Shorenstein Finds Opportunity in Sour Real Estate Market

San Francisco Firm Puts Dry Powder to Work, Picking Up Distressed Property and Subordinated Debt in Manhattan and California

July 9, 2008
CoStar Group
Written by Randyl Drummer

Holding fast to tried-and-true real estate wisdom, successful sellers during boom times often become successful buyers during the downturns that follow. Walter Shorenstein and his son, Douglas, didn’t become San Francisco real estate tycoons by making poorly timed decisions.

After raising more than $2 billion in its largest fund to date, the Shorenstein Co. has turned its attention to buying in trophy markets on both coasts from distressed sellers desperate to shed debt and raise cash in the slumping commercial real estate market.

Maguire Properties, Inc. (NYSE: MPG) announced this week it would sell its 607,000-square-foot Main Plaza office property in Orange County, CA to Shorenstein for $211 million, including $10 million in cash and about $161 million in assumed debt. Main Plaza, a pair of 12-story Class A office buildings and two freestanding buildings, is located in the John Wayne Airport submarket of Irvine. (see related CoStar coverage)

Last month, Shorenstein closed on the purchase of a controlling interest in the entity that owns Park Avenue Tower and 850 Third Avenue in Midtown Manhattan, formerly owned by Harry Macklowe, for $930 million. (see related CoStar coverage) Shorenstein Properties acquired the buildings on behalf of Shorenstein Realty Investors Nine, LP, a $2 billion private commingled fund.

The pair of Manhattan trophy buildings were a part of the ill-fated package of New York City properties Macklowe acquired last year for $7 billion from Blackstone Group following its purchase of Equity Office Properties Trust. But Macklowe defaulted on short-term, high-interest loans from Fortress Investment Group and a consortium led by Deutsche Bank AG. In February, Deutsche Bank took control of the former EOP buildings and put them up for sale. In May, under pressure from Fortress, Macklowe agreed to sell the GM Building and three other assets to Boston Properties for nearly $4 billion.

Shorenstein also last month picked up a $250 million mezzanine loan backed by 450 Lexington Avenue, a Class-A office building located in the Grand Central submarket of Manhattan, the ninth debt purchase made by the company in the last nine months. The Manhattan office deal ups Shorenstein’s New York City portfolio to more than 4.1 million square feet of equity owned interests and more than $500 million of subordinated debt.

"Our ability to quickly and expertly assess, underwrite and close transactions despite ongoing dislocation in the real estate credit markets means that we continue to see solid opportunities to acquire debt and equity interests in key Class A buildings, generating attractive risk-adjusted yields throughout our target markets," said Douglas Shorenstein, chairman and CEO of Shorenstein Properties.

Shorenstein saw another opportunity in Maguire Properties, whose shares have fallen 65% in the last year, partly as a result of the high level of debt it incurred, similar to Macklowe, to purchase former EOP property.

Two of Los Angeles-based Maguire’s largest shareholders, hedge funds Third Point LLC and JMB Capital Partners LP, have rebelled against the company, despite the installation of new CEO Nelson C. Rising, who took over control of the company from founder Rob Maguire in May.

New York-based Third Point, managed by Daniel Loeb, disclosed that Maguire received an unsolicited takeover bid of $20 per share valued at about $940 million and urged the company’s board of directors to reopen talks with the potential acquirer, said to be Pacific Office Properties Trust Inc., which reportedly made and withdrew the bid last month.

Another Maguire investor, JMB Capital Partners LP of Century City, which owns 4.65 million shares, said in a filing it now owns a 9.7% stake and will seek to take control of the board at the company’s annual meeting in October.

The sale of Main Plaza "demonstrates our commitment to our stated objective of disposing of certain Orange County properties to accomplish our balance sheet goals," Rising said.

The REIT, the largest office landlord in Los Angeles, announced last month it would sell its 105-acre Park Place mixed-use development property in Irvine through Eastdil Secured and had resumed or started talks to sell certain other OC properties. The announcement included the departure of Chief Financial Officer Martin Griffiths and two other senior executives. Maguire announced yesterday it has appointed Christine N. Garvey to the board to fill its vacant seat.

Shorenstein said at the end of the first quarter that companies with lots of dry powder -- such as $2 billion in investment funds for value added opportunities -- are in a good position to weather a down cycle that he believes may still be in its early stages.

"If you aren't spending your time playing defense with existing problems, you're in a very good position," Doug Shorenstein told the San Francisco Chronicle in March. "We also are at the beginning of a down market, we're in a recession, I believe, and in all recessions, we see a contraction of service jobs, which results in lower rents. So the revenue side of the business will be impacted."

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