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Maguire Properties Inc. (NYSE:MPG)

Q3 2009 Earnings Call

November 3, 2009 11:00 am ET

Executives

Nelson Rising – President and Chief Executive Officer

Shant Koumriqian – Chief Financial Officer

Peggy Moretti – Senior Vice President, Investor and Public Relations

Analysts

John Guinee – Stifel Nicolaus & Company

[Enrique Torres] – Green Street Advisors

Gordon Watson – Ore Hill Partners

Kenneth Hart – Hart Capital Management

Charles Fisher – LS Partners

[Joe Bishop] – Investor

Operator

Welcome to the Maguire Properties Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions). I would now like to turn the conference over to Ms. Peggy Moretti of Maguire Properties. Please proceed.

Peggy Moretti

Good morning. During the course of today's call management will make forward-looking statements regarding, among other things, projected 2009 results of operations, leasing, competitive advantages, financing and acquisition.

The company's projections are affected by many factors outside of its control. For a discussion of such factors, please refer to the company's most recent annual report on Form 10-K under the caption Risk Factors.

The forward-looking statements on today's call are based on the company's current expectations. Maguire Properties does not intend to update these statements prior to our next quarterly earnings release. And we expressly disclaim any duties to make any such update.

Our supplemental package, along with information required, under SEC Regulation G may be accessed in the Investor Relations section of the Maguire Properties website at www.maguireproperties.com.

And now I'd like to turn the call over to Nelson Rising, President and Chief Executive Officer. Nelson?

Nelson Rising

Good morning and thank you very much for joining our call today. I'll begin this morning with a brief discussion of liquidity and debt maturities. At this point, we are currently projecting unrestricted cash in the $45 to $50 million at year-end 2009.

In addition, we have restricted cash of $137 million, excluding reserves that were associated with the seven loans that are now in default. The largest component of this $137 million is $49 million, which is set aside in various collateral accounts that will be released to unrestricted status between now and 2012.

We have no debt maturities for the balance of 2009. However, we do have a $98 million loan on the portion of Lantana that is due in 2010. We have been in contact with the special servicer on this loan, and we are very hopeful that we can achieve an extension on that loan.

We also have several construction loans that are due in 2010. The construction loan on Lantana with a current balance of approximately $78 million is due in June. The buildings involved in this are currently involved in a sales process. We're optimistic that that sales process will conclude before the due date of that loan.

The other construction loans we have and that will be in maturity and reaching maturity, one in May, one in June and one in August of 2010, are all involved now in a sales process. And it's our hope that we will be able to sell those assets prior to the maturity dates on those loans.

We also have a maturity on our Brea campus mortgage. This is due May 1, 2010, and we're hopeful that this loan can be extended. The property is performing very well, and so that is our expectation, that we'll be able to accomplish that.

On our last conference call on August 10, I discussed our approach for dealing with six CMBS loans on six of our properties. Five of these properties were acquired in April 2007, in the EOP/Blackstone transaction, and one was acquired from CommonWealth portfolio in March of 2005. The borrower for each of these loans is a special-purpose entity formed for the purpose of owning and operating an individual property.

Prior shortfalls in monthly debt service and leasing costs have been mostly satisfied by property reserves. And these reserves were funded at acquisition with mortgage proceeds. These reserves were exhausted, and so therefore the board approved a plan whereby we would no longer be servicing these loans and special-purpose entities with corporate capital.

At the time of our last call, we had just advised master servicers on these six loans that the future operating debt service requirements will rely only on property-generated revenues. And as a result we expect an imminent default under these loans. After reviewing these materials, the six master servicers concluded these assets would indeed be an imminent default and turned them over to the special servicers. We have been dealing with those special servicers for the past several months.

The first step in dealing with a special servicer is to enter into a pre-negotiation agreement. And among other terms, both parties are bound to confidentiality. So as a result, I'll have to confine my comments to generalities, and the loans now are in various stages of the process.

The seventh property, Park Place, had a balance sheet loan, and we entered into a deed in lieu of foreclosure on this property. On the August 10 call, I projected cash flow savings of these six properties for 18 months after the disposition of these assets were projected, and still are projected, to be approximately $30 million.

In addition, in order to maintain occupancy levels, we would have needed $25 million to pay leasing costs including tenant improvements and leasing commissions. The remaining reserves for these assets were only $10 million, hence an additional $15 million in capital would have been required.

We believed then and we believe now that we would have a cash savings of approximately $45 million over the 18-month period beginning in 2010. On the broader more macro scale, the credit crunch continues to drag on and the amount of commercial real estate mortgage debt is a staggering $3.6 trillion. Banks, S&Ls, mutual banks and savings banks provide 54% of this, CMBS 26%; insurance companies 9%. The balance is held a variety of smaller entities.

To put this perspective, in 2007 domestic CMBSs amounted to $230 billion. In 2008, they were only $12.1 billion in newly issued CMBSs, and in 2009 only $10 billion. Commercial banks aren't exactly jumping back into the game, either.

Life insurance companies are the one source that appears to be funding, but that they are indeed very, very selective. So there appears to be a general consensus that the commercial mortgage market has at least a couple of years of paying ahead of it. However, all the news is not bad.

In September, on September 14, the Treasury Department issued new regulations that could provide relief to borrowers using CMBS. Up until the time of the regulations, there was uncertainty as to what activities a special servicer could engage in without becoming an active business.

And just to put this overall issue in context, when the CMBS was created, individual mortgages were bundled and put into what is known as a REMIC, Real Estate Mortgage Investment Conduit. And the REMIC needed to be passive in order to make the original transaction not taxable. So there was very little guidance and a great deal of uncertainty as to what the special servicer could do in any case other than a case when the master servicer and the special servicer believed there was imminent default.

Under these new guidelines without going into all the detail, it's made clear now that a special servicer will still be considered passive even if they negotiate the loan balance, the interest rate and, in many cases most importantly, the maturity.

So I think this is a very important development especially in light of the fact that there seems to be little or no new CMBS activity and little or no major activity by commercial banks of the ability then to extend or modify existing CMBSs is quite important.

This is particularly important for Maguire. And the reason I spent a little time explaining the background here is because a significant amount of the assets on our core portfolio and those assets we intend to keep are all commercial mortgage-backed securities. This I think gives us a great deal more operating flexibility than we had prior to the 14th of September.

On October 30 we sold a small office building in Orange County and received net proceeds of $6 million to be used for general corporate purposes. And during the third quarter we recorded a $5.9 million cash impairment charge – non-cash impairment charge related to this sale.

We continue our efforts to market certain of our other assets, including Lantana, the land at 755 South Figueroa and two land parcels one adjacent to City Tower and one adjacent to 500 Orange, both in Central Orange County.

In addition we are in the process of marketing One California on behalf of Macquarie, the 80% owner of the property. We have two offers that we are considering, and we expect that Macquarie will make a decision after a board meeting next week as to what action to take on this asset.

Finally during the third quarter, we completed 172,000 square feet of new leases and 124,000 square feet of lease renewals. On our downtown core office portfolio is now 84.7% leased and our Tri-Cities properties are 92.4% leased.

With that, I would be pleased to open it up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Guinee – Stifel Nicolaus & Company,

John Guinee – Stifel Nicolaus & Company

Can you just walk through the leasing and occupancy status of the various assets that you have for sale right now?

Nelson Rising

The assets for sale.

John Guinee – Stifel Nicolaus & Company

Lantana, Von Karman, Goode, Northside, One Cal Plaza?

Nelson Rising

With respect to the Lantana property, the leasing is 78%; with respect to 755 South Fig, that's a land parcel, as are the other two, land parcels in Orange County. The Cal Plaza one – One Cal Plaza is currently 77% leased.

John Guinee – Stifel Nicolaus & Company

How about Von Karman and Goode and Northside which I think you said were all in the sales process?

Nelson Rising

Yes, Northside is 75% leased, that's a small building in San Diego. There have been no leases completed on Von Karman or in 207 Goode. We do have a user who we're negotiating with for the Von Karman property. And we do have a buyer that we are negotiating with to purchase 207 Goode along with three other Glendale assets, but those are in various stages of completion.

John Guinee – Stifel Nicolaus & Company

On Plaza Las Fuentes and I think the Lantana Media Campus, you had to do some loan pay downs. Is that reflected somewhere in the supplemental?

Nelson Rising

Yes, it is. The loan pay down on Lantana has resulted in reducing that construction loan to $77 million plus. The loan pay down on Plaza Las Fuentes has reduced the $100 million loan to $94 million.

Operator

Your next question comes from Michael Knott – Green Street Advisors.

[Enrique Torres] – Green Street Advisors

[Enrique Torres] on behalf of Michael. Quick question about your [FFO] burn rate, it looks like if you subtract out the defaulted properties, you get from a 10 million down to a [55]. Any indication or you can give some color on what you expect for the next quarter or two going forward, and when, or if, you expect that to get to the breakeven level.

Nelson Rising

I'll have Shant answer that.

Shant Koumriqian

That's correct, it'd be at a [55] and we did have about $1.5 million of severance charges during the quarter which were reflected in the [55], so if you back that out, the burn would be a negative four.

Next quarter, we have a fairly reasonable lease expiration schedule, so we would expect a similar type of burn. As Nelson mentioned, there are a number of assets that we are focused on. If we can come to resolution on those assets over the next number of quarters, the burn will further reduce. And potentially, at some point in 2010 go positive.

[Enrique Torres] – Green Street Advisors

And then can you just supply a little more color on the asset sale of 130 State College? Do you guys have a cap rate on that deal?

Shant Koumriqian

We don't disclose a cap rate. The purchase price was –

Nelson Rising

Six point five, netted $6 million. It was a leased building, and I'm not sure of the size but it was –

Shant Koumriqian

Forty-two thousand.

Nelson Rising

Forty-two thousand square feet, but we just have a practice of not disclosing cap rates.

[Enrique Torres] – Green Street Advisors

I just wanted to make sure I have understood the Sempra lease stuff. I know you guys have a big maturity coming up there. If I understand the disclosure correctly, it looks like the in place rents for $37, but you guys are signing leases at $20 a foot in L.A.

Can you comment on the progress in working with the subtenants there and getting those leases done and what you might think the impact on NOI will be in 2010 or '11?

Nelson Rising

Sempra is the tenant, Pacific Enterprises successor. Their lease expires in June of 2010. We also, if you recall, moved Latham & Watkins from that building to the building we're in at 355 South Grand. So we do have a significant vacancy in that building. And that's what brings our overall vacancy downtown.

We are in the process of trying to extend the subtenants that are the subtenants of Sempra, and we're having some success at that. We are also, obviously, trying to lease the former Latham & Watkins space which is a terrific build-out, and we have several interested law firms but nothing to report.

Clearly the biggest problem we have in our portfolio downtown will be the leasing of that U.S. Bank Tower.

[Enrique Torres] – Green Street Advisors

Just to follow up on that so should we expect some NOI loss even if the space is re-leased just because of a large rent difference?

Nelson Rising

I'm sorry, I missed that.

[Enrique Torres] – Green Street Advisors

Even if you are able to lease the space to sub tenants is there a big gap in rents there that we should still expect some kind of NOI loss?

Nelson Rising

Yes, the rent that Sempra is paying is quite high. I'm not sure the exact number. I made that lease 15 years ago and it had very nice bumps in it. But at my – yes it's clearly the market rents today, and I would say we have very, very real time experience in the net rent of $20 to $22 a very, very – it's significantly lower than the Sempra rent.

Operator

Our next question comes from Gordon Watson – Ore Hill Partners.

Gordon Watson – Ore Hill Partners

I just had a question on the parking. The parking revenue looks basically flat year over year. I'm just trying to get what you disclose what percentage of that parking revenue is built into the leases on those properties as opposed to variable parking revenue?

Shant Koumriqian

The majority of it is. And for all of our leases we typically have a must-take requirements in the leases where the tenants have to take a certain number of spaces per thousand. In addition they lease additional spaces above that.

We have two offsite garages in Downtown LA that are associated with a couple of our projects. One is associated with U.S. Bank Tower and Gas, the other one with Wells Fargo center here where we're officed.

Those two offsite garages do pull some transient outside revenues, but again those parking garages are there to serve our entire Downtown LA portfolio. So the majority or the lion's share of parking is tied directly to tenant leases.

Operator

(Operator Instructions) Your next question comes from Kenneth Hart – Hart Capital Management.

Kenneth Hart – Hart Capital Management

With the suspension of the preferred dividends coming up on about a one year mark at what point do the preferred share holders get representation on the board and how is that going to be handled?

Nelson Rising

The representation on the board is a consequence of six successive quarters without paying a divided. That would put it to June of 2010.

Operator

Your next question comes from Charles Fisher – LS Partners.

Charles Fisher – LS Partners

A couple of things, you talked about capital raising last quarter is the portfolio getting closer to where you think you might do a capital raise in the next quarter or two?

Nelson Rising

Our goal would be to be able to raise, either at the project level or at the corporate level, capital sometime in 2010. That's our goal, whether we can achieve that will depend on market conditions beyond our control.

When we look at for example U.S. Bank Tower and the amount of leasing that needs to be done there, a third party capital injection at that asset level would be a very meaningful part of our leasing strategy.

Charles Fisher – LS Partners

I thought there was a chance that if stock that was common maybe kind of breaking 300 or 350 you might think about doing the secondary in the common. Was that ever considered?

Nelson Rising

Well no. We're not thinking of the common offering as a way to do that. If it had gone higher we probably would have, but at that level it would be very dilutive, and I think there is probably better ways to bring in third party capital.

Charles Fisher – LS Partners

And any update on the Denver JV property? I know it was for sale I don't know if that's

Nelson Rising

Well yes that's a great building by the way that's the Wells Fargo building in Denver, and we initially marketed the property and then Macquarie decided because of pricing not to pull it off the market. The building is 94% leased, if not the best building in Denver clearly one of them and in a terrific location with a great tenant roster.

So its value is there, it's just a question of when it can be realized.

Charles Fisher – LS Partners

This is on small data but on the 300,000 square feet you leased looks like Orange County did a little better than the down town L.A. building. Is that just kind of based on where the leases were done?

Shant Koumriqian

Actually the downtown L.A. buildings did better. The Orange County buildings if you look at our cash GAAP growth pages in the supplemental were actually down I think 16.5% on a cash basis and 20% on a GAAP basis.

The L.A. County offsets or the L.A. CBD assets had a 10% increase in cash rent growth. When you look at the consolidated numbers we had a large lease that we did in San Diego a large renewal that had a roll down as well that's dragging down our consolidated renewal metrics.

Operator

(Operator Instructions) Your next question comes from Charles Fisher – LS Partners.

Charles Fisher – LS Partners

Can you talk a little bit about the timing of the leasing cycle? How long is it taking people to sort of from when they desire or need or they are developing needs to when they actually sign the lease in today's environment?

Nelson Rising

It's a lot longer cycle today than it was two years ago. Largely because many tenants are feeling as uncertain about the economy as landlords are. And so people are really shopping and trying to get the best buy available to them, and as I say, there's just not a sense of urgency that if they don't – unless their lease is expiring. And in many cases, as we saw by our numbers, we've had significant renewals.

And a lot of tenants are just simply doing that as opposed to going out and looking for space in a different building. The cycle – so I would estimate from the time we have a tenant that we are marketing to and they say yes, we'll sign a letter of intent. From that point on it's probably about a 30 to 60-day process. But it's getting them to sign the letter of intent that's taking longer.

Charles Fisher – LS Partners

Have you seen an improvement, Nelson, in the last few months or not overall?

Nelson Rising

No I haven't. To be very candid with you, I haven't seen tangible evidence of an improvement. You begin to see that there is less pessimism in the marketplace but from a standpoint of commercial office building leasing, it's really a question of job growth. And once people start to see job growth, then I think they start to lease more space.

But until then I think that's really, I think, the current impediment. And just like all the recessions I've lived through, I've been seven cycles since I've been in the real estate business, in all but one or two of them job growth was the last to come back because people are reticent to start hiring until they know it's really over. And I think we'll start seeing job growth sometime in the second half of 2010 I don't see it before that.

Operator

Your next question comes from Gordon Watson – Ore Hill Partners.

Gordon Watson – Ore Hill Partners

On the construction loans you're selling, are you anticipating at this time making any payments from unrestricted cash to get rid of those construction loans?

Nelson Rising

It's conceivable there will be some, but it's our hope that it will be minimal. The Northside property is on the market. It's 75% leased. It's a good property that's part of a four-building complex, and we are marketing all four buildings and just the newly constructed building separately if someone wants that.

And so I think that will be successful in not having any payment. The offer that we have in bottom of that for in common stock will require some payment to bring that loan to the balance. The purchase price is being offered to us under a letter of intent, not a binding agreement yet, on the 207 Goode would be the loan balance number. These are all transactions in the works. Nothing is closed, and I just don't have an answer as to the amount that we would be forced to pay. Those loans do have guarantees.

In the case of the Glendale property we have just received a Certificate of Occupancy and as is the case of most construction loans, until you have Certificate of Occupancy 100% of the loan is guaranteed. Once the lender approves the Certificate of Occupancy, the Glendale number will be $9 million. Von Karman is about $7 million, and Northside is about $4 million. But it's our hope that our sales prices will come close to giving us break even on this.

Operator

Your next question comes from [Joe Bishop] – Investor.

[Joe Bishop] – Investor

Another caller asked about the representation on the board for preferred shareholders, and I was just wondering what does that mean? And I guess the second part of the question, is there any projection for resuming the preferred dividend?

Nelson Rising

Let me take the last question first. At this point, given the cash requirements of the company we are not anticipating being in a position to pay that dividend between now and the end of the second quarter of next year.

And so I think the assumption one should make that, in fact, there will be two new directors sometime after the second quarter of next year. The process for that we have not determined. It is our goal to have two very knowledgeable and strong directors on the board if, in fact, we are not able to pay that dividend.

We have a very strong board now which is something I am really pleased and proud that we were able to recruit the board that we have. And it would be our hope that the preferred nominees would be of the same caliber.

[Joe Bishop] – Investor

But what would they be able to do for us? Would they be able to influence decisions on the board that would maybe speed up the day when the preferred dividend could be renewed?

Nelson Rising

I would say that they would be a voice for the preferreds on a whole series of matters. The most important thing for the company to do is to improve its operating results and to rid ourselves of some of the problems we have been fighting since the day I arrived here in late May of '08. And in that regard I would look forward to them to be as constructive as other board members and help guiding us to where the company can get to renewed profitability, in which case dividends, both common and preferred, would be the order of the day. But we're not there yet.

Operator

(Operator Instructions). That concludes our question and answer session. I'll now turn the call over the Maguire Management Team for any closing comments they might have.

Nelson Rising

These are challenging times in general for the economy and specifically for commercial real estate and even more specifically as we try to work our way through a series of issues here at Maguire. I feel pleased with the progress we are making. We have much to do, and we'll continue to devote our full efforts to achieving the best results possible.

Operator

Ladies and gentlemen that concludes our conference call for today. You may all disconnect.

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