing;

 

   

Decreased rental rates or increased vacancy rates;

 

   

Difficulties in identifying properties to acquire and completing acquisitions;

 

   

Difficulty in operating the properties owned through our joint ventures;

 

   

Our failure to successfully operate acquired properties and operations;

 

   

Difficulties in disposing of identified properties at attractive valuations or at all;

 

   

Our failure to reduce our level of indebtedness;

 

   

Our failure to successfully develop or redevelop properties;

 

   

Our failure to maintain our status as a REIT;

 

   

Environmental uncertainties and risks related to natural disasters;

 

   

Financial market fluctuations; and

 

   

Changes in real estate and zoning laws and increases in real property tax rates.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Annual Report on Form 10-K. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the following factors in evaluating our company, our properties and our business. The occurrence of any of the following risks might cause our stockholders to lose all or a part of their investment. For purposes of this section, the term “stockholders” means the holders of shares of our common stock and of our Series A Preferred Stock. When we refer to our “Effective Portfolio,” it includes properties in our joint venture with Macquarie Office Trust at our ownership interest.

Most of our properties depend upon the Southern California economy and the demand for office space.

Most of our properties are located in Los Angeles County, California, Orange County, California and San Diego County, California, and many of them are concentrated in the LACBD, which exposes us to greater economic risks than if we owned properties in several geographic regions. Moreover, because our portfolio of properties consists primarily of office buildings, a decrease in the demand for office space, and Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in the Southern California region (such as business layoffs or downsizing, industry slowdowns (such as the current difficulties in the mortgage industry), relocations of businesses, changing demographics, increased telecommuting, terrorist targeting of high-rise structures, infrastructure quality, California state budgetary constraints and priorities, increases in real estate and other taxes, costs of complying with government regulations or increased regulation and other factors) and the national and Southern California regional office space market (such as oversupply of,

 

11


Table of Contents

reduced demand for or decline in property values in such office space). The State of California is also generally regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for office space in California. Any adverse economic or real estate developments in the Southern California region, or any decrease in demand for office space resulting from California’s regulatory environment, business climate or energy or fiscal problems, could adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders. We cannot assure you of the growth of the Southern California economy or the national economy or our future growth rate.

Tax indemnification obligations in the event that we sell certain properties could limit our operating flexibility.

We have agreed to indemnify Mr. Maguire (and certain related entities) and certain others against adverse tax consequences to them in the event that our Operating Partnership directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in five of the office properties in our portfolio, which represented 37.2% of our Effective Portfolio’s aggregate annualized rent as of December 31, 2007. These tax indemnity obligations apply for initial periods ranging between seven and nine years from the date of our IPO, which occurred on June 27, 2003, with up to three one-year extension periods if Mr. Maguire and related entities maintain ownership of Operating Partnership units equal to 50% of the units received by them in the formation transactions. In addition, Mr. Maguire and certain entities owned or controlled by Mr. Maguire and entities controlled by certain former senior executives of our Predecessor have guaranteed $591.8 million of our debt as of December 31, 2007. We agreed to these provisions in order to assist Mr. Maguire and certain other contributors in preserving their tax position after their contribution of property interests to us. While we do not intend to sell any of these properties in transactions that would trigger these tax indemnifications obligations, if we were to trigger our tax indemnification obligations under these agreements, we would be required to pay damages for the resulting tax consequences to Mr. Maguire and other contributors, and we have acknowledged that a calculation of damages will not be based on the time value of money or the time remaining within the restricted period. In addition, we could involuntarily trigger our tax indemnification obligations under these provisions in the event of a condemnation of one of these properties.

Potential losses may not be covered by insurance.

We carry commercial liability, fire, extended coverage, earthquake, flood, pollution legal liability, boiler and machinery, earthquake sprinkler leakage, terrorism, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy that also covers certain properties owned by Mr. Maguire. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsured losses such as loss from riots or war. Some of our policies, like those covering losses due to terrorism, earthquake and floods, are insured subject to limitations involving large deductibles or co-payments and policy limits, which may not be sufficient to cover such losses. Most of our properties are located in Southern California, an area especially subject to earthquakes. Six of the eight largest properties in our office portfolio—US Bank Tower, Gas Company Tower, Wells Fargo Tower, KPMG Tower, Two California Plaza and One California Plaza (one of our joint venture properties)—are all located within the Bunker Hill section of downtown Los Angeles. Together, these properties represented roughly 45.1% of our Effective Portfolio’s aggregate annualized rent as of December 31, 2007. Because these properties are located so closely together, an earthquake in downtown Los Angeles could materially damage, destroy or impair the use by tenants of all of these properties. While we presently carry earthquake insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes, particularly losses from an earthquake in downtown Los Angeles. In addition, we may discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss.

 

12


Table of Contents

If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. In the event of a significant loss at one of the properties owned by Mr. Maguire covered by the blanket policy, the remaining insurance under this policy, if any, could be insufficient to adequately insure our existing properties covered by this policy. In such event, securing additional insurance, if possible, could be significantly more expensive than our current policy.

Future terrorist attacks in the United States could harm the demand for and the value of our properties.

Future terrorist attacks in the U.S., such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. Certain of our properties (including US Bank Tower) are well-known landmarks and may be perceived as more likely terrorist targets than similar, less recognizable properties, which could potentially reduce the demand for and value of these properties. A decrease in demand or value could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates or then-prevailing market rates. Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss, or increased security costs, and the availability of insurance for such acts may be limited or may cost more. Six of the eight largest properties in our office portfolio—US Bank Tower, Gas Company Tower, Wells Fargo Tower, KPMG Tower, Two California Plaza and One California Plaza (one of our joint venture properties)—are all located within the Bunker Hill section of downtown Los Angeles. Together, these properties represented roughly 45.1% of our Effective Portfolio’s aggregate annualized rent as of December 31, 2007. Because these properties are located so closely together, a terrorist attack on any one of these properties, or in the downtown Los Angeles or Bunker Hill areas generally, could materially damage, destroy or impair the use by tenants of all of these properties. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected. Additionally, certain tenants have termination rights or purchase options in respect of certain casualties. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property. Failure to reinvest casualty proceeds in the affected property or properties could also trigger our tax indemnification obligations under our agreements with certain limited partners of our Operating Partnership with respect to sales of specified properties.

Our debt level reduces cash available for distribution, including cash available to pay dividends on our common stock and Series A Preferred Stock, and may expose us to the risk of default under our debt agreements.

As of December 31, 2007, our total consolidated indebtedness was approximately $5.0 billion. At December 31, 2007, we had a $130.0 million secured revolving credit facility under which we had no outstanding borrowings; however, approximately $10.3 million of this facility has been used to secure standby letters of credit, none of which have been drawn. The terms of our secured revolving credit facility include certain restrictions and covenants, which limit, among other things, the payment of dividends, the incurrence of additional indebtedness and liens and the disposition of assets. The terms also require compliance with financial ratios relating to interest coverage, fixed charge coverage and maximum leverage, the maximum amount of unsecured indebtedness and certain investment limitations. Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties. We may not generate sufficient operating cash flow after debt service to pay the distributions currently contemplated and any such distributions may be financed by additional borrowings until we reduce our leverage level sufficiently to enable us to pay distributions from operating cash flow. In the event of default, our debt agreements may also prevent us from paying distributions necessary to maintain our REIT qualification. Our revolving credit facility also prohibits us from distributing to our stockholders in excess of the greater of (1) 95% of our “funds from operations” (as defined in our revolving credit facility) or (2) $1.60 per share during any four consecutive fiscal quarters, except as necessary to enable us

 

13


Table of Contents

to qualify as a REIT for federal income tax purposes. Our existing mortgage agreements contain lockbox and cash management provisions, which, under certain circumstances, limit our ability to utilize available cash flows at the specific property, including paying distributions. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences including the following:

 

   

Our cash flow may be insufficient to meet our required principal and interest payments;

 

   

We may be unable to borrow additional funds as needed or on favorable terms;

 

   

We may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

Because a portion of our debt bears interest at variable rates, increases in interest rates could increase our interest expense;

 

   

We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

 

   

We may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;

 

   

We may violate restrictive covenants in our loan agreements, which would entitle the lenders to accelerate our debt obligations;

 

   

Our default under any one of our mortgage loans with cross default provisions could result in a default on other indebtedness; and

 

   

Our agreement with Mr. Maguire and other contributors to use commercially reasonable efforts to maintain certain debt levels may limit our flexibility to refinance the debt encumbering our properties.

If any one of these events were to occur, our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected. In addition, our debt agreements contain lockbox and cash management arrangements pursuant to which substantially all of the income generated by our properties is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders and from which cash is distributed to us only after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. As a result, we may be forced to draw funds from our revolving credit facility in order to pay dividends to our stockholders and maintain our qualification as a REIT.

Furthermore, foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could hinder our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code of 1986, as amended (the “Code”). Foreclosures could also trigger our tax indemnification obligations under the terms of our agreements with Mr. Maguire and others with respect to sales of certain properties obligating us to use commercially reasonable efforts to make certain levels of indebtedness available for them to guarantee.

We depend on significant tenants.

As of December 31, 2007, our 20 largest tenants represented approximately 34.9% of our Effective Portfolio’s total annualized rental revenues.

Our rental revenues depend on entering into leases with and collecting rents from tenants. General and regional economic conditions, such as the current difficulties in the mortgage industry, may adversely affect our major tenants and potential tenants in our markets. These major tenants may experience a downturn in their business, which may weaken their financial condition, resulting in their failure to make timely rental payments and/or default under their leases. In the event of any tenant default, we may experience delays in enforcing our

 

14


Table of Contents

rights as landlord and may incur substantial costs in protecting our investment. The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the United States Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Even so, our claim for unpaid rent would likely not be paid in full. The chance of a downturn in our tenants’ business or one or more tenant bankruptcies may be increased with respect to tenants that are in or rely on the mortgage industry.

Our revenue and cash available for distribution to our stockholders could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in their business, or fail to renew their leases at all or renew on terms less favorable to us than their current terms.

Failure to hedge effectively against interest rate changes may adversely affect results of operations.

We seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements, and that such arrangements may not be effective in reducing our exposure to interest rate changes. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We may be unable to complete acquisitions or successfully operate acquired properties.

We continue to evaluate the market of available properties and may acquire office and other properties when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them may be adversely affected by the following significant risks:

 

   

Our potential inability to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded REITs and institutional investment funds;

 

   

Even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;

 

   

Even if we enter into agreements for the acquisition of office properties, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;

 

   

We may be unable to finance the acquisition at all or on favorable terms;

 

   

We may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

 

   

We may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result our results of operations and financial condition could be adversely affected;

 

   

Market conditions may result in higher than expected vacancy rates and lower than expected rental rates;

 

   

We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties; and

 

15


Table of Contents
   

In connection with certain potential acquisitions, we have entered into a right of first opportunity agreement with Macquarie Office Trust, whereby for any potential acquisition or development property prospect located in Southern California meeting certain investment criteria, we are obligated to offer Macquarie Office Trust the first opportunity to acquire a participating interest in that property.

If we cannot finance property acquisitions on favorable terms, or operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected.

We may be unable to successfully complete and operate developed properties.

We intend to develop and substantially renovate office and other properties. Our future development and construction activities involve the following significant risks:

 

   

We may be unable to obtain construction financing at all or on favorable terms;

 

   

We may be unable to obtain permanent financing at all or on advantageous terms if we finance development projects through construction loans;

 

   

We may not complete development projects on schedule or within budgeted amounts; and

 

   

We may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations; and occupancy rates and rents at newly developed or renovated properties may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable.

While we intend to develop office properties primarily in the Southern California market, we may in the future develop properties for commercial, retail or other use and expand our business to other geographic regions where we expect the development of property to result in favorable risk-adjusted returns on our investment. Presently, we do not possess the same level of familiarity with development of other property types or other markets, which could adversely affect our ability to develop such properties successfully or at all or to achieve expected performance.

We may encounter problems during development and construction activities.

We are currently developing projects at Lantana Media Campus, 207 Goode Avenue, 17885 Von Karman Avenue and Mission City Corporate Center. We are currently planning development projects at 755 South Figueroa, Glendale Center, Stadium Tower II, Brea Financial Commons/Brea Corporate Place, Pacific Arts Plaza, Park Place, 2600 Michelson, 500 Orange Center, 605 City Parkway, City Plaza II, City Tower II and San Diego Tech Center. These construction projects, and others that we may undertake from time to time, are subject to significant development and construction risks, any of which could cause unanticipated cost increases and delays. These include the following:

 

   

Adverse weather that damages the project or causes delays;

 

   

Delays in obtaining or inability to obtain necessary permits, licenses and approvals;

 

   

Changes to the plans or specifications;

 

   

Shortages of materials and skilled labor;

 

   

Increases in material and labor costs;

 

   

Engineering problems;

 

   

Labor disputes and work stoppages with contractors, subcontractors or others that are constructing the project;

 

16


Table of Contents
   

Environmental issues;

 

   

Shortages of qualified employees;

 

   

Fire, flooding and other natural disasters;

 

   

Expenditure of funds on, and the devotion of management time to, projects that may not be completed; and

 

   

Geological, construction, excavation, regulatory and equipment problems.

We may not be able to complete the development of any projects we begin and, if completed, our development and construction activities may not be completed in a timely manner or within budget, which could have a material adverse effect on our results of operations and prospects.

Our performance and value are subject to risks associated with real estate assets and with the real estate industry.

Our ability to pay dividends to our stockholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events include:

 

   

Local oversupply, increased competition or reduction in demand for office space;

 

   

Inability to collect rent from tenants;

 

   

Vacancies or our inability to rent space on favorable terms;

 

   

Inability to finance property development and acquisitions on favorable terms;

 

   

Increased operating costs, including insurance premiums, utilities and real estate taxes;

 

   

Costs of complying with changes in governmental regulations; and

 

   

Changing submarket demographics.

In addition, we are subject to risks generally incident to the ownership of real property, including changes in global, national, regional or local economic or real estate market conditions. For example, the current difficulties in the mortgage industry or a rise in interest rates could make it more difficult for us to lease space in or dispose of our properties. In addition, rising interest rates could also make alternative interest bearing and other investments more attractive and therefore potentially lower the relative value of our existing real estate investments. These conditions, or the public perception that any of these conditions may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Real properties are illiquid investments and we may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so.

Real properties are illiquid investments and we may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. The foregoing could mean that we may be unable to complete our planned $2.0 billion sale of strategically-identified properties in the near term or at all.

 

17


Table of Contents

If we do not have adequate cash to fund our business, we will be adversely affected.

Our business requires continued access to adequate cash to finance our operations, dividends, capital expenditures, indebtedness repayment obligations, development costs and property acquisition costs, if any. We expect to generate the cash to be used for those purposes primarily with internally generated cash flow, existing cash on hand, borrowings under our $130.0 million revolving credit facility, refinancing of existing indebtedness and the proceeds from sales of strategically-identified assets and potential joint ventures. We may not be able to generate sufficient cash for these purposes. For example, we may have difficulties with cash flow, particularly if we are unable to renew leases, lease vacant space or re-lease space as leases expire according to expectations, which may impact our ability to comply with the covenants of the revolving credit facility and to draw funds under that facility (and in turn our compliance with the 3161 Michelson construction loan). We may be unable to refinance existing indebtedness on favorable terms or at all, especially during periods of uncertainty in the credit markets. Based on market conditions, we may be unable to complete any joint venture transactions or sell non-strategic assets. Any of the foregoing would adversely affect our stockholders and could impact our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We compete with numerous developers, owners and operators of office and commercial real estate, many of whom own properties similar to ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, some of which are significantly above current market rates, we may lose potential tenants and may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when their leases expire. As a result, our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders may be adversely affected.

We could default on leases for land on which some of our properties are located.

We possess leasehold interests on the land at Two California Plaza that, including renewal options, expires in 2082. We also have a lease for the land at Brea Corporate Place that expires in 2083. As of December 31, 2007, we had 1,656,580 net rentable square feet of office space located on these parcels. If we default under the terms of these long-term leases, we may be liable for damages and lose our interest in these properties, including our options to purchase the land subject to the leases.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire.

As of December 31, 2007, leases representing 8.4% and 6.4% of the square footage of the properties in our Effective Portfolio will expire in 2008 and 2009, respectively, and an additional 18.9% of the square footage of the properties in our Effective Portfolio was available. Above market rental rates at some of our properties will force us to renew or re-lease some expiring leases at lower rates. We cannot assure you that leases will be renewed or that our properties will be re-leased at net effective rental rates equal to or above their current net effective rental rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders would be adversely affected.

Because we own a hotel property, we face the risks associated with the hospitality industry.

We own the Westin® Pasadena Hotel in Pasadena, California and are susceptible to risks associated with the hospitality industry, including:

 

   

Competition for guests with other hotels, some of which may have greater marketing and financial resources than the manager of our hotel;

 

18


Table of Contents
   

Increases in operating costs from inflation and other factors that the manager of our hotel may not be able to offset through higher room rates;

 

   

Future terrorist attacks that could adversely affect the travel and tourism industries and decrease demand for our hotel;

 

   

Fluctuating and seasonal demands of business travelers and tourism;

 

   

General and local economic conditions that may affect demand for travel in general; and

 

   

Potential oversupply of hotel rooms resulting from excessive new development.

If our hotel does not generate sufficient revenues, our financial position, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and ability to satisfy our debt service obligations and to pay dividends to our stockholders may be adversely affected.

We could incur significant costs related to government regulation and private litigation over environmental matters.

Under various laws relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up such contamination at that property or emanating from that property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the liability may be joint and several. The presence of contamination or the failure to remedy contamination in our properties may expose us to third-party liability or adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral.

These environmental laws also govern the presence, maintenance and removal of ACBM, and may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability. Some of our properties contain ACBM and we could be liable for such fines or penalties. We cannot assure our stockholders that costs of future environmental compliance will not affect our ability to make distributions to our stockholders or those such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations.

Some of the properties in our portfolio contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. If hazardous or toxic substances were released from these tanks, we could incur significant costs or be liable to third parties with respect to the releases. From time to time, the EPA designates certain sites affected by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which the Glendale Center is located lies within a large Superfund site, and we could be named as a potentially responsible party with respect to that site.

Existing conditions at some of our properties may expose us to liability related to environmental matters.

Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties in our existing portfolio. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the site

 

19


Table of Contents

assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities, or compliance concerns may have arisen after the review was completed or may arise in the future and future laws, ordinances or regulations may impose material additional environmental liability. We cannot assure our stockholders that costs of future environmental compliance will not affect our ability to make distributions to our stockholders or those such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.

Potential environmental liabilities may exceed our environmental insurance coverage limits.

We carry environmental insurance to cover likely and reasonably anticipated potential environmental liability associated with above-ground and underground storage tanks at all of our properties where such tanks are located. While we believe this coverage is sufficient to protect us against likely environmental risks, we cannot assure you that our insurance coverage will be sufficient or that our liability, if any, will not have a material adverse effect on our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

We may incur significant costs complying with the Americans with Disabilities Act and similar laws.

Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that the properties in our portfolio substantially comply with present requirements of the ADA and we continue to make capital expenditures to address the requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties is not in compliance with the ADA, then we would be required to incur additional costs to bring the property into compliance. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other legislation, our financial condition, results of operations, cash flow, per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected.

We may incur significant costs complying with other regulations.

The properties in our portfolio are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we might incur governmental fines or private damage awards. We believe that the properties in our portfolio are currently in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Our exploration of strategic alternatives may adversely affect us.

On December 11, 2007, we announced that we formed a Special Committee comprised solely of independent directors to focus on strategic alternatives for achieving stockholder value, including a possible sale of our company. We cannot assure you that any transaction will be proposed by any party or found acceptable. The Special Committee’s ability to complete a transaction, if the Special Committee decides to pursue such a strategy, will depend on numerous factors, some of which are outside the Special Committee’s control. There are various risks and uncertainties related to our strategic alternatives review process, including:

 

   

The process may disrupt operations and distract management;

 

20


Table of Contents
   

We may not be able to successfully achieve the benefits of any strategic alternative undertaken by us;

 

   

The process may be time consuming and expensive and may result in the loss of business opportunities;

 

   

Regardless of whether the current process results in any transaction, we may be subject to a related proxy contest and/or stockholder litigation;

 

   

Perceived uncertainties as to our future direction may result in increased difficulties, including difficulties in: (1) recruiting and retaining employees, particularly senior management, (2) entering into deals with potential joint venture partners, (3) securing new loans or refinancing existing loans and (4) leasing new space or renewing existing leases; and

 

   

The trading prices of our common stock and Series A Preferred Stock may be highly volatile during the process, including following any further public announcements regarding the process.

The foregoing could adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock and Series A Preferred Stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

We may face a proxy contest and/or stockholder litigation.

In the ordinary course of business or in connection with a particular set of facts, we may be subject to a proxy contest and/or stockholder litigation. If we were to engage in a proxy contest and/or stockholder litigation, the process may prove to be costly, disrupt our operations and distract management.

Our growth depends on external sources of capital that are outside of our control.

In order to maintain our qualification as a REIT, we are required under the Code to annually distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to federal and state income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:

 

   

General market conditions;

 

   

The market’s perception of our growth potential;

 

   

Our current debt levels;

 

   

Our current and expected future earnings;

 

   

Our cash flow and cash distributions; and

 

   

The market price per share of our capital stock.

If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or pay the cash dividends to our stockholders necessary to maintain our qualification as a REIT.

Joint venture investments, including our joint venture with Macquarie Office Trust, could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.

We are currently partners with Macquarie Office Trust and DH Von Karman, LLC in joint ventures. We may also co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring

 

21


Table of Contents

non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In the case of our existing joint ventures and any additional joint ventures, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entities. Additionally we have a right of first opportunity agreement with Macquarie Office Trust, which obligates us to offer Macquarie Office Trust the first opportunity to invest in any potential acquisition property. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Impasses could also result in either the sale of a building or buildings, the sale of our joint venture interest or the purchase of Macquarie Office Trust’s interest. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. We will seek to maintain sufficient control of such entities to permit them to achieve our business objectives.

A recently completed acquisition of office and development real property subjects us to various risks which could adversely affect our operating results.

On April 24, 2007, we purchased 24 properties and 11 developments sites from Blackstone Real Estate Advisors for $2.875 billion. During 2007, we disposed of eight properties and three development sites and contributed one property to a joint venture that were acquired as part of this transaction. We purchased the properties on an as is, where is basis and with all faults and defects, without any representations or warranties, except as expressly set forth in the Purchase Agreement. The properties are located in Los Angeles and Orange County, California and as of the date of purchase totaled approximately 5.9 million rentable square feet and developable land now estimated to support approximately 3.0 million square feet of improvements.

Risks associated with the acquisition of the properties include:

 

   

We may be unable to find buyers for properties that have been determined by management to be non-core properties; and

 

   

In addition, because we have released the seller from all claims related to the properties to the extent provided by law, we may be subject to unknown future liabilities without any recourse.

Each of the above instances may potentially have a material adverse effect on our financial position, results of operations, cash flow, the per share trading price of our common stock and Series A Preferred Stock, and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Conflicts of interest exist with holders of units in our Operating Partnership.

We may pursue less vigorous enforcement of terms of certain agreements because of conflicts of interest with one of our officers. Mr. Maguire has entered into employment and non-competition agreements with us pursuant to which he has agreed, among other things, not to engage in certain business activities in competition with us and pursuant to which he will devote substantially full-time attention to our affairs. We have also entered into property management and development agreements with respect to certain properties owned by Mr. Maguire. None of these employment, non-competition, and management and development agreements was negotiated on an arm’s-length basis. We may choose not to enforce, or to enforce less vigorously, our rights under these employment, non-competition, management and development agreements because of our desire to maintain our ongoing relationship with the individuals involved.

 

22


Table of Contents

Tax consequences upon sale or refinancing. Some holders of Operating Partnership units, including Mr. Maguire (and certain related entities), may suffer different and more adverse tax consequences than holders of our common stock or Series A Preferred Stock upon the sale or refinancing of the properties owned by our Operating Partnership, and therefore these holders may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties.

Outside activities of management. Mr. Maguire has substantial outside business interests, including Maguire Aviation, his controlling interests in the Solana property in Texas, a senior housing project located at 740 South Olive Street and a parking structure located at 17th and Grand Avenue both in the LACBD, 1733 Ocean Avenue, Western Asset Plaza, Water’s Edge I and II and certain other passive real estate investments, and Master Investments, LLC, an entity that is a potential competitor. Although Mr. Maguire is party to an employment agreement, which requires that he devote substantially full-time attention to our business and affairs, this agreement also permits Mr. Maguire to devote time to his outside business interests consistent with his past practice prior to our IPO, and we have no assurance that Mr. Maguire will continue to devote any specific portion of his time to us. As a result, these outside business interests could interfere with Mr. Maguire’s ability to devote time to our business and affairs.

Our chairman and chief executive officer has substantial influence over our affairs. As of December 31, 2007, Mr. Maguire beneficially owns common stock and Operating Partnership units redeemable for cash or shares of our common stock, at our option, totaling an aggregate of 9,042,036 shares, including 52,632 Operating Partnership units beneficially owned through Maguire Partners—Master Investments, LLC, an entity in which Mr. Maguire owns a 55% interest, representing a total of approximately 16.60% of the total outstanding shares of our common stock and outstanding Operating Partnership Units. As of December 31, 2007, Mr. Maguire had pledged 2,040,039 of his Operating Partnership units and 1,567,810 shares of his common stock to lenders as collateral for personal loans. Consequently, Mr. Maguire has substantial influence on us and could exercise his influence in a manner that is not in the best interests of our stockholders. Pursuant to the partnership agreement of our Operating Partnership, we may not engage in termination transactions, such as a tender offer, merger or sale of substantially all of our assets, without meeting certain criteria with respect to the consideration to be received by the limited partners and without the consent of partners (including us) holding 50% of all partnership interests.

Failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.

We operate in a manner that is intended to allow us to qualify as a REIT for federal income tax purposes under the Code. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court. If we lose our REIT status, we will face serious tax consequences that would substantially reduce the funds available for distribution to our stockholders for each of the years involved because: (i) we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and we would be subject to federal and state income tax at regular corporate rates; (ii) we could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and (iii) unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock and Series A Preferred Stock. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable U.S. Treasury Department regulations that have been promulgated under the Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. To qualify as a REIT, we must satisfy a number of asset, income,

 

23


Table of Contents

organizational, distribution, stock ownership and other requirements. Also, we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, excluding capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property and, in certain cases, a 100% penalty tax in the event we sell property as a dealer or if our services company enters into agreements with us or our tenants on a basis that is determined to be other than an arm’s-length basis.

To maintain our REIT status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, excluding capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

Our success depends on key personnel whose continued service is not guaranteed.

We depend on the efforts of key personnel, particularly Mr. Maguire. Among the reasons that Mr. Maguire is important to our success is that he has a national industry reputation that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with such personnel could diminish. In addition, Mr. Maguire is 72 years old and, although he has informed us that he does not currently plan to retire, his continued service to us cannot be guaranteed. Many of our other senior executives also have strong regional industry reputations, which aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit prospects. While we believe that we could find replacements for all of these key personnel, the loss of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel.

Our charter and Maryland law contain provisions that may delay, defer, or prevent transactions that may be beneficial to the holders of our common stock and Series A Preferred Stock.

Our charter contains a 9.8% ownership limit. Our Articles of Amendment and Restatement (our “charter”), subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% of the outstanding shares of our common stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership, direct or indirect, in excess of 9.8% of the value of our outstanding shares of our common stock could jeopardize our status as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may delay or impede a transaction or a change of control that might be in the best interest of our stockholders.

We could authorize and issue stock without stockholder approval. Our charter authorizes our board of directors to amend the charter to increase or decrease the aggregate number of shares of stock or the number of

 

24


Table of Contents

shares of stock of any class or series that we have the authority to issue, to issue authorized but unissued shares of our common stock or Series A Preferred Stock and to classify or reclassify any unissued shares of our common stock or Series A Preferred Stock and to set the preferences, rights and other terms of such classified or unclassified shares. Although our board of directors has no such intention at the present time, it could establish another series of stock that could, depending on the terms of such series, delay, defer or prevent a transaction that might be in the best interest of our stockholders.

Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General Corporation Law (“MGCL”), may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could be in the best interest of our stockholders, including: (i) “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting shares or any affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding voting shares) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and (ii) “control share” provisions that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future. In addition, provided that we have a class of equity securities registered under the Securities Exchange Act of 1934 and at least three independent directors, Subtitle 8 of Title 3 of the MGCL permits us to elect to be subject, by provision in our charter or bylaws or a resolution of our board of directors and notwithstanding any contrary provision in the charter or bylaws, to certain provisions, including a classified board and a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred. Our charter, bylaws, the partnership agreement and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might otherwise be in the best interest of our stockholders.

Market interest rates and other factors may affect the value of our common stock and Series A Preferred Stock.

One of the factors influences the price of our common stock and Series A Preferred Stock is the dividend yield on our common stock and Series A Preferred Stock relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, could cause the market price of our common stock and Series A Preferred Stock to go down. The trading price of shares of our common stock and Series A Preferred Stock would also depend on many other factors, which may change from time to time, including:

 

   

Prevailing interest rates;

 

   

The market for similar securities;

 

   

The attractiveness of REIT securities in comparison to the securities of other companies, taking into account, among other things, the higher tax rates imposed on dividends paid by REITs;

 

   

Government action or regulation;

 

25


Table of Contents
   

General economic conditions; and

 

   

Our financial condition, performance and prospects.

Our revolving credit facility prohibits us from redeeming our common stock and Series A Preferred Stock and may limit our ability to pay dividends on our common stock and Series A Preferred Stock.

Our revolving credit facility prohibits us from redeeming or otherwise repurchasing any shares of our stock, including the common stock and Series A Preferred Stock. Our revolving credit facility also prohibits us from distributing to our stockholders more than 95% of our “funds from operations” (as defined in our revolving credit facility) during any four consecutive fiscal quarters, except as necessary to enable us to qualify as a REIT for federal income tax purposes. As a result, if we do not generate sufficient funds from operations (as defined in our revolving credit facility) during the twelve months preceding any common stock and Series A Preferred Stock dividend payment date, we would not be able to pay all or a portion of the accumulated dividends payable to holders of our common stock and Series A Preferred Stock on such payment date without causing a default under our revolving credit facility. In the event of a default under our revolving credit facility, we would be unable to borrow under our revolving credit facility and any amounts we have borrowed thereunder could become due and payable.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

Existing Portfolio

At December 31, 2007, our Operating Partnership owns whole or partial interests in 37 office and retail projects, a 350-room hotel with 266,000 square feet, offsite parking garages and on-site structured and surface parking. Excluding the 80% interest that our Operating Partnership does not own in the joint venture, our Effective Portfolio’s share of the Total Portfolio is approximately 17.8 million square feet. Our Operating Partnership also owns undeveloped land adjacent to existing office properties that we believe can support up to approximately 8.6 million square feet of office, retail and residential uses and an additional 8.3 million square feet of structured parking.

As of December 31, 2007 and 2006, our Maguire Macquarie joint venture owned the following six office properties:

 

Properties

  

Location

   Rentable
Square Feet

Wells Fargo Center

   Denver, CO    1,211,773

One California Plaza

   Los Angeles, CA    992,899

San Diego Tech Center

   San Diego, CA    645,872

Washington Mutual Campus

   Irvine, CA    414,595

Cerritos Corporate Center

   Cerritos, CA    326,535

Stadium Gateway

   Anaheim, CA    272,826
       
   3,864,500
       

 

26


Table of Contents

The following table summarizes our Total Portfolio as of December 31, 2007:

 

          Square Feet     Leased % and In-Place Rents
    Number
of
Buildings
  Number
of
Tenants
  Year Built /
Renovated
  Ownership
%
    Net
Building
Rentable
  Effective(1)   % of
Net
Rentable
    %
Leased
    Total
Annualized
Rents(2)
  Effective
Annualized
Rents(2)
  Annualized
Rent $/
RSF(3)

Office Properties

                                                 

Los Angeles County

                                                 

Los Angeles Central Business District:

                     

Gas Company Tower

  1   16   1991   100 %   1,325,017   1,325,017   6.34 %   89.4 %   $ 32,745,053   $ 32,745,053   $ 27.65

US Bank Tower

  1   47   1989   100 %   1,396,177   1,396,177   6.68 %   85.4 %     32,083,530     32,083,530     26.90

Wells Fargo Tower

  2   68   1982   100 %   1,394,671   1,394,671   6.67 %   92.8 %     25,712,369     25,712,369     19.88

Two California Plaza

  1   62   1992   100 %   1,328,275   1,328,275   6.35 %   93.1 %     23,899,487     23,899,487     19.32

KPMG Tower

  1   21   1983   100 %   1,139,835   1,139,835   5.45 %   69.0 %     16,189,316     16,189,316     20.58

777 Tower

  1   37   1991   100 %   1,009,602   1,009,602   4.83 %   94.1 %     19,135,796     19,135,796     20.14

550 South Hope Street

  1   46   1991   100 %   565,738   565,738   2.71 %   91.0 %     8,427,539     8,427,539     16.37

One California Plaza

  1   32   1985   20 %   992,899   198,580   4.75 %   89.3 %     16,906,892     3,381,378     19.06
                                                 

Total LACBD Submarket

  9   329       9,152,214   8,357,895   43.78 %   87.9 %     175,099,982     161,574,468     21.76

Tri-Cities Submarket

                     

Glendale Center

  2   4   1973/1996   100 %   386,318   386,318   1.85 %   100.0 %     8,495,724     8,495,724     21.99

801 North Brand

  1   31   1987   100 %   284,889   284,889   1.36 %   85.8 %     4,572,978     4,572,978     18.71

701 North Brand

  1   13   1978   100 %   131,129   131,129   0.63 %   100.0 %     2,176,581     2,176,581     16.60

700 North Central

  1   22   1979   100 %   134,168   134,168   0.64 %   92.2 %     1,986,458     1,986,458     16.06

Plaza Las Fuentes

  3   9   1989   100 %   192,958   192,958   0.92 %   100.0 %     3,765,372     3,765,372     19.51
                                                 

Total Tri-Cities Submarket

  8   79       1,129,462   1,129,462   5.40 %   95.5 %     20,997,113     20,997,113     19.47

Santa Monica Professional and Entertainment Submarket

                     

Lantana Media Campus

  3   22   1989/2001   100 %   331,572   331,572   1.59 %   85.8 %     9,732,277     9,732,277     34.19
                                                 

Total Entertainment Submarket

  3   22       331,572   331,572   1.59 %   85.8 %     9,732,277     9,732,277     34.19

Cerritos Office Submarket

                     

Cerritos—Phase I

  1   1   1999   20 %   221,968   44,394   1.06 %   100.0 %     5,982,037     1,196,407     26.95

Cerritos—Phase II

  1   —     2001   20 %   104,567   20,913   0.50 %   100.0 %     2,482,421     496,485     23.74
                                                 

Total Cerritos Submarket

  2   1       326,535   65,307   1.56 %   100.0 %     8,464,458     1,692,892     25.92

Total Los Angeles County

  22   431       10,939,783   9,884,236   52.33 %   89.0 %   $ 214,293,830   $ 193,996,750   $ 22.01
                                                 

Orange County

                                                 

John Wayne Airport Submarket

                     

Park Place

  8   41   1977/2002   100 %   1,786,041   1,786,041   8.54 %   71.0 %   $ 18,971,017   $ 18,971,017   $ 14.96

3161 Michelson

  1   3   2007   100 %   532,141   532,141   2.55 %   32.4 %     5,086,346     5,086,346     29.49

2600 Michelson

  1   32   1986   100 %   307,286   307,286   1.47 %   85.1 %     4,689,010     4,689,010     17.94

1920 Main Plaza

  3   34   1988   100 %   304,935   304,935   1.46 %   81.7 %     5,117,030     5,117,030     20.55

2010 Main Plaza

  1   29   1988   100 %   280,680   280,680   1.34 %   71.1 %     3,474,323     3,474,323     17.40

18581 Teller

  1   3   1983   100 %   86,087   86,087   0.41 %   100.0 %     1,362,066     1,362,066     15.82

Washington Mutual Irvine Campus

  4   2   1989/2004   20 %   414,595   82,919   1.98 %   100.0 %     9,078,994     1,815,799     21.90
                                                 

Total Airport Submarket

  19   144       3,711,765   3,380,089   17.75 %   71.4 %     47,778,786     40,515,591     18.02

Costa Mesa Submarket

                     

Griffin Towers

  2   41   1987   100 %   543,205   543,205   2.60 %   77.1 %     6,625,459     6,625,459     15.83

Pacific Arts Plaza

  8   44   1982   100 %   785,225   785,225   3.76 %   85.0 %     14,079,617     14,079,617     21.09
                                                 

Total Costa Mesa Submarket

  10   85       1,328,430   1,328,430   6.36 %   81.8 %     20,705,076     20,705,076     19.06

 

27


Table of Contents
          Square Feet     Leased % and In-Place Rents
    Number
of
Buildings
  Number
of
Tenants
  Year Built /
Renovated
  Ownership
%
    Net
Building
Rentable
  Effective(1)   % of
Net
Rentable
    %
Leased
    Total
Annualized
Rents(2)
  Effective
Annualized
Rents(2)
  Annualized
Rent $/
RSF(3)

Office Properties

                                                 

Orange County

                                                 

Central Orange Submarket

                     

3800 Chapman

  1   1   1984   100 %   157,231   157,231   0.75 %   100.0 %     2,143,143     2,143,143     13.63

500-600 Parkway

  3   7   1978   100 %   457,069   457,069   2.19 %   13.6 %     959,511     959,511     15.39

City Tower

  1   30   1988   100 %   410,068   410,068   1.96 %   90.2 %     7,033,738     7,033,738     19.01

City Plaza

  1   38   1969/1999   100 %   327,003   327,003   1.56 %   56.6 %     2,810,281     2,810,281     15.19

500 Orange Tower

  3   47   1987   100 %   333,505   333,505   1.60 %   94.4 %     5,852,308     5,852,308     18.58

Stadium Towers Plaza

  1   31   1988   100 %   257,321   257,321   1.23 %   79.4 %     3,777,805     3,777,805     18.48

Stadium Gateway

  1   9   2001   20 %   272,826   54,565   1.31 %   91.8 %     4,912,677     982,535     19.63
                                                 

Total Central Orange Submarket

  11   163       2,215,023   1,996,762   10.60 %   69.7 %     27,489,463     23,559,321     17.80

Other

                     

Brea Corporate Place

  2   17   1987   100 %   328,305   328,305   1.57 %   66.8 %     2,699,605     2,699,605     12.30

Brea Financial Commons Portfolio

  3   4   1987   100 %   164,490   164,490   0.79 %   49.1 %     1,563,746     1,563,746     19.35

130 State College

  1   —     1983   100 %   43,449   43,449   0.21 %   0.0 %     —       —       —  
                                                 

Total Other

  6   21       536,244   536,244   2.57 %   56.0 %     4,263,351     4,263,351     14.20

Total Orange County

  46   413       7,791,462   7,241,525   37.28 %   71.6 %   $ 100,236,676   $ 89,043,339   $ 17.96
                                                 

San Diego County

                                                 

Sorrento Mesa Submarket

                     

San Diego Tech Center

  11   32   1984/1986   20 %   645,872   129,174   3.09 %   98.6 %   $ 12,063,357   $ 2,412,671   $ 18.95
                                                 

Total Sorento Mesa Submarket

  11   32       645,872   129,174   3.09 %   98.6 %     12,063,357     2,412,671     18.95

Mission Valley Submarket

                     

Mission City Corporate Center

  3   13   1990   100 %   190,634   190,634   0.91 %   84.6 %     3,873,805     3,873,805     24.02
                                                 

Total Mission Valley Submarket

  3   13       190,634   190,634   0.91 %   84.6 %     3,873,805     3,873,805     24.02

Total San Diego County

  14   45       836,506   319,808   4.00 %   95.4 %   $ 15,937,162   $ 6,286,476   $ 19.97
                                                 

Other

                                                 

Denver, CO—Downtown Submarket

                     

Wells Fargo Center—Denver

  1   41   1983   20 %   1,211,773   242,355   5.80 %   95.2 %     21,612,583     4,322,517     18.74
                                                 

Total Other

  1   41       1,211,773   242,355   5.80 %   95.2 %     21,612,583     4,322,517     18.74

Total Office Properties

  83   930       20,779,524   17,687,924   99.41 %   83.1 %   $ 352,080,251   $ 293,649,082   $ 20.39
                                                 

Retail Property

                                                 

John Wayne Airport Submarket

                     

Park Place

  8   25   1981   100 %   122,533   122,533   0.59 %   95.1 %   $ 3,527,833   $ 3,527,833   $ 30.26
                                                 

Total Retail Properties

  8   25       122,533   122,533   0.59 %   95.1 %     3,527,833     3,527,833     30.26

Total Office and Retail Properties

  91   955       20,902,057   17,810,457   100.00%     83.2 %     $355,608,084     $297,176,915     $20.45
                                                 

Effective Office and Retail Properties

          17,810,457       81.1 %       $ 20.56
                               

 

28


Table of Contents
          Square Feet   Leased % and In-Place Rents
    Number
of
Buildings
  Number
of
Tenants
  Year
Built /
Renovated
  Ownership
%
    Net
Building
Rentable
  Effective(1)   % of
Net
Rentable
  %
Leased
  Total
Annualized
Rents(2)
  Effective
Annualized

Rents(2)
  Annualized
Rent $/
RSF(3)

Hotel Property

                    SQFT   Effective
SQFT
  Number
of
Rooms
               

Westin Hotel, Pasadena, CA

        100 %   266,000   266,000   350        
                           

Total Hotel Property

          266,000   266,000   350        
                           

Total - Office, Retail, and Hotel

          21,168,057   18,076,457          
                         

Parking Properties

                    SQFT   Effective
SQFT
  Vehicle
Capacity
  Effective
Vehicle
Capacity
  Annualized
Parking
Revenue(4)
  Effective
Annualized
Parking

Revenue(5)
  Effective
Annualized
Parking
Revenue per
Vehicle
Capacity(6)

On-Site Parking

          12,052,893   10,131,539   40,863   34,265   $ 55,295,414   $ 47,535,202   $ 1,387

Off-Site Garages

          1,815,453   1,815,453   5,729   5,729     11,229,264     11,229,264     1,960
                                         

Total Parking Properties

          13,868,346   11,946,992   46,592   39,994   $ 66,524,678   $ 58,764,466   $ 1,469
                                         

Total—Office, Retail, Hotel and Parking Properties

          35,036,403   30,023,449          
                         

 

(1) Includes 100% of our consolidated portfolio and 20% of our Maguire Macquarie joint venture portfolio.
(2) Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2007. This amount reflects total base rent before any one-time or non-recurring rent abatements but after annually recurring rent credits and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent.
(3) Annualized rent per rentable square foot represents annualized rent as computed above, divided by the total square footage under lease as of the same date.
(4) Annualized parking revenue represents the annualized quarterly parking revenue as of December 31, 2007.
(5) Effective annualized parking revenue represents the annualized quarterly parking revenue as of December 31, 2007 adjusted to include 100% of our consolidated portfolio and 20% of our Maguire Macquarie joint venture portfolio.
(6) Effective annualized parking revenue per vehicle capacity represents the annualized parking revenue as computed above, divided by the vehicle capacity.

 

29


Table of Contents

Tenant Information

Our Total Portfolio is currently leased to 955 tenants, many of which are nationally recognized firms in the financial services, entertainment, accounting and law sectors. The following table sets forth information regarding the 20 largest tenants in our office portfolio based on annualized rent for the Effective Portfolio as of December 31, 2007:

 

   

Tenant

  Number
of
Locations
  Annualized
Rent (1)
  % of Total
Annualized
Rent
    Total
Leased
Square
Feet
  % of Aggregate
Leased Square
Feet of
Existing Portfolio
    Weighted
Average
Remaining
Lease
Term in Months
  S & P Credit Rating /
National Recognition (2)
  Rated              
1  

Southern California Gas Company

  1   $ 21,283,883   7.1 %   576,516   4.0 %   46   A
2  

Sempra (Pacific Enterprises)

  1     8,504,539   2.9 %   225,756   1.6 %   30   A
3  

Wells Fargo Bank (3)

  4     6,609,560   2.2 %   393,765   2.7 %   81   AA+
4  

Bank of America (3)

  4     4,175,636   1.4 %   189,338   1.3 %   46   AA
5  

Disney Enterprises

  1     3,706,960   1.2 %   156,215   1.1 %   42   A
6  

US Bank, National Association

  2     3,784,704   1.3 %   162,090   1.1 %   87   AA+
7  

State Farm Mutual Auto Insurance Company

  3     2,618,861   0.9 %   171,497   1.2 %   24   AA
8  

Washington Mutual, FA (3)

  1     2,271,661   0.8 %   100,136   0.7 %   52   A-
9  

GMAC Mortgage Corporation

  1     2,342,898   0.8 %   130,161   0.9 %   72   AAA
10  

Home Depot

  1     2,143,142   0.7 %   157,231   1.1 %   43   BBB+
                       
 

Total Rated / Weighted Average (3), (4)

      57,441,844   19.3 %   2,262,705   15.7 %   53  
                       
 

Total Investment Grade Tenants (3)

      107,547,847   36.2 %   4,976,164   34.4 %    
                     
  Unrated - Nationally Recognized              
11  

Latham & Watkins

  2     9,813,441   3.3 %   382,716   2.6 %   182   2nd Largest US Law Firm
12  

Gibson Dunn & Crutcher

  2     8,843,741   3.0 %   354,721   2.5 %   118   19th Largest US Law Firm
13  

Deloitte & Touche

  1     5,216,904   1.8 %   342,094   2.4 %   87   Largest US Accounting Firm
14  

Marsh USA, Inc.

  1     3,727,695   1.3 %   212,721   1.5 %   124   World’s Largest Insurance Broker
15  

KPMG

  1     3,612,487   1.2 %   175,971   1.2 %   78   4th Largest US Accounting Firm
16  

Morrison & Foerster

  1     3,469,400   1.2 %   138,776   1.0 %   69   22nd Largest US Law Firm
17  

Munger Tolles & Olson

  1     3,374,322   1.1 %   160,682   1.1 %   170   129th Largest US Law Firm
18  

PricewaterhouseCoopers

  1     2,988,225   1.0 %   160,784   1.1 %   65   3rd Largest US Accounting Firm
19  

Bingham McCutchen, LLP

  1     2,799,537   0.9 %   104,712   0.7 %   61   27th Largest US Law Firm
20  

Sidley & Austin

  1     2,456,316   0.8 %   187,362   1.3 %   192   5th Largest US Law Firm
                       
 

Total Unrated /Weighted Average (3), (4)

      46,302,068   15.6 %   2,220,539   15.4 %   122  
                       
 

Total Nationally Recognized Tenants (3)

      73,962,833   24.9 %   3,629,961   25.1 %    
                       
 

Total / Weighted
Average (3), (4)

    $ 103,743,912   34.9 %   4,483,244   31.1 %   87  
                       
 

Total Investment Grade or Nationally Recognized Tenants (3)

    $ 181,510,680   61.1 %   8,606,125   59.6 %    
                     

 

(1) Annualized base rent is calculated as monthly contractual base rent under existing leases as of December 31, 2007, multiplied by 12. For those leases where rent has not yet commenced, the first month in which rent is to be received is used to determine annualized base rent.
(2) S&P credit ratings are as of December 31, 2007. Rankings of law firms are based on total gross revenue in 2006 as reported by American Lawyer Media’s LAW.com.
(3) Includes 20% of annualized rent and leased square footage for our Maguire Macquarie joint venture properties.
(4) The weighted average calculation is based on the effective net rentable square feet leased by each tenant, which reflects our pro-rata share of the Maguire Macquarie joint venture.

 

30


Table of Contents

The following table presents the diversification of the tenants occupying space in our Effective Portfolio by industry as of December 31, 2007:

 

NAICS Code

  

North American Industrial Classification

System Description

   Total Leased
Square Feet
   Percentage of
Effective
Office Portfolio
Leased

Square Feet
 
221    Utilities    967,177    6 %
541   

Professional, Scientific and Technical Services (except Legal Services)

   1,711,910    12 %
611    Educational Services    270,579    2 %
5411    Legal Services    3,428,285    24 %
311 - 339    Manufacturing    230,019    2 %
511 - 518    Information    746,006    5 %
521 - 525    Finance and Insurance    5,168,513    36 %
531 - 532    Real Estate and Rental and Leasing    310,628    2 %
721 - 722    Accommodation and Food Services    254,813    2 %
921 - 923    Public Administration    312,553    2 %
   Other    1,050,470    7 %
              
      14,450,953    100 %
              

Lease Terms

Our leases are typically structured for terms of five to ten years and usually require the purchase of a minimum number of monthly parking spaces at the property. Leases usually contain provisions permitting tenants to renew expiring leases at prevailing market rates. Most of our leases are triple net and modified gross leases. Triple net and modified gross leases are those in which tenants pay not only base rent, but also some or all real estate taxes and operating expenses of the leased property. Tenants typically reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for a certain number of parking spaces. We are generally responsible for structural repairs.

Lease Distribution

The following table presents information relating to the distribution of leases in our Effective Portfolio based on the effective net rentable square feet under lease as of December 31, 2007:

 

Square Feet Under Lease

   Number of
Leases
   Percent of
all Leases
    Total
Leased
Square Feet
   Percentage of
Aggregate
Leased
Square Feet
    Annualized
Rent
   Percentage of
Annualized
Rent
 

less than 2,500

   310    30.8 %   434,922    3.0 %   $ 9,733,139    3.3 %

2,501-10,000

   366    36.3 %   1,877,250    13.0 %     37,900,798    12.7 %

10,001-20,000

   143    14.2 %   1,627,721    11.3 %     30,597,426    10.3 %

20,001-40,000

   82    8.1 %   1,995,980    13.8 %     39,707,268    13.4 %

40,001-100,000

   67    6.7 %   3,024,036    20.9 %     58,487,030    19.7 %

greater than 100,000

   39    3.9 %   5,491,044    38.0 %     120,751,254    40.6 %
                                   
   1,007    100.0 %   14,450,953    100.0 %   $ 297,176,915    100.0 %
                                   

 

31


Table of Contents

Lease Expirations

The following table presents a summary of lease expirations for our wholly-owned portfolio (excluding our joint venture properties), for leases in place at December 31, 2007 plus available space, for each of the ten calendar years beginning January 1, 2008. This table assumes that none of the tenants exercise renewal options or early termination rights, if any, at or prior to the scheduled expirations.

 

Year

   Total Area in
Square Feet Covered
by Expiring Leases
   Percentage
of Aggregate
Square Feet
    Annualized
Rent
   Percentage
of Total
Annualized
Rent
    Current Rent
per Square Foot(1)
   Rent per
Square Foot
at Expiration(2)

Available

   3,320,266    19.5 %          

2008

   1,461,849    8.6 %   $ 25,600,296    9.1 %   $ 17.51    $ 17.56

2009

   1,039,125    6.1 %     18,938,193    6.7 %     18.23      18.81

2010

   1,701,200    10.0 %     37,080,527    13.1 %     21.80      23.01

2011

   2,443,010    14.3 %     57,111,451    20.2 %     23.38      25.10

2012

   1,129,858    6.6 %     23,404,931    8.3 %     20.71      23.32

2013

   1,993,011    11.7 %     37,537,173    13.3 %     18.83      23.07

2014

   524,562    3.1 %     10,277,426    3.6 %     19.59      23.82

2015

   834,083    4.9 %     16,899,878    6.0 %     20.26      24.36

2016

   136,881    0.8 %     2,605,850    0.9 %     19.04      25.57

2017

   1,194,258    7.0 %     24,307,819    8.6 %     20.35      24.47

Thereafter

   1,259,454    7.4 %     28,805,579    10.2 %     22.87      30.38
                                     
   17,037,557    100.0 %   $ 282,569,123    100.0 %   $ 20.60    $ 23.33
                                     

 

(1) Current rent per leased square foot represents current base rent, divided by total square footage under lease as of the same date.
(2) Rent per leased square foot at expiration represents base rent including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

 

32


Table of Contents

The following table presents a summary of lease expirations for our joint venture with Macquarie Office Trust for leases in place at December 31, 2007 plus available space, for each of the ten calendar years beginning January 1, 2008. This table assumes that none of the tenants exercise renewal options or early termination rights, if any, at or prior to the scheduled expirations:

 

Year

   Total Area in
Square Feet Covered
by Expiring Leases
   Percentage
of Aggregate
Square Feet
    Annualized
Rent
   Percentage
of Total
Annualized
Rent
    Current Rent
per Square Foot(1)
   Rent per
Square Foot
at Expiration(2)

Available

   196,188    5.1 %          

2008

   185,401    4.8 %   $ 3,573,015    4.9 %   $ 19.27    $ 19.34

2009

   541,976    14.0 %     9,980,901    13.7 %     18.42      19.23

2010

   446,469    11.6 %     10,240,529    14.0 %     22.94      25.16

2011

   470,990    12.2 %     9,331,980    12.8 %     19.81      21.77

2012

   349,286    9.0 %     6,775,917    9.3 %     19.40      21.64

2013

   242,204    6.3 %     4,307,918    5.9 %     17.79      21.68

2014

   726,799    18.8 %     15,149,034    20.7 %     20.84      24.85

2015

   105,013    2.7 %     1,912,811    2.6 %     18.21      22.26

2016

   81,033    2.1 %     1,378,696    1.9 %     17.01      23.08

2017

   37,787    1.0 %     732,423    1.0 %     19.38      28.52

Thereafter

   481,354    12.4 %     9,655,737    13.2 %     20.06      28.34
                                     
   3,864,500    100.0 %   $ 73,038,961    100.0 %   $ 19.91    $ 22.92
                                     

 

(1) Current rent per leased square foot represents current base rent, divided by total square footage under lease as of the same date.
(2) Rent per leased square foot at expiration represents base rent including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Historical Percentage Leased and Rental Rates

The following table sets forth, as of the indicated dates, the percentage leased and annualized rent per leased square foot for our Effective Portfolio:

 

     Percent Leased    Annualized Rent
per Square Foot(1)

December 31, 2007

   81.10%    $ 20.56

December 31, 2006

   87.60%      21.34

December 31, 2005

   91.60%      19.88

 

(1) Annualized rent per leased square foot represents the annualized monthly contractual rent under existing leases as of the date indicated. This amount reflects total base rent before any one-time or nonrecurring rent abatements but after annually recurring rent credits and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a full gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent.

 

33


Table of Contents

Historical Tenant Improvements and Leasing Commissions (1) (2) (3)

The following table sets forth certain historical information regarding tenant improvements and leasing commission costs for tenants in our Effective Portfolio through December 31, 2007. The information presented assumes all tenant concessions and leasing commissions are paid in the calendar year in which the lease was executed, which may be different from the year in which the lease commences or in which they were actually paid.

 

     For the Year Ended December 31,
     2007    2006    2005

Renewals (5)

        

Number of leases

     152      74      67

Square feet

     881,406      824,516      740,375

Tenant improvement costs per square foot (4)

   $ 11.69    $ 29.22    $ 11.25

Leasing commission costs per square foot

   $ 5.14    $ 8.18    $ 3.64

Total tenant improvements and leasing commissions

        

Costs per square foot

   $ 16.83    $ 37.40    $ 14.89

Costs per square foot per year

   $ 3.41    $ 4.78    $ 3.46

New / Modified Leases (6)

        

Number of leases

     141      147      138

Square feet

     893,634      1,015,192      1,047,634

Tenant improvement costs per square foot (4)

   $ 22.89    $ 20.93    $ 24.29

Leasing commission costs per square foot

   $ 6.52    $ 6.34    $ 5.41

Total tenant improvements and leasing commissions

        

Costs per square foot

   $ 29.41    $ 27.27    $ 29.70

Costs per square foot per year

   $ 5.00    $ 4.33    $ 4.78

Total

        

Number of leases

     293      221      205

Square feet

     1,775,040      1,839,708      1,788,009

Tenant improvement costs per square foot (4)

   $ 17.33    $ 24.64    $ 18.89

Leasing commission costs per square foot

   $ 5.84    $ 7.16    $ 4.68

Total tenant improvements and leasing commissions

        

Costs per square foot

   $ 23.17    $ 31.80    $ 23.57

Costs per square foot per year

   $ 4.28    $ 4.55    $ 4.36

 

(1) Based on leases executed during the period. Excludes leases to related parties, short-term leases less than six months, and leases for raw space.
(2) Tenant improvements and leasing commission information are included from the date of acquisition.
(3) Tenant improvements and leasing commission information in 2007 and 2006 reflects 100% of the consolidated portfolio and 20% of the Maguire Macquarie joint venture properties. Information for 2005 reflects 100% of the consolidated portfolio and 100% of the Maguire Macquarie joint venture properties.
(4) Tenant improvements include improvements and lease concessions.
(5) Does not include retained tenants that have relocated to new space or expanded into new space.
(6) Includes retained tenants that have relocated or expanded into new space and lease modifications.

 

34


Table of Contents

Historical Capital Expenditures (1)

The following table sets forth certain information regarding historical non-recoverable and recoverable capital expenditures in our Effective Portfolio for 2007, 2006 and 2005. Recoverable capital expenditures are reimbursed by tenants under the terms of their leases, but are borne by us to the extent of the unleased space in our portfolio.

 

     For the Year Ended December 31,
     2007    2006    2005

Non-recoverable capital expenditures (2), (3)

   $ 11,377,206    $ 2,607,195    $ 4,502,547

Total square feet (4)

     16,675,985      12,247,589      9,150,550

Non-recoverable capital expenditures per square foot

   $ 0.68    $ 0.21    $ 0.49

Recoverable capital expenditures (5), (6)

   $ 2,863,262    $ 1,451,773    $ 1,553,935

Total square feet (4)

     16,675,985      12,247,589      9,150,550

Recoverable capital expenditures per square foot

   $ 0.17    $ 0.12    $ 0.17

 

(1) Historical capital expenditures for each period shown reflect properties owned for the entire period. For properties acquired during each period, the capital expenditures will be reflected in the following full period of ownership. For properties sold during each period, the capital expenditures will be excluded for that period. Any capital expenditures incurred for acquisition or disposition properties during the period of acquisition or disposition will be footnoted separately.
(2) Excludes $507,000 and $619,000 of non-recoverable capital expenditures for 2006 and 2005, respectively, incurred at acquired properties following their acquisition.
(3) Excludes approximately $13.2 million of non-recoverable capital expenditures for 2007 as a result of discretionary renovation costs of $1.9 million at KPMG Tower, $9.4 million at 3161 Michelson as a result of on-going improvements made to the building until it is leased to stabilization and excludes $1.9 million related to planned renovation at Lantana Media Campus.
(4) The square footages of Cerritos Corporate Center and Washington Mutual Irvine Campus are deducted from the total square feet amount as the tenants pay for all capital expenditures.
(5) Recoverable capital improvements, such as equipment upgrades, are generally financed through capital leases. The annual amortization, based on each asset’s useful life, as well as any financing costs, are generally billed to tenants on an annual basis as payments are made. The amounts presented represent the total value of the improvements in the year they are made.
(6) Excludes $506,000 of recoverable capital expenditures for 2005 incurred at acquired properties following their acquisition.

The following table sets forth certain information regarding historical capital expenditures at our hotel property for 2007, 2006 and 2005:

 

     For the Year Ended December 31,  

Westin® Hotel, Pasadena, CA

   2007     2006     2005  

Hotel improvements and equipment replacement

   $ 712,955     $ 730,531     $ 313,011  

Total hotel revenue

     27,214,156       27,053,648       24,037,425  

Hotel improvements as a percentage of hotel revenue

     2.6 %     2.7 %     1.3 %

Renovation and upgrade costs(1)

   $     $ 164,072     $ 3,461,780  

 

(1)

The Westin® Hotel underwent a $12.2 million renovation from December 2002 through August 2005, of which $3.5 million was funded by Westin®.

 

35


Table of Contents

Construction in Progress and Development Pipeline

As of December 31, 2007, we had approximately 1.0 million square feet of construction in progress and developable land that we believe can support an additional 16.9 million square feet:

 

        As of December 31, 2007

Property

 

Location

 

Percentage
Pre-Leased

   

Developable
Square Feet(1)

 

Type of Planned

Development

Construction in Progress

       

Lantana Media Campus

 

Santa Monica, CA

  31 %   198,000   Office
      223,000   Structured parking

207 Goode Avenue

 

Glendale, CA

      189,000   Office

17885 Von Karman Avenue

 

Irvine, CA

      150,000   Office

Mission City Corporate Center

 

San Diego, CA

      92,000   Office
      128,000   Structured parking
         
 

Total construction in progress

  

  980,000  
         

Development Pipeline

       

755 South Figueroa

 

Los Angeles, CA

    930,000   Office
      266,000   Structured parking

Glendale Center—Phase II

 

Glendale, CA

    264,000   Mixed use
      158,000   Structured parking

Stadium Tower II

 

Anaheim, CA

    282,000   Office
      367,000   Structured parking

Brea Financial Commons/Brea Corporate Place (2)

 

Brea, CA

    550,000   Office, mixed use
      784,000   Structured parking

Pacific Arts Plaza

 

Costa Mesa, CA

    468,000   Office
      225,000   Residential (3)
      260,000   Structured parking

Park Place

 

Irvine, CA

    1,285,000   Office, retail & hotel
      1,052,000   Residential
      2,376,000   Structured parking

2600 Michelson (4)

 

Irvine, CA

    270,000   Office
      154,000   Structured parking

500 Orange Center (5)

 

Orange, CA

    900,000   Office
      960,000   Structured parking

605 City Parkway

 

Orange, CA

    200,000   Office
      228,000   Structured parking

City Plaza II

 

Orange, CA

    360,000   Office
      387,000   Structured parking

City Tower II (6)

 

Orange, CA

    465,000   Office
      696,000   Structured parking

San Diego Tech Center (7), (8)

 

Sorrento Mesa, CA

    1,320,000   Office
      1,674,000   Structured parking
         
 

Total development pipeline

 

  16,881,000  
         

 

(1) The developable square feet represents the office, retail, residential and parking square footages that we estimate can be developed on the referenced property.
(2) The developable square feet presented represents management’s estimate of the development potential for the referenced property based on the allowed density under current zoning and capacity considerations for the site still under planning review.

 

36


Table of Contents
(3) The developable square feet presented represents management’s estimate of the development potential for the referenced property based on the construction of 180 residential units as contemplated under a Program EIR completed by the City of Costa Mesa for this and other surrounding properties. This residential development would replace an existing 67,450 square foot office building at Pacific Arts Plaza.
(4) The developable square feet presented represents management’s estimate of the development potential for the referenced property based on an allocation of excess trips reserved from our disposition of Inwood Park, which we are currently in discussion with the City of Irvine over securing, and the potential utilization of excess trips from our other assets in the Irvine Business Complex (i.e. Park Place).
(5) The developable square feet presented represents management’s estimate of the development potential for the referenced property based on the allowed density under current zoning. Approximately 60,000 square feet of the estimated development potential will require the consolidation of an adjacent remnant parcel in cooperation with the City of Orange.
(6) The developable square feet presented represents management’s estimate of the development potential for the referenced property based on the allowed density under a Conditional Use Permit obtained for the property in 2001, which has since expired.
(7) Land held for development was not contributed to our joint venture with Macquarie Office Trust.
(8) The third phase contemplates the demolition of 120,000 square feet of existing space.

Secured Debt

As of December 31, 2007, we had approximately $5.00 billion of outstanding consolidated debt. This indebtedness was comprised of mortgages secured by 29 properties and five construction loans. The weighted average interest rate on this indebtedness as of December 31, 2007 was 5.76% (based on the 30-day LIBOR rate at December 31, 2007 of 4.60% for our variable-rate loans). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Item 8, Note 7 to Consolidated Financial Statements” included in this Annual Report on Form 10-K.

 

Item 3. Legal Proceedings.

We are involved in various litigation and other legal matters, including tort claims and administrative proceedings, which we are addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations.

 

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of our stockholders during the fourth quarter of 2007.

 

37


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

For information regarding the market in which our common stock, par value $0.01 per share, is traded, see the cover page hereof. For information regarding the high and low closing prices of our common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 20 to the Consolidated Financial Statements.”

Holders of Record

As of February 22, 2008, there were 26 holders of record of our common stock.

Dividends

In both 2007 and 2006, we declared quarterly distributions per share of $0.40 to holders of our common stock. These distributions are paid in the month following our quarter end. We currently intend to continue to declare quarterly distributions on our common stock. The actual amount and timing of distributions, however, will be at the discretion of our board of directors and will depend upon our financial condition in addition to the requirements of the Code, and no assurance can be given as to the amounts or timing of future distributions.

Subject to the distribution requirements applicable to REITs under the Code, we intend, to the extent practicable, to invest substantially all of the proceeds from dispositions and refinancing of our assets in real estate-related assets and other assets. We may, however, under certain circumstances, make a distribution of capital or assets. Such distributions, if any, will be made at the discretion of our board of directors. Distributions will be made in cash to the extent that cash is available for distribution.

Securities Authorized for Issuance under Equity Compensation Plans

Information regarding our equity compensation plans is incorporated herein by reference to our 2008 Notice of Annual Meeting of Stockholders and Proxy Statement or Form 10-K/A, which we intend to file with the SEC within 120 days after December 31, 2007.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

None.

 

38


Table of Contents

Performance Graph

The following graph compares the performance of our common stock from June 25, 2003 (the date upon which our common stock began publicly trading) through December 31, 2007 with that of the S&P 500 Index, the National Association of Real Estate Investment Trusts (“NAREIT”) Equity Index and the NAREIT Office Index. Upon written request, we will provide any stockholder with a list of the companies included in the NAREIT Equity and NAREIT Office indices. The Cumulative Total Return shown below assumes an initial investment of $100 on June 25, 2003 and reinvestment of dividends. The historical information included in the performance graph and Cumulative Total Return is not necessarily indicative of future performance. The data shown is based on the closing share prices or index values, as applicable, at the end of the last trading day of each month shown (except for our initial trading date, June 25, 2003).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Maguire Properties, Inc., the S&P 500 Index,

the NAREIT Equity Index and the NAREIT Office Index

LOGO

 

* $100 invested on 6/25/03 in stock or 5/31/03 in index, including reinvestment of dividends. Fiscal year ending December 31.

 

     6/03    12/03    12/04    12/05    12/06    12/07

Maguire Properties, Inc.

   $ 100.00    $ 132.74    $ 159.79    $ 190.43    $ 257.30    $ 199.89

S&P 500

     100.00      116.61      129.30      135.65      157.08      165.71

NAREIT Equity

     100.00      123.05      161.90      181.59      245.26      206.78

NAREIT Office

     100.00      122.24      158.28      177.96      253.88      201.48

 

39


Table of Contents
Item 6. Selected Financial Data.

The following table sets forth selected consolidated financial and operating data on a historical basis for our company and on a combined historical basis for the Predecessor. We have not presented historical information for our company prior to June 27, 2003, the date on which we consummated our IPO, because during the period from our formation until our IPO, we did not have any material corporate activity.

The Predecessor combined historical financial information includes the following entities, which are a subset of the entities referred to collectively in this Annual Report on Form 10-K as the Maguire Organization, for periods prior to June 27, 2003:

 

   

The property management, leasing and real estate development operations of Maguire Partners Development, Ltd.;

 

 

 

The real estate operations for certain entities that owned Plaza Las Fuentes and the Westin® Pasadena Hotel, Gas Company Tower, 808 South Olive garage and the KPMG Tower; and

 

   

Investments in and equity in the net income (loss) from the operations of certain real estate entities that owned US Bank Tower, Wells Fargo Tower and Glendale Center for all periods prior to June 27, 2003.

The owners of the Predecessor were Mr. Maguire and certain others who had minor ownership interests.

 

    Maguire Properties, Inc.     The
Predecessor
 
    For the Year Ended December 31,     Period
June 27,

2003
through
December 31,

2003
    Period
January 1,
2003
through
June 26,

2003
 
    2007     2006     2005     2004      
    (In thousands, except per share data)  

Operating Results (1), (2), (3):

           

Revenue:

           

Rental

  $ 340,601     $ 240,496     $ 286,754     $ 187,748     $ 73,084     $ 28,732  

Tenant reimbursements

    105,317       84,985       107,438       79,664       35,181       13,367  

Hotel operations

    27,214       27,054       24,037       20,519       9,711       8,738  

Other revenues

    74,903       78,867       54,944       38,783       19,396       8,220  
                                               

Total revenue

    548,035       431,402       473,173       326,714       137,372       59,057  
                                               

Expenses:

           

Rental property operating and maintenance

    124,113       84,651       96,579       69,245       27,600       12,277  

Hotel operating and maintenance

    17,146       17,324       15,739       14,497       6,925       6,863  

Real estate taxes

    49,555       31,736       40,743       24,430       10,775       2,962  

Parking

    16,476       12,236       11,860       9,293       3,733       1,295  

General and administrative

    37,677       36,909       21,707       17,530       24,507       15,003  

Other expense

    5,177       649       2,649       2,657       777       272  

Depreciation and amortization

    201,173       129,774       156,957       86,587       30,811       11,387  

Interest

    233,890       121,927       149,787       64,235       26,206       24,853  

Loss from early extinguishment of debt

    21,662       11,440       1,769       791       46,760       6,667  
                                               

Total expenses

    706,869       446,646       497,790       289,265       178,094       81,579  
                                               

(Loss) income from continuing operations before equity in net (loss) income of real estate entities, equity in net loss of unconsolidated joint ventures, gain on sale of real estate and minority interests

    (158,834 )     (15,244 )     (24,617 )     37,449       (40,722 )     (22,522 )

Equity in net (loss) income of real estate entities

                            (25 )     1,648  

Equity in net loss of unconsolidated joint ventures

    (2,149 )     (3,746 )                        

Gain on sale of real estate

          108,469                          

Minority interests allocated to continuing operations

    24,421       (10,523 )     7,998       (3,982 )     9,731       (275 )
                                               

 

40


Table of Contents
    Maguire Properties, Inc.     The
Predecessor
 
    For the Year Ended December 31,     Period
June 27,

2003
through
December 31,
2003
    Period
January 1,
2003
through
June 26,

2003
 
    2007     2006     2005     2004      
    (In thousands, except per share data)  

(Loss) income from continuing operations

    (136,562 )     78,956       (16,619 )     33,467       (31,016 )     (21,149 )
                                               

Loss from discontinued operations before gain on sale of real estate and minority interests

    (15,045 )     (10,007 )     (8,788 )                  

Gain on sale of real estate

    195,387                    

Minority interests allocated to discontinued operations

    (24,461 )     1,377       1,589                    
                                               

Income (loss) from discontinued operations

    155,881       (8,630 )     (7,199 )                  
                                               

Net income (loss)

    19,319       70,326       (23,818 )     33,467       (31,016 )   $ (21,149 )
                 

Preferred stock dividends

    (19,064 )     (19,064 )     (19,064 )     (17,899 )        
                                         

Net income (loss) available to common stockholders

  $ 255     $ 51,262     $ (42,882 )   $ 15,568     $ (31,016 )  
                                         

Net income (loss) available to common stockholders—basic

  $ 0.01     $ 1.11     $ (0.99 )   $ 0.37     $ (0.74 )  
                                         

Weighted average number of common shares outstanding

    46,750,597       46,257,573       43,513,810       42,504,134       42,009,487    
                                         

Net income (loss) available to common stockholders—diluted

  $ 0.01     $ 1.09     $ (0.99 )   $ 0.36     $ (0.74 )  
                                         

Weighted average number of common and common equivalent shares outstanding

    46,833,002       46,931,433       43,513,810       42,679,124       42,009,487    
                                         

Distributions declared per common share

  $ 1.60     $ 1.60     $ 1.60     $ 1.60     $ 0.82    
                                         

 

    Maguire Properties, Inc.
    As of December 31,
    2007   2006   2005   2004   2003
    (In thousands)

Financial Position:

         

Investments in real estate, net

  $ 4,962,707   $ 3,017,249   $ 3,588,623   $ 2,220,665   $ 1,553,449

Total assets

    5,749,778     3,511,729     4,069,191     2,603,894     1,805,918

Mortgage and other secured loans

    5,003,341     2,794,349     3,353,234     1,805,450     1,211,250

Total liabilities

    5,391,794     3,051,146     3,592,484     1,994,329     1,373,916

Minority interests

    14,670     28,671     40,070     72,198     88,578

Stockholders’ equity

    343,314     431,912     436,637     537,367     343,424

 

    For the Year Ended December 31,  
    2007     2006     2005     2004     2003  
    (In thousands)  

Other Information:

         

Cash flows from (used for) operating activities

  $ 45,742     $ 105,992     $ 104,817     $ 105,113     $ (70,826 )

Cash flows used for investing activities

    (2,635,790 )     (65,426 )     (1,494,618 )     (614,155 )     (446,513 )

Cash flows from financing activities

    2,663,772       15,523       1,370,340       529,802       558,098  

 

(1) During 2007, we purchased 24 office properties and development sites from Blackstone Real Estate Advisors for $2.875 billion. The consolidated statements of operations include the results of operations for these properties commencing with the date of acquisition, April 24, 2007.
(2) Our selected financial data has been reclassified to reflect the disposition of Wateridge Plaza, Pacific Center and Regents Square during 2007, which have been presented as discontinued operations in our consolidated statements of operations. Therefore, amounts presented in the table above for the years ended 2006 and 2005, respectively, will not agree to those previously reported in our Annual Reports on Form 10-K/A and 10-K for the years ended December 31, 2006 and 2005, respectively.
(3) During 2005, we purchased ten office properties and three development sites from Commonwealth Partners for $1.510 billion. The consolidated statements of operations include the results of operations for these properties commencing with the date of acquisition, March 15, 2005.

 

41


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes. See Item 8 “Financial Statements and Supplementary Data.”

Overview

We are a self-administered and self-managed real estate investment trust, and we operate as a REIT for federal income tax purposes. We are the largest owner and operator of Class A office properties in the Los Angeles Central Business District, have a significant presence in the John Wayne submarket of Orange County and are primarily focused on owning and operating high-quality office properties in the high-barrier-to-entry Southern California market.

As of December 31, 2007, our Operating Partnership indirectly owns whole or partial interests in 37 office and retail properties, a 350-room hotel and offsite parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 86.4% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in Maguire Macquarie Office, LLC, an unconsolidated joint venture formed in conjunction with Macquarie Office Trust, our Operating Partnership’s share of the Total Portfolio is 17.8 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office, hotel and retail properties from which we derive our net income or loss, which we recognize in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The aggregate square footage of our Effective Portfolio has not been reduced to reflect our minority interest partners’ share of the Operating Partnership.

Our property statistics as of December 31, 2007 are as follows:

 

    Number of   Total Portfolio   Effective Portfolio
  Properties   Buildings   Square Feet     Parking
Square
Footage
  Parking
Spaces
  Square Feet     Parking
Square
Footage
  Parking
Spaces

Wholly owned properties

  31   71   17,037,557     11,466,653   38,345   17,037,557     11,466,653   38,345

Unconsolidated joint venture

  6   20   3,864,500     2,401,693   8,247   772,900     480,339   1,649
                                   
  37   91   20,902,057     13,868,346   46,592   17,810,457     11,946,992   39,994
                                   

Percentage leased

      83.2 %       81.1 %    
                       

As of December 31, 2007, the majority of our Total Portfolio is located in ten submarkets in Southern California: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the Santa Monica Professional and Entertainment submarket; the John Wayne Airport, Costa Mesa, Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa and Mission Valley submarkets of San Diego County. We also have an interest in one property in Denver, Colorado (a joint venture property).

Our office properties are typically leased to high credit tenants for terms ranging from five to ten years. As of December 31, 2007, investment grade rated tenants generated 36.2% of the annualized rent of our Effective Portfolio, and nationally recognized professional service firms generated an additional 24.9% of the annualized rent of our Effective Portfolio. The weighted average remaining lease term of our Effective Portfolio was approximately 5 years as of December 31, 2007.

We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our hotel property and on- and off-site parking garages. We also receive income from providing management, leasing and real estate development services to our joint venture with Macquarie Office Trust and certain properties owned by Robert F. Maguire III, our chairman and chief executive officer.

 

42


Table of Contents

Factors Which May Influence Future Results of Operations

As of December 31, 2007, our Effective Portfolio was 81.1% leased to 955 tenants. Approximately 8.4% of our Effective Portfolio leased square footage expires during 2008 and 6.4% of our Effective Portfolio leased square footage expires during 2009. Our leasing strategy for 2008 focuses on negotiating renewals for leases scheduled to expire during the year, and identifying new tenants or existing tenants seeking additional space to occupy the spaces for which we are unable to negotiate such renewals. Additionally, we will seek to lease currently vacant space in our office and retail properties with lower occupancy rates.

Our corporate strategy is to continue to own and develop high-quality office buildings concentrated in strong, supply-constrained markets. Our leasing strategy focuses on executing long-term leases with creditworthy tenants. The success of our leasing and development strategy is dependent upon the general economic conditions in the United States and Southern California, and more specifically in the Los Angeles metropolitan, Orange County and San Diego County areas.

We believe that our in-place rental rates scheduled to expire in 2008 and 2009 have contractual rental rates that are at or below market rental rates which will be prevailing during that time. However, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current contractual rental rates.

We believe that new real estate investments will have a significant impact on our future results of operations, including the acquisitions of the properties through the Blackstone Transaction. During 2008, we will continue to endeavor to lease up our newly acquired properties with creditworthy tenants at rental rates at or above current market rates. In addition, we will continue to take advantage of greater economies of scale achieved and implement more efficient operations throughout all of the properties in our portfolio.

Current Submarket Information

LACBD, California

As of December 31, 2007, our LACBD portfolio was 87.9% leased, with approximately 1,021,266 square feet available for lease. Throughout 2008, we will be focused on increasing occupancy, primarily at US Bank Tower, which is currently 85.4% leased, but expected to decrease significantly upon the relocation of Latham & Watkins to our KPMG Tower property in mid 2008. The closing of the Blackstone Transaction, which added approximately 1.9 million square feet of office space to our LACBD portfolio, increased our concentration in this market.

Los Angeles County, California (excluding LACBD)

As of December 31, 2007, our Los Angeles County (excluding LACBD) portfolio was 93.6% leased, with approximately 97,826 square feet available for lease.

Orange County, California

As of December 31, 2007, our Orange County portfolio was 70.2% leased, with approximately 2,075,004 square feet available for lease. The Blackstone Transaction, which added approximately 3.6 million square feet of office space in Orange County to our portfolio, increased our concentration in this market.

San Diego County, California

As of December 31, 2007, our San Diego County portfolio was 90.2% leased, with approximately 31,181 square feet available for lease.

 

43


Table of Contents

Development Properties

We believe that a portion of our future growth over the next several years will come from projects currently under development. As of December 31, 2007, we had four projects under construction:

 

   

Our building at 17885 Von Karman Avenue at the Washington Mutual Irvine Campus, a 150,000 square foot office building. We received a temporary certificate of occupancy for this property in January 2008;

 

   

Our Mission City Corporate Center, comprised of a 92,000 square foot office building with 128,000 square feet of structured parking, located in San Diego, California. We received a final inspection report for this property in early January 2008;

 

   

Our project at the Lantana Media Campus, comprised of two office buildings totaling 198,000 square feet with 223,000 square feet of structured parking, located in Santa Monica, California. This project was 31% leased as of December 31, 2007. We expect Lantana–East to be completed in the first quarter of 2008 and Lantana–South to be completed in the second quarter of 2008; and

 

   

Our building at 207 Goode, a 189,000 square foot office building located in Glendale, California, which began construction during the fourth quarter of 2007.

Land cost related to the four projects was $48.3 million as of December 31, 2007. The total estimated construction budget (excluding land) for these projects is approximately $218.4 million, of which $99.1 million has been incurred as of December 31, 2007.

We expect the funding for these developments to be provided principally from construction loans and, to a lesser extent, from other liquidity sources, including cash on hand, our line of credit and sales of strategically identified assets.

We have a proactive planning process by which we continually evaluate the size, timing and scope of our development programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets. However, we may be unable to lease committed development projects at expected rentals rates or within projected time frames or complete projects on schedule or within budgeted amounts, which could adversely affect our financial condition, results of operations and cash flows.

During the third quarter of 2007, we placed our project at 3161 Michelson in service. This property is a 530,000 square foot office building located in Irvine, California with two parking garages totaling approximately 1,338,000 square feet with the capacity to accommodate approximately 5,100 vehicles. As of December 31, 2007, this property was 32.4% leased. As we lease this property to stabilization, we will continue incurring tenant improvement and leasing commission costs, which will be funded through our existing construction loan.

We also own undeveloped land adjacent to certain of our other properties, primarily located in Downtown Los Angeles, the Tri-Cities area of Los Angeles County, Orange County and San Diego County that we believe can support approximately 17 million net rentable square feet of office, retail, hotel, structured parking and residential uses.

 

44


Table of Contents

Acquisitions and Dispositions

2007 Acquisitions and Dispositions

A summary of our 2007 property acquisitions and dispositions is as follows (in millions, except square footage amounts):

 

    

Location

   Net Rentable
Square Feet
   Mortgage Debt
Incurred at

Purchase (1)

Properties Acquired:

        

130 State College

   Brea, CA    43,000      None
          

Blackstone properties:

        

Griffin Towers

   Santa Ana, CA    544,000    $ 200.0

500-600 City Parkway (2)

   Orange, CA    459,000      117.0

Brea Corporate Place

   Brea, CA    328,000      70.5

Brea Financial Commons

   Brea, CA    165,000      38.5

Two California Plaza

   Los Angeles, CA    1,330,000      470.0

550 South Hope Street

   Los Angeles, CA    566,000      200.0

City Tower

   Orange, CA    409,000      140.0

City Plaza

   Orange, CA    324,000      111.0

500 Orange Tower

   Orange, CA    333,000      110.0

Stadium Towers Plaza

   Anaheim, CA    255,000      100.0

1920 Main Plaza

   Irvine, CA    306,000      80.9

2010 Main Plaza

   Irvine, CA    281,000      79.8

2600 Michelson

   Irvine, CA    308,000      110.0

The City – 3800 Chapman

   Orange, CA    157,000      44.4

18581 Teller

   Irvine, CA    86,000      20.0
              
      5,851,000    $ 1,892.1
              

Properties Acquired and Disposed of: (3)

        

Blackstone properties:

        

Inwood Park

   Irvine, CA    157,000    $ 39.6

1201 Dove Street

   Newport Beach, CA    78,000      21.4

Fairchild Corporate Center

   Irvine, CA    105,000      29.2

Redstone Plaza

   Newport Beach, CA    168,000      49.7

Bixby Ranch

   Seal Beach, CA    295,000      82.6

Lincoln Town Center

   Orange, CA    215,000      71.4

Tower 17

   Irvine, CA    231,000      92.0

1100 Executive Tower

   Orange, CA    367,000      127.0

18301 Von Karman

   Irvine, CA    220,000      95.0
              
      1,836,000      607.9
              
      7,687,000    $ 2,500.0
              

Properties Disposed of:

        

Wateridge Plaza

   San Diego, CA    268,000   

Pacific Center

   Mission Valley, CA    439,000   

Regents Square

   La Jolla, CA    312,000   
          
      1,019,000   
          

 

(1) For purposes of this schedule, the amount of debt shown is the face value of the debt before any related discounts.

 

45


Table of Contents
(2) The amount available under this loan totals $117.0 million, of which $97.8 million was outstanding at December 31, 2007.
(3) We also disposed of three development sites as part of these transactions: Inwood Park, Bixby Ranch and 1100 Executive Tower.

Acquisitions –

We purchased 24 properties and 11 development sites from Blackstone Real Estate Advisors in April 2007 for $2.875 billion. The purchase price (before reserves and closing costs) was funded through new mortgage financings of $2.28 billion, a bridge mortgage financing of $223.0 million, and a $530.0 million corporate facility, which was comprised of a $400.0 million term loan, which was fully drawn at closing, and a $130.0 million revolving credit facility, which was not drawn at closing. We funded our $175.0 million cash requirement to close this transaction with excess proceeds from the Wells Fargo Tower refinancing.

We acquired 130 State College, an office property located in Brea, California, in July 2007 for approximately $11 million.

Dispositions –

We acquired eight office properties and three development sites that we had acquired as part of the Blackstone Transaction: Inwood Park, 1201 Dove Street, Fairchild Corporate Center, Redstone Plaza, Bixby Ranch, Lincoln Town Center, Tower 17, 1100 Executive Tower and the Inwood Park, Bixby Ranch and 1100 Executive Tower development sites. We disposed of these properties shortly after their acquisition. A total of $274.0 million of the debt encumbering these properties was assumed by the buyers upon disposition while $238.9 million was repaid. We recorded no gain or loss on the disposal of these properties since the purchase price allocated to them at the date of acquisition equaled the value recorded upon disposal.

We disposed of three office properties: Wateridge Plaza, Pacific Center and Regents Square and recorded a total gain on disposition of $195.4 million. The mortgage loans related to Pacific Center and Regents Square of $121.2 million and $103.6 million, respectively, were assumed by the buyers of these properties. The mortgage loan of $47.9 and mezzanine loan of $15.0 million related to Wateridge Plaza were repaid upon disposition.

We contributed our office property located at 18301 Von Karman in Irvine, California to DH Von Karman Maguire, LLC in October 2007 for an agreed upon value of approximately $112 million, less approximately $2 million of credits and the transfer of loan reserves of approximately $7 million in connection with the joint venture’s assumption of the existing $95.0 million mortgage loan on the property. We retain a 1% common equity interest and a 2% preferred interest in this joint venture. We recorded no gain or loss on the contribution of this property since the purchase price allocated to it at the date of acquisition equaled the value recorded upon disposal.

 

46


Table of Contents

2006 Acquisitions and Dispositions

A summary of our 2006 property acquisitions and dispositions is as follows (in millions, except square footage amounts):

 

     Location    Net Rentable
Square Feet
   Mortgage Debt
Incurred at

Purchase

Properties Acquired:

        

Pacific Center

   Mission Valley, CA    439,000      None

701 North Brand

   Glendale, CA    131,000    $ 33.8
              
      570,000   
          

Properties Contributed to Joint Venture:

        

One California Plaza

   Los Angeles, CA    984,000   

Cerritos Corporate Center

   Cerritos, CA    326,000   

Washington Mutual Campus

   Irvine, CA    415,000   

San Diego Tech Center

   San Diego, CA    645,000   

Wells Fargo Center

   Denver, CO    1,201,000   
          
      3,571,000   
          

808 South Olive garage

   Los Angeles, CA      

Acquisitions –

We acquired Pacific Center, an office property located in Mission Valley, California, in February 2006 for approximately $149.0 million using net proceeds received from our transfer of properties to our joint venture with Macquarie Office Trust.

We purchased 701 North Brand and the remaining 50% interest in an adjacent garage which we did not previously own in September 2006 for $45.0 million using the net proceeds received from mortgaging the property.

Dispositions –

We contributed Wells Fargo Center (Denver), One California Plaza (our remaining 75% interest), San Diego Tech Center, Washington Mutual Campus and Cerritos Corporate Center to our joint venture with Macquarie Office Trust in January 2006. We received net cash proceeds of $376.4 million and recognized a gain on sale of $108.5 million related to the establishment of the joint venture with Macquarie Office Trust. The joint venture assumed the existing mortgage loans on these properties totaling $661.3 million.

We sold the 808 South Olive garage, a parking garage located in downtown Los Angeles, California for $26.5 million in March 2006. In connection with the sale of the garage, we entered into an amended and restated parking easement with the buyer of the garage, which expires in 2011, in order to continue to meet the terms of our leases with tenants in the Gas Company and US Bank Towers. The gain on sale of this property has been deferred until such time as the amended and restated parking easement expires. The $13.2 million mortgage related to the garage was reallocated to our Gas Company Tower property upon completion of the sale.

 

47


Table of Contents

Investment in Unconsolidated Joint Ventures

Maguire Macquarie Office, LLC

Maguire Properties, L.P. and Macquarie Office Trust entered into a joint venture agreement during 2005, which resulted in the creation of Maguire Macquarie Office, LLC. On January 5, 2006, the series of transactions contemplated by the joint venture agreements were completed, including:

By Maguire Properties, L.P. –

 

   

Contribution of the Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, Washington Mutual Irvine Campus and Cerritos Corporate Center office properties to the Joint Venture;

By Macquarie Office Trust –

 

   

Contribution of the Stadium Gateway office property and cash.

By the Joint Venture –

 

   

Assumption of $661.3 million of mortgage debt from Maguire Properties, L.P. secured by Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center and Washington Mutual Irvine Campus; and

 

   

Completion of a $95.0 million mortgage financing secured by Cerritos Corporate Center.

As a result of the these transactions, we received net cash proceeds of $376.4 million during 2006, consisting of $363.0 million relating to Macquarie Office Trust’s acquisition of an 80% interest in the five office properties we contributed to the joint venture, $19.0 million representing the distribution of our 20% pro rata share of Cerritos Corporate Center mortgage financing net proceeds received by the joint venture, net of $5.6 million in cash we paid to fund the acquisition of our 20% interest in Stadium Gateway. After these transactions, our interest in the joint venture is 20% and Macquarie Office Trust’s interest is 80%.

We recognized a net gain on sale of real estate in the 2006 consolidated statement of operations of $108.5 million related to the joint venture transactions. We recorded our investment in the joint venture at based on 20% of our historical net book value of the five properties we contributed and fair value paid for Stadium Gateway.

Maguire Properties, L.P. is the guarantor on the $95.0 million mortgage loan secured by Cerritos Corporate Center through January 4, 2009.

In accordance with the joint venture agreement, both Maguire Properties, L.P. and Macquarie Office Trust have rights of first offer to co-invest in any Southern California acquisition opportunities meeting certain defined criteria that the other party intends to acquire. In addition, Macquarie Office Trust has a right to acquire up to a 50% interest in our development projects at Washington Mutual Irvine Campus and San Diego Tech Center at 92.5% of stabilized value, which will be determined when the project is 90% leased.

DH Von Karman Maguire, LLC

In October 2007, we contributed our office property located at 18301 Von Karman in Irvine, California to DH Von Karman Maguire, LLC for an agreed upon value of approximately $112 million, less approximately $2 million of credits and the transfer of loan reserves of approximately $7 million in connection with the joint venture’s assumption of the existing $95.0 million mortgage loan on the property. We retain a 1% common equity interest and a 2% preferred interest in the joint venture. No gain or loss was recorded in the consolidated

 

48


Table of Contents

statement of operations during 2007 from the contribution of this property to our joint venture since the purchase price allocated to this property in April 2007 upon acquisition equaled the value recorded upon disposal.

Results of Operations

2007 Compared to 2006

Our results of operations for the year ended December 31, 2007 compared to the same period in 2006 were significantly affected by our acquisitions and dispositions in both years. Therefore, our results are not comparable from period to period. To eliminate the effect of the changes in our Total Portfolio due to acquisitions and dispositions, we have separately presented the results of our “Same Properties Portfolio.”

Properties included in our Same Properties Portfolio analysis are all of the properties in our office portfolio, with the exception of our joint venture properties, properties acquired in the Blackstone Transaction in April 2007, Wateridge Plaza, Pacific Center and Regents Square that were sold during 2007, 701 North Brand that was acquired in third quarter 2006 and 130 State College that was acquired in third quarter 2007.

 

49


Table of Contents

Consolidated Statements of Operations Information

 

     Same Properties      Total Portfolio  
     For the
Year Ended
    Increase/
Decrease
    %
Change
     For the
Year Ended
     Increase/
Decrease
     %
Change
 
     12/31/07     12/31/06          12/31/07      12/31/06