Brookfield Office to Acquire MPG in Los Angeles Expansion

Brookfield Office Properties Inc. agreed to buy MPG Office Trust, expanding its Southern California holdings to become the biggest office owner in downtown Los Angeles.

MPG’s common-stock holders will receive $3.15 a share in cash, 21 percent more than the closing price yesterday, the Los Angeles-based real estate investment trust said in a statement today. Brookfield also will begin a tender offer for MPG’s preferred stock for $25 a share in cash. The deal is valued at $2.2 billion including debt and after cash proceeds from the planned sale of MPG’s U.S. Bank Tower, said Wilkes Graham, a senior vice president at Compass Point Research & Trading LLC.

MPG had been selling properties and exploring a takeover to pay debt from acquisitions made in 2007, near the peak of the U.S. real estate market. The purchase will make Brookfield “by far” the largest office landlord in downtown Los Angeles, where MPG once dominated, said Carl Muhlstein, a managing director at brokerage Jones Lang LaSalle Inc.

“It’s the best outcome for downtown L.A. because we now have a well-capitalized ownership, which can at least reinvest in the buildings and in the community,” Muhlstein, who is based in Los Angeles, said in a telephone interview today. “Whereas a nearly insolvent MPG never had enough money to even take care of day-to-day stuff.”

Holding Company

Brookfield is forming a fund called DTLA Holdings that will own MPG’s assets and Brookfield’s current buildings in downtown Los Angeles, the New York-based company said in a separate statement. It will own about 47 percent of DTLA, with institutional partners holding the rest. After the deal, the portfolio will include seven so-called class A office buildings with 8.3 million square feet (771,000 square meters).

Brookfield’s contribution to DTLA Holdings will total about $550 million, consisting of equity in its existing downtown Los Angeles assets totaling $410 million and an additional investment of $140 million. The institutional investor partners have pledged $600 million.

MPG last month agreed to sell downtown Los Angeles’s U.S. Bank Tower, the West Coast’s tallest office building, for $367.5 million to Singapore-based Overseas Union Enterprise Ltd.

Shareholder Liquidity

“We have found a strategic buyer who has the capital and the market presence to appreciate the potential long-term value of our assets,” MPG Chief Executive Officer David Weinstein said in the company’s statement today. “This transaction potentially offers both our common and preferred shareholders a liquidity event that would remain uncertain if the company were to continue on as an independent entity.”

The deal leaves Brookfield with a downtown Los Angeles portfolio that has 1.2 million square feet of vacancy, with several tenant leases expected to expire in the next several years, said Rob Stevenson, head of U.S. REIT research at Macquarie Capital in New York.

“Tell me two or three years from now what the vacancy is and what average rents are in the portfolio versus today, and I’ll tell you whether or not it’s a success,” said Stevenson, who estimates that DTLA’s buildings are 86 percent leased. “They’ve got to find some tenants, and the question winds up being do they try to pull tenants out of competing buildings or is there enough organic growth?”

Blackstone Deal

MPG Office Trust, formerly known as Maguire Properties Inc., has been burdened by debt incurred six years ago, when it bought 24 properties and 11 development sites from Blackstone Group LP. The company, then led by Robert Maguire, paid $2.88 billion for all the real estate in downtown Los Angeles and Orange County, California, that Blackstone gained in its takeover of Sam Zell’s Equity Office Properties Trust.

MPG had about $1.9 billion of debt as of Dec. 31, including about $638 million maturing this year on KPMG Tower and 777 Tower, both in downtown Los Angeles, according to its annual report. It doesn’t have committed sources of cash adequate to fund its potential needs, the company said in the report, filed last month.

MPG rose 20 percent to $3.13 at the close in New York. It was the stock’s biggest gain since July 2012. Brookfield climbed 3 percent to $17.95.

Brookfield is lower Manhattan’s largest office landlord, with holdings that include 1 New York Plaza and the 8 million-square-foot Brookfield Place, formerly known as World Financial Center.