California Dreaming With Maguire Properties

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Maguire Properties (NYSE: MPG) reported earnings yesterday, and it wasn't too dreamy a picture.

The Los Angeles office-property company posted a drop in funds from operations to $17.7 million, from $23.6 million a year ago, and swung to a net loss on a GAAP basis.

Management spent little time explaining the earnings reversal in its main presentation during the conference call. It appears that rental revenue declined as certain key leases expired, revenue from the Westin Pasadena hotel dropped, and rental expenses increased. Still, the company was upbeat about the market. Any significant subprime impact was discounted, even though the company sits on the creditors' committee of New Century, one of its lessees. As it stands, New Century has not rejected any of the Maguire leases, and the company expects that any that are rejected can be re-leased at higher rates.

Dominating the call: a glowing report of the company's completion in late April of its $2.875 billion acquisition of the former Equity Office Properties portfolio of Orange County and downtown L.A. office properties. The transaction was funded through $2.28 billion of new mortgage financing, $223 million in bridge mortgage financing, and a $400 million corporate term loan. The transaction boosts Maguire's presence in what it sees as key California markets, and will be the company's focus over the next few months as it sells certain properties to reduce its debt load and seeks to integrate the remainder in its portfolio. 

Any investment in Maguire clearly represents a bullish view of the Southern California commercial real estate market. Maguire has done well in the past by selling off assets and reinvesting in its development pipeline. Continued strength in the market thanks to high demand and low supply could certainly boost its income as leases expire. Still, the company has a lot on its plate now, and it just served up a disappointing quarter from a short-term perspective on the bottom line. Investors will need to carefully watch Maguire's activities and operations as it wrestles with the Equity Office portfolio transactions and market dynamics, to make sure that its California dream doesn't turn scary.

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Fool contributor S.J. Caplan does not own shares of the companies discussed in this article. The Fool's disclosure policy drives through your suburbs into your blues.