Real estate woes are being blamed for a large part of Newport Beach-based Conexant Systems Inc.’s recent financial troubles.
The chipmaker, which has its headquarters at the two-building 4000 MacArthur office complex at MacArthur Boulevard and Jamboree Road, filed for Chapter 11 bankruptcy protection at the end of February, following years of falling sales and mounting debt.
The company intends to restructure its operations through a prepackaged plan of reorganization that has the approval of its sole secured lender, QP SFM Capital Holdings Ltd., a unit of billionaire George Soros’ New York-based hedge fund Soros Fund Management LLC.
A reorganization of the company’s real estate holdings looks to be a key part of Conexant’s restructuring. First-day court filings in Delaware’s bankruptcy court detailed what the company called a substantial “real estate burden” that has been a constant contributor to the company’s recent losses.
“Conexant is currently saddled with outsized and untenable real estate costs,” Chief Executive Sailesh Chittipeddi said in a Feb. 28 declaration made with the court.
Chittipeddi claims in court filings that the company “has substantial real estate obligations related to underutilized and unoccupied real estate from operations it has sold or spun off.”
As of September 2011, the company had obligations on 381,763 square feet of impaired leased space—real estate it leases but does not itself use, including properties in Newport Beach, according to Chittipeddi.
More than 110,000 square feet of Conexant’s impaired real estate was completely vacant and offered for lease, he said.
Conexant subleased the remaining 270,000 square feet at a loss.
The vacant and underutilized real estate combined to cost Conexant about $300,000 every month, according to the court filing.
Its net payments on these “dead leases” have consumed more than 20% of its cash on hand since it was taken private two years ago, he said.
The impaired space apparently includes a big chunk used by Mindspeed Technologies Inc. and Jazz Semiconductor Inc. in buildings next to Conexant’s headquarters in the Koll Center Newport development near John Wayne Airport.
Conexant previously owned the 4000 MacArthur office complex, but in 2005 the chipmaker signed a sales-leaseback deal with Newport Beach-based KBS Realty Advisors LLC, which paid $110 million for the two buildings.
“The resulting leases are at unfavorable, above-market rates,” Conexant said of its sales-leaseback deals.
The 4000 MacArthur buildings have changed hands two other times since the 2005 sales-leaseback, and are now owned by New York-based real estate investor Emmes Group of Cos., which took over the property in 2011.
Emmes last year began a new marketing campaign for the property which suggested Conexant could depart the 10-story west tower at the complex and perhaps relocate to the east tower, where Mindspeed is located.
Regulatory filings show Conexant occupying about 97,000 square feet in the west tower, which has its name on top of the building.
Chittipeddi told the Business Journal on the day of the bankruptcy filing that Emmes would have to agree to a restructuring of the lease for its headquarters or risk seeing the company reject the lease altogether.
No court filings suggesting a lease rejection for the building have been filed by Conexant to date, although another nearby office that it leases on Von Karman Avenue is on the chopping block.
The company said in court filings that it plans to reject the lease it has for the 4340 Von Karman office, a 68,500-square-foot, four-story building near the Pacific Club. It is believed to have a lease for most of the entire office but subleases much of it out to other tenants.
Uptown OK
Conexant’s bankruptcy came the same week that the 25-acre parcel of land next to its headquarters, which counts the local operations of Jazz Semiconductor, got approval from the Newport Beach City Council for a massive residential redevelopment.
Uptown Newport, a 1,244-home project being headed up by Irvine-based Shopoff Group LP, received the city’s OK to move ahead following a 6-0 vote, with Councilman Tony Petros abstaining.
The development, planned to go up along Jamboree Road, near the Newport Beach and Irvine city line, could see initial construction work begin later this year.
Uptown Newport—a venture that includes an affiliate of Shopoff Group and a fund controlled by New York-based DRA Advisors LLC—paid Conexant $23.5 million for the land near the end of 2010.
Conexant got a $21.5 million cash payment and retained a small stake in the development in the deal.
