By Brian Louis and John Gittelsohn

Aug. 10 (Bloomberg) -- Maguire Properties Inc., the largest office landlord in downtown Los Angeles, may relinquish control of seven Southern California buildings with $1.06 billion of debt and said it’s not planning on filing for bankruptcy.

The company told lenders “it will no longer continue to fund the cash shortfall” on the mortgages for six properties, Los Angeles-based Maguire said in a statement today. Two properties are in default and Maguire said it already surrendered one building to a lender.

“We are not considering bankruptcy,” Chief Executive Officer Nelson Rising said today on a conference call. “And we feel the course we’re on is a far better course of action.”

Maguire’s decision is a sign that landlords in Southern California’s overleveraged office market can no longer make payments and may be forced to abandon properties. Maguire has been trying to sell buildings to pay debt incurred in 2007 when it purchased properties from Blackstone Group LP. Loans against six properties were split up into commercial mortgage-backed securities and resold to investors.

“It does highlight the credit problems associated with recent vintage CMBS loans and a trend in borrower behavior to increasingly walk away,” said Barclays Capital Research analysts Aaron Bryson and Tee Yong Chew in a research note today.

Equity Office Deal

Maguire paid $2.88 billion in 2007 for 24 office properties and 11 development sites. The purchase, from Blackstone Group, encompassed all of the real estate in downtown Los Angeles and Orange County that Blackstone acquired in its acquisition of billionaire Sam Zell’s Equity Office Properties Trust. The subsequent credit-market freeze blocked Maguire’s plans to refinance.

The seven properties are: Stadium Towers Plaza in Anaheim; Park Place I and II in Irvine; 2600 Michelson in Irvine; Pacific Arts Plaza in Costa Mesa; 500 Orange Tower in Orange; and 550 S. Hope in Los Angeles. Six of the seven buildings are located in Orange County, formerly headquarters to some of the nation’s biggest subprime mortgage lenders including New Century Financial Corp. and Ameriquest Mortgage Co.

Several of the loans on properties Maguire is handing over to lenders were written assuming rents would rise, Barclays said today. Owners of real estate under pressure are likely to be on the agenda when Federal Reserve Chairman Ben S. Bernanke and the Federal Open Market Committee meet tomorrow on monetary policy.

‘Blocking and Tackling’

Rising said the company is trying to deal with troubled projects one at a time to get its balance sheet in order.

“It’s just old fashioned blocking and tackling,” he said. “The question was asked to me are we considering bankruptcy. The answer is no. Given the fact we’ve seen the economy come close to bottoming out and maybe the headwinds will not be as stiff as they have been, we are looking forward to staying the course.”

The company said it’s focusing on properties it owns in downtown Los Angeles, which have an occupancy rate of almost 85 percent. The U.S. Bank Tower, the tallest building in Los Angeles, is 62 percent leased, Rising said.

Rising, who took over from company founder Robert Maguire, said the disposition of the properties will result in a cash savings of $45 million over six months. Maguire said it will try to sell six of the buildings with lenders.

The office vacancy rate in the Airport Area of Orange County, where four buildings -- Park Place I and II, 2600 Michelson and Pacific Arts Plaza -- are located was 18.5 percent at the end of the second quarter, according to Voit Real Estate Services in Irvine. That’s up from 15.3 percent in the second quarter of 2008.

Prices Fall

Asking prices in the area fell to $2.50 a square foot in June, down from $2.99 a foot a year earlier, Voit reported.

The office vacancy rate in Central Orange County, where Stadium Towers and 500 Orange Tower are located, rose to almost 16 percent in June from 13.4 percent a year earlier, Voit reported. Prices per square foot for that area fell to $2.01 from $2.39 a year earlier, Voit reported.

The Los Angeles Economic Development Corp. reported in July that 263 commercial properties in Los Angeles, valued at $4.5 billion, were in default, foreclosure or bankruptcy. That represented a 113 percent increase since the beginning of 2009, the report said.

Maguire said that last week it gave back Park Place I in a deed in lieu of foreclosure transaction to the lender.

Debt Ratios

It’s also stopping payment on Stadium Towers, 500 Orange Tower, Park Place II, 2600 Michelson, Pacific Arts Plaza, and 550 S. Hope in downtown Los Angeles, a 28-story tower.

The 825,000 square-foot Pacific Arts Plaza building has a 28 percent vacancy rate, and is generating about $1.07 for every dollar in debt, according to Barclays.

The 566,000-square-foot office building at 550 S. Hope is 86 percent occupied, and generates roughly 96 cents for every $1 in debt, Barclays said. The 333,000 square-foot 500 Orange Tower is generating 75 cents for every $1 in debt, and is 80 percent occupied, Barclays estimates.

The 275,000 square-foot Park Place II office building is generating 80 cents for every $1 owed, with an 80 percent occupancy rate, according to Barclays. A 307,000 square-foot building at 2600 Michelson Dr. is generating 77 cents for every $1 owed.

The 257,000 square-foot office property at Stadium Towers Plaza is generating 59 cents for every $1 in debt and is 61 percent occupied.

Wider Loss

Maguire also said today its second-quarter loss widened as it wrote down the value of the seven properties it’s trying to dispose of.

Funds from operations was negative $339.7 million, or $7.10 a share, compared with negative $56.4 million, or $1.18, a year earlier, Maguire said in a statement today. Maguire took an impairment charge of $345 million against the assets.

Maguire rose 18 cents, or 20 percent, to $1.07 at 12:17 p.m. in New York Stock Exchange composite trading. The shares are down more than 90 percent in the past year.

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