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Maguire Properties, Inc. (NYSE:MPG)

Q4 2009 Earnings Call Transcript

March 23, 2010 11:00 am ET

Executives

Peggy Moretti – VP, Investor and Public Relations

Nelson Rising – President and CEO

Shant Koumriqian – EVP and CFO

Analysts

Jordan Sadler – Keybanc Capital Markets

John Guinee – Stifel

Enrique Torres [ph] – Green Street Advisors

Brian Chinderley [ph] – AM

Charles Fisher – LS Partners

Alex Contiti [ph] – Odeon Capital

Wilkis Graham [ph] – Compass Point

Operator

Ladies and gentlemen, thank you for standing by. 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 conditions, 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 duty to make any such updates. Our supplemental package, along with information required under SEC Regulation G may be accessed in the Investor Relations section at the Maguire Properties Web site at www.maguireproperties.com.

Now, I would like to turn the call over to Nelson Rising, President and Chief Executive Officer. Nelson?

Nelson Rising

Good morning and thank you all for joining our call today the purpose of which is to review the results of the fourth quarter and the full year 2009 and to outline strategic initiatives for 2010.

During the 22 months since I have been with Maguire Properties, we have been focused on liquidity, debt reduction, debt maturities, disposing of non-core assets, and leasing our core assets. The press release, which you all received yesterday, highlighted a number of very significant transactions completed in 2009 and the first quarter of 2010. I will not revisit these transactions in my comments, but will be pleased to answer any of the questions you may have during the question-and-answer section of the call.

I am pleased to report that we ended 2009 with $218 million in cash, and most importantly, $91 million of which was unrestricted. In order to achieve this increase in unrestricted cash, we reduced capital expenditures, G&A expense, and leasing cost. For example, with respect to leasing cost, in 2009, our costs were reduced to $3.24 per square foot per year compared to $5.60 per square foot per year in 2008. This is a very significant switch in our leasing strategy and enabled us to again maximize on our liquidity.

Another very important thing to report is in 2009, our operating income exceeded operating expenses, and we anticipate this trend to continue in 2010 with net cash proceeds from operations in 2010 to be in the $25 million to $35 million range. In addition, the company is actively marketing non-core land parcels for sale, which could add an additional $20 million to our unrestricted cash at year-end 2010.

As of December 31, 2009 our outstanding debt totalled $3.4 million, this is excluding our properties that are in default. This represents a 33% reduction compared to the $5 billion of debt outstanding as of December 31, 2007. Since year-end 2009, we have reduced our outstanding debt by an additional $162.5 million through property dispositions. We continue to make great progress with respect to our debt maturities. Last week for example, we announced the disposition of Griffin Towers in Orange County. This enabled us to convert a repurchase facility to an unsecured $22 million term loan, with $7 million due in 2010 and $15 million due in 2011. In addition, the company was relieved of non-recourse project debt operating deficits and cost associated with leasing.

Three of our construction loans secured by non-core assets will mature in 2010. The successful disposition of 3385 Northside in the Mission City Corporate Center in San Diego addressed one of these loans that was due to mature in August of 2010. This sale eliminated approximately $17 million of project debt and a $4 million repayment guaranty. Two other construction loans, one secured by building 207 Goode in Glendale and the other by building at 17885 Von Karman in Irvine, mature in May and June 2010 respectively. We are in active discussions with the lender regarding both of these assets and are exploring a number of alternatives including short-term extensions and marketing the assets for sale.

We also have a May 1 loan maturity on our Brea campus mortgage and plan to exercise our extension option. In addition, the mortgage secured by Plaza Las Fuentes in Pasadena matures in September 2010 but it also has an extension option, and we will begin discussions with the lender within the next few weeks regarding the terms of exercising this existing extension option.

In August 2009, we launched a plan to deal with loans secured by seven non-core assets. These assets have been acquired by the company during the period between 2005 and 2007. Our place one of these properties was secured by a balance sheet loan and was sold to the lender relieving the company of $170 million of non-recourse debt, significant operating losses, and leasing expense. The company also defaulted on the remaining six non-core CMBS loans amounting to approximately $830 billion. The company is no longer servicing the debt and is no longer paying property taxes operating shortfalls or leasing cost. However, the assets and liabilities of these properties as well as operating results are still reflected on our balance sheet in continuing results of operations.

During 2009, we recorded non-cash impairment charges to write down our investment in these properties to fair value. Additionally, we are recording default interest at 5% in addition to the contractual interest rate, interest for loan agreements. At the time of disposition, the assets and liabilities of these properties will be removed from our balance sheet to the extent we are no longer advocated to repay the mortgages and loans and related costs we will record a gain in discontinued operations on the debt extinguishments.

Let me give you a status update now of these six loans that are in default. Park Place II in Orange County in Irvine, the special servicer Helios [ph] has selected a buyer following a full marketing process and the asset is under contract and expected to close during second quarter. So, as I was mentioning earlier, that would mean that the amount on the balance sheet would be reversed and the charges including the 5% default interest will also be reversed. Pac Arts Plaza, also located in Orange County, the special servicer is LNR [ph] and they have appointed a receiver. The receiver is authorized to market the asset and we will cooperate in the sales effort. Upon closing the sale, we will be released from all obligations and liabilities. If the property is not sold within 12 months after the date of which onwards the receiver was appointed LNR is obligated to acquire the asset by foreclosure or deed-in-lieu and deliver a general release to us.

There are three of our CMBS loans with CW Capital as the special servicer. These are 550 South Hope, 500 Orange, and Stadium Tower. We are in ongoing discussions with CW Capital and will report progress as is determined; the remaining CMBS loan is secured by 2600 Michelson. ING is a special servicer and appointed a receiver several months ago. A case management conference call with the judge is scheduled for March 29 and we will know more then about the progress we are making. In all incidents, as I said earlier, we are not paying debt service payables or property taxes.

One last comment I would like to make before we turn it over to questions and answers, we are really pleased with our leasing efforts during the fourth quarter and throughout the year. In the fourth quarter, we leased 300,000 square feet of new leases and renewals and during the full year, we leased 1.4 million square feet. I think that is an extraordinary year given the overall conditions we face in the real estate markets here around the country. Our downtown portfolio is now 84.9% leased, our Tri-Cities portfolio is now 92.3% leased.

I would like to turn it over to questions and answers, if you have any, and turn it over to the moderator.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Jordan Sadler with Keybanc Capital Markets.

Jordan Sadler – Keybanc Capital Markets

Thanks. Nelson, could you maybe provide a little bit of insight – yes, I think you gave us good color on backward looking basis and the stuff that is in progress or already been accomplished but maybe from a forward-looking perspective, if you could just give us a little bit of color on sort of next steps, would there be additional assets you would look to sell beyond maybe the few land parcels you had identified and were put back to additional lenders or is it just straight leasing from here?

Nelson Rising

It is not straight leasing from here but I have to emphasize that is a very important part of our business plan for 2010 and beyond. There are other assets that we are considering what our alternatives would be, whether to sell them in some form or another discuss with lenders the termination of our obligations. We have not made those decisions yet so I would prefer not to go on to any greater detail than that. But we have accomplished a lot with respect to our indebtedness, we have more to do and you can look to us to be aggressive in dealing with that in 2010.

Jordan Sadler – Keybanc Capital Markets

And as it relates to the assets you spoke about that are currently in default, the expectation is that there will be no additional cash payments beyond what you have already recorded?

Nelson Rising

Yes, clearly we intend, have no intention to extend resources on those assets. We are working cooperatively with the special servicers to the extent that they would like us to assist in the sales or with the receivers to that matter but we do not anticipate any additional cost.

Jordan Sadler – Keybanc Capital Markets

Even if any of those properties had repayment guarantees or master lease obligations on them.

Nelson Rising

The six that we were referring to that are now in the default mode, did not have any master lease obligations or guarantees. As it relates to the construction loans, which I alluded to, the property in San Diego, which we sold last week did have a $4 million repayment guarantee. There is a repayment guarantee on both the Glendale property and the Orange County property, which we are obligated to pay, we will be continuing to discuss with the lender, and we have a meeting scheduled with them early in April. But those guarantees are there.

If you want to put that in a context, there was a repositioning obligation that exists on the property in Orange County, Griffin Towers and that number we described as $22 million of which $7 million will be paid in 2010 and the remaining $15 million will be paid in 2011. There is a guaranty on the Von Karman loan that is in the range of $7 million and there is a repayment guarantee that is in the range of $10 million to $15 million on the property in Glendale on 207 Goode. So in the aggregate that is the extent of the guarantees and repayment obligations we have, the rest is all non-recourse.

Jordan Sadler – Keybanc Capital Markets

Okay, I will hop back in the queue. Thank you.

Operator

Our next question comes from John Guinee with Stifel. Please go ahead.

John Guinee – Stifel

Hi Nelson, how are you Shant? Nice job.

Nelson Rising

Thank you.

John Guinee – Stifel

The first question, we know people do not spend a lot of time on it but you have got some lingering tax protection issues with the former CEO Robert Maguire. Are there any assets that the property does not cover the debt service and you are carrying the property simply because not carrying the property triggering a default would trigger tax protection? And along the same line of questioning, is there any contingent liabilities on your balance sheet for the tax protection liabilities that are outstanding right now?

Nelson Rising

Okay, let me take the first question first. The building in which there is tax protection include the Plaza Las Fuentes office building not the hotel, the Wells Fargo Centre North Tower, Wells Fargo Centre South Tower, our Library in the US Bank Tower, I still call it Library Tower and Gas Company Tower, and those are the buildings that Rob has is tax protection obligations are spread. And all of those buildings are positive in cash flow.

John Guinee – Stifel

Okay and then the second question, is there any contingent liabilities on the balance sheet, are you reserving for any potential tax liability or how does that all work out and I ask that because I am not sure where it fits in on the capital stack in terms of liabilities or if it is a relatively insignificant number or if it is hundreds of million of dollars. I just –

Nelson Rising

I am going to let Shant answer that.

Shant Koumriqian

Hi John, there is no contingent liability recorded on our balance sheet. Now, just to repeat, you have two assets that have tax protection PLF and Wells Fargo Tower that expire in 2010 and their extension options that can extend to 2013. So your original aspirations and then the other three assets which are KPMG Tower, Gas Company Tower, and US Bank Tower those expire in 2012 with three-year extensions in 2015 and again we have those documents filed in our IPO prospectus documents that anyone can go back and pull them and then we also have disclosures in our K built into risk factors in the liquidity section I believe. So those are the summary of all five vendor (inaudible) contingent obligations that we do have thorough disclosure. It has many significant material obligations or (inaudible) which is why it was fully disclosed at the IPO, and continues to be on an annualized basis.

John Guinee – Stifel

Okay and the K is going to be filed today I assume?

Shant Koumriqian

It will be filed towards the end of the month when it is due.

John Guinee – Stifel

Okay, thank you very much.

Operator

Our next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead.

Peggy Moretti

Michael?

Enrique Torres – Green Street Advisors

Can you hear me?

Nelson Rising

Good morning Michael.

Enrique Torres – Green Street Advisors

Hi, this is Enrique Torres [ph] on behalf of Michael. Good morning.

Nelson Rising

Good morning.

Enrique Torres – Green Street Advisors

I want to re-visit the Glendale asset sale that you had mentioned and also that had kind of a head wind in the press. It has been mentioned that you are going to sell a four-asset Glendale portfolio and I wanted to know if those were still in negotiations, or you can give an update on that?

Nelson Rising

I did not quite understand the first part of the question.

Enrique Torres – Green Street Advisors

I was just referring, I know you had mentioned about 207 Goode but there had also been mention of previously selling 207 Goode along with some of the North Brand assets, is that sale still in the works or in negotiation or has that been taken off the table?

Nelson Rising

That particular sale has been taken off the table. The buyer had a brief period of time, which he was to come off with a proposal; the proposal was not satisfactory so we intend to continue to market those assets. But there is nothing pending.

Enrique Torres – Green Street Advisors

Okay, great, thank you for that that clarification helps. And then just to quickly follow up on that, the occupancy certificate on those assets or in 207 Goode, have you guys been able to obtain that to change the repayment guarantee?

Shant Koumriqian

Enrique, this is Shant, so what we have is we have received an occupancy certificate, that is one of the conditions to reduce the recourse. We believe that we have met the conditions to reduce the recourse and we are currently in discussions with that lender regarding the longer-term resolution of that asset. So at this point, we believe we have met all the conditions but we are in discussions at this point, you should have seen the loan is fully recourse and the repayment guaranty would be the difference between the full amount of the debt and the value of the asset, we will report on our progress in the next call.

Enrique Torres – Green Street Advisors

Okay, great, and then one final question, if I was to take the portfolio of Orange County assets not those in default but the remaining assets, would those as a portfolio be meeting debt service requirements and be cash flow neutral or positive or would this be cash flow negative?

Shant Koumriqian

What we have in Orange County, let us just run through them, we basically have four assets remaining that are now in default starting with the Brea campus and we have a disclosure in our Q on a quarterly basis where there is a debt service guarantee as of the end of the third quarter was covering that service. We refer that as Brea Campus, it is called Brea Corporate and Brea Financial, they are two separate assets but we look at them as Campus.

We have 3800 Chapman, which is in Central Orange County and again we disclosed NOI and the debt service guarantee but not there. At the end of the third quarter it was close to covering debt service. That asset has a debt service guarantee that expires in 2017 or earlier if we can achieve a one-one debt service coverage ratio. Our focus has been to lease up the building. We have three floors vacant. We recently completed a floor and we are actively focused on leasing the other two floors with a goal of achieving a one-one debt service coverage ratio.

The third asset we have is City Tower, which is in Central Orange County as well right across the street from 3800 Chapman. That asset has an interest reserve that we have been drawing upon and continue to give you updates but at this point we have not been funding that asset any corporate cash. It also has leasing reserves as well which we have been using to try and lease the building, and it allows us to get well within Orange County at 17885 Von Karman. This is one of the construction loans that Nelson referred to that has a rounding of $7 million repayment guaranty. That loan matures in June of this year and we are talking to our lenders that with the ultimate resolution of that asset which can lead to a number of things including an extension and/or a marketing of the asset in the next year.

Enrique Torres – Green Street Advisors

Okay.

Shant Koumriqian

On a combined basis that is about 1.2 million square feet of assets in Orange County and that is basically what is left other than assets in default.

Enrique Torres – Green Street Advisors

Great and then just a quick follow up on 1300 Chapman, I did see you guys did get some good leasing volume and traction there, so is that close to mean that 1.1 debt service requirement or it is still going to take a little bit more leasing there to get it to meet the requirement?

Shant Koumriqian

It is getting close. We have to do a little bit more leasing in the tests, it is a trailing 12 and actually if you need to hit it you have to have 15 months of debt service. So our goal will be to hit it and then you will have to hold the asset for 15 months and hopefully meet the one-one.

Enrique Torres – Green Street Advisors

Okay, great, thank you.

Operator

Our next question comes from Brian Chinderley [ph] with AM. Please go ahead.

Brian Chinderley – AM

I appreciate you taking the questions. I am curious you listed the six properties that are currently with special services where you have loans in default and you are in various stages of either selling the properties or going through other actions on those to potentially return those properties, question is what is your expectation on the net reduction in debt that would come from the likely outcomes that you now have in front of you and are there any restricted cash that is held in association with guaranty obligations or contingent obligations on those properties that might free up as part of this as well?

Nelson Rising

Let me go back and deal with the complexity of dealing with CMBS in default, and in September of last year, Treasury gave some more guidance as to what a CMBS special servicer could do that will still allow them to keep the passive status of a CMBS which is a real estate investment mortgage conduit. So, as a result of that, the Treasury said you could extend maturities, you could reduce principal and you could reduce interest rates but made it very clear that if you foreclosed on the asset and sold to a third party, you could not extend the CMBS to that third party sale. That is what is now happening around the country with CMBS defaults and there was a Wall Street article earlier in the month that talked about what was happening with various borrowers in default and our kind of role, unintended role of being the first one to start to work our way through this mine field.

So as a result, for example, we have three loans with CW Capital and they have not yet decided how they are going to address that particular issue of default now or waiting for a period of time and have the CMBS extend to a subsequent buyer. So during the period, and I went through in detail the other three and how we are progressing, we do not anticipate, as Shant said and I said, any additional costs of owning those properties and going back to the second part of your question –

Brian Chinderley – AM

Second part had to do with the guarantee obligations, so you are saying that – I understand that you are not looking at any additional money out of your pocket but to the extent that you have got guarantee obligations that you are currently reserving for, any of those free up and therefore free of restricted cash or is there a possibility of that outcome or can you talk to that issue a bit?

Nelson Rising

Sure, Shant, why do not you do that?

Shant Koumriqian

Yes, on these assets there really is very little recourse there was a debt service guarantee on 500 Orange and that burned off on 12/31/2009. When these assets are ultimately disposed that means ultimate sale, and when it comes off our books, we will reverse all liabilities when we did impair the assets, we had to impair them to fair values below the debt, when these assets ultimately come off our books, we will be able to recognize a gain, the difference between when we wrote the assets down versus where the debt is.

In terms of your question on restricted cash, the restricted cash is also collateral under the loan agreement. We have disclosed and it has, and we will continue to in a liquidity session the amount of restricted cash associated with these assets, I believe it was about $23.5 million as of the end of the third quarter, that cash is collateral and since the assets are currently worth less than the debt that gives additional collateral (inaudible). So we would not expect to get that cash.

Brian Chinderley – AM

Okay. You talked about some of your progress on the leasing side specifically the 350,000 square feet in the fourth quarter, can you comment about how the rate on those leases compares to the in-place rents in those impacted buildings or will you have information in schedules that would be part of the K or what can you do to help me on that?

Nelson Rising

Shant?

Shant Koumriqian

Yes, we actually do – those were supplemental schedule on pages 40, 41 and 42 we do disclose the renewal rates both on a cash and on a GAAP basis and we disclose this and a 10% decrease in cash rents, so in new rents were released at 10% lower than in-place rents and you can see what the breakout is between Downtown LA and Orange Country on a subsequent basis.

Brian Chinderley – AM

I am sorry it was sort of a bad connection so you are saying that that information will be in the K?

Shant Koumriqian

The information is on page 40, 41, and 42 of the supplemental package that we posted yesterday.

Brian Chinderley – AM

Okay, good, alright. Good enough. That is very helpful. Then one of the questions that I think a lot of people have had is what level of tenant improvements might be associated with lease deals that are necessary in order to fill some of the space or keep existing tenants in the space and how expensive those might be? Can you comment on the overall picture on that because you clearly – it is quite positive that you have now got $90 million of unrestricted cash but you can eat into some of that cash pretty quickly if you get to put a lot of tenant improvement behind renewal deals or deals to get tenants in place.

Nelson Rising

Let me take a shot at a portion of that question and then turn it over to Shant. As I mentioned, one of the things that we put into practice here was to try to reduce our leasing cost and obviously one of the ways to do that is to set your rents at market and not try to buy an over market rent, which is something we just could not afford to do. So that by reducing our cost by over $2 per square foot per year of lease, we were able to lease at market rates and therefore be able to make those savings. Going forward, Shant, why do not you take us through what we are anticipating.

Shant Koumriqian

Sure. In page 43 of our supplemental we disclosed what our costs are on a per square foot per year basis for the last three years and by quarter in 2009, and what we were able to do at least in the last year was reduce our concessions compared to prior years. For the full year of 2009, we incurred about $3.24 per year belief. So for a five or a seven-year lease, you can multiply $3.24 by that term, and again if you look at the renewals during the year, you will see that renewal cost per square foot per year ranged between $2 and $3 per foot adding on quarter, new leases always stood a little bit higher. One thing we have been doing we are extremely focused on individual buildings and the condition of the space. So what we are seeing are concessions anywhere between $2.50 and $5.00 per year of the lease, depending on the condition of the space, depending on the credit quality of the tenant, and depending on the specific circumstances of the building. So we would expect to see that going forward.

Brian Chinderley – AM

Got it. Thank you very much. I will jump back in the queue.

Nelson Rising

Thank you.

Operator

And our next question comes from Charles Fisher with LS Partners. Please go ahead.

Charles Fisher – LS Partners

Good morning, all of you; congratulations on a very successful quarter.

Nelson Rising

Thank you.

Charles Fisher – LS Partners

Could you, and maybe, Shant, it would be better if you could just talk about what your expectation is on the cash burn rate on the next couple of quarters.

Nelson Rising

Shant?

Shant Koumriqian

Sure. So, where we have gotten to in the current quarter – and if you recall previously, we were burning quite a bit of cash on a quarterly basis, when you backed out the default assets, we have gotten close to breakeven on a quarterly basis. Now, what will happen here over the next several years will depend on what happens from a leasing perspective. We do have some large leases that are expiring in 2010, we have a 150,000 square foot tenant that we talked about in the past, Kirkland & Ellis, that is vacating their space from 777 Tower, they were not able to take advantage of a couple of law firms that failed across the street here in one of (inaudible) buildings and moved into that space. That space did come back to us this quarter.

In the middle of the year, we have Pacific Enterprises, which is our second largest tenant; it is disclosed in our Major Tenants page of our supplemental. We have discussed that lease in the past. That is an original tenant in the building, a tenant that was acquired many years ago and their spaces have long been sub-leased. That is about 220,000 square feet, and we have also discussed the fact that lease is above market. It is at $37.00 net. That will be rolling down when that tenant vacates. We are in discussions with sub-tenants; we hope to retain a good portion of the sub-tenants in terms of rental rates. We have various types of leases, some at market, some below market, but again depending on the condition of the space, we are looking at each sub-tenant on a standalone basis.

Those are the major explorations in 2010. So when you look at our cash burn, and while we have made significant progress, as we disclosed a few assets in 2010, we will have additional benefits of disposing the assets that are burning cash, and then, you have these two leases that are expiring in the first quarter and in the second quarter, and the loss of revenue will result in an increase in cash burn in the second half of the year.

Charles Fisher – LS Partners

And Shant, it was my understanding, am I correct that that the Kirkland & Ellis space is actually very nice, and that we should have – the company should have success re-leasing in that space?

Nelson Rising

Yes, it is. I think that is right. And we anticipate that we will have success.

Charles Fisher – LS Partners

And on the last call, Nelson, you talked about possible JV opportunities in 2010. Do you want to comment on that?

Nelson Rising

Well, we have nothing new to add except to reinforce what I have said in the past that as we look at our cash needs going forward, we may very well either on an asset level or broader than an asset level, seek third-party capital. And it is – these are discussions that we have had internally, and we would think that that is a way to deal with the leasing costs that we are going to have to cover going forward.

Charles Fisher – LS Partners

Switching to the JVs, my read of the last quarter looked like this, the JV portfolio actually had a pretty good operational experience. It looks like it might have been anywhere from $500 [ph] million of cash flow, at the entry level, across all the properties.

Nelson Rising

Yes, that sounds correct. Shant, why don't you give some more color?

Shant Koumriqian

Yes, with the JV, one of the things that is hurting the results of the joint venture I would just point out is the Quintana asset, which is also in default. The joint venture is working through that asset servicer and those results are included in the JV financial statements, but what we did have was some leasing that occurred early in the year and those spaces have never built out and those tenants have started paying rent.

Charles Fisher – LS Partners

Would you envision the company at the Maguire level receiving any cash flow from our ownership interest of the JVs or is it all going to get put back into (inaudible) and other costs?

Shant Koumriqian

Well, if you look at the joint venture, it is approximately 80% leased; if you go into the tables in the supplemental and back out Quintana, which I believe is in the footnotes, you will see that it is about 85% leased. There is quite a bit of (inaudible) that meets the current year joint venture over the next several years, so I think we are not expecting to generate much cash from the joint venture nor put much cash into the joint venture. A lot of capital will be recycled for leasing.

Charles Fisher – LS Partners

Terrific. I appreciate the answers. Thanks, guys.

Nelson Rising

Thank you.

Operator

(Operator Instructions). Our next question comes from Alex Contiti [ph] with Odeon Capital. Please go ahead.

Alex Contiti – Odeon Capital

How are you doing? I was just wondering if you could give a little bit more clarity on the cash flow situation. You said that you guys are at about breakeven, slightly positive at the moment. How much of that is due to sort of one-time cutbacks in I guess leasing expenses and maybe minimal CapEx, and you know, what does the quarterly cash flow look like in a stabilized environment and a stabilized spending rate?

Nelson Rising

Well, if we go back to one of my earlier statements, is that we have gotten to the point where our cash from operations exceeds expenses related there too, and we had pointed out that as far as 2010, we are looking at that number to be in the $25 million to $35 million range for the year, in addition to what cash we could generate from the sale of non-core assets. And beyond that, Shant, you have anything else to add?

Shant Koumriqian

Well, where we are at today is $90 million. If we just go through some of the non-recurring uses of cash that we will face here in 2010, we have the three or two construction loans that we refer to that has a $7 million repayment guaranty on one, what we believe to be a $10 million repayment guaranty in Glendale, and then there is a $7 million dollar bullet payment on the now unsecured term loan, formerly the Griffin Tower repurchase facility. So those three assets or those three items combined are about $25 million, which are a non-recurring use.

So when I refer to the fact that we are close to breakeven, that means NOI less that service, less G&A, less capital expenditures and leasing costs during the quarter. The rest of these obligations that I referred to are being funded from other sources, primarily cash on the balance sheet. So for the three recourse payments that we referred to, approximately $25 million, and again, at this point, we believe that our recourse payment on 207 Goode is $10 million. We have not come to an agreement yet with our lender.

We have loan maturity on POS [ph] coming up later in the year in September. We have three extension options, we have got service coverage ratio tests and leverage tests that we need to meet. If we do not meet those tests, we are required to pay down, so again we have allotted for a pay-downs in our projections of our cash to be at the end of the year. We also have leasing that we need to do in the portfolio, and again, a big user of cash in the future will be leasing costs, and we have allotted for approximately $10 million to $15 million in costs to be funded for leasing from cash on the balance sheet.

And then finally, as we are disposing of assets, while we are not funding any of the ongoing operating losses or interest, we do have our own internal costs and external costs that we need to incur, closing costs, legal fees, and what not, we have allocated the tons of money to help us dispose the rest of the assets that we are planning on selling during the year. So, therefore, we go from $90 million today to somewhere in the $25 million to $35 million range at the end of the year, assuming we saw no further assets or land as Nelson referred to earlier in his comments.

Alex Contiti – Odeon Capital

Great. Thank you. That is very helpful. And if I could ask one more question about the properties and when you are looking about, you know, what is keeping your core portfolio and what not, what sort of stabilized interest expenses are you looking at, because you know, certainly your portfolio will benefit from a different sort of interest rate and lending environment, I was just wondering, you know, what kind of rates are you modeling forward when you are looking at whether to keep properties or to let them go and give them back to the services?

Nelson Rising

So, first of all, let us define our core portfolio so we are both talking about the same things. I have said on many occasions that it is our goal to focus our attention on the downtown core assets. So you need to assemble some of the greatest buildings in California and our view is that Downtown Los Angeles is going to be a very viable marketplace in the future. So when we are talking about core that is how I am defining it. We can expand that a bit to other assets that we would be holding for a period of time, but Shant, if you would just answer the question as it relates to the Downtown core assets.

Shant Koumriqian

Sure. So we have six assets in Downtown LA, one of them is a variable rate loan that we swapped; that loan matures in October of 2012. Our current swapped rate is 7.16%. And we have five assets that have rates effectively in the 5.5% range, two of the assets have loans that mature in the latter half of 2013. The other three, which are a combined $1.5 million debt, do not mature until effectively 2017. So when we look at our core set of assets, our interest rate on those assets is somewhere in the mid-5% range for several years.

Alex Contiti – Odeon Capital

And do you view that as sort of a sustainable refinancing rate? I mean, I know those maturities are down the line, but I guess, when you kind of look in your cash flow going forward, what sort of interest rates are you modeling or thinking about?

Nelson Rising

Well, first of all, I don't think we have the visibility to project what is going to happen in real estate financing out to the time of these maturities. Right now, the principal lending that is taking place; basically there is no CMBS financing to speak of, the principal real estate lending that is taking place is from insurance companies. The commercial banks have not yet stepped back into the game in a large way. So it is hard to take this current situation, which I don't believe is going to be a long-term situation and to speculate as to what rates would be achievable in 2013, 2015, or 2017. Shant?

Shant Koumriqian

Just to answer your question, when we look at the near term debt maturities, you know, KPMG Tower slopped at 7.16%, it is probably within range of what one could achieve today. Clearly, the loans on the Downtown LA assets are maturing in 2017. You know, those interest rates are below market today, although at the right level of leverage, you could swap into those rates at the LIBOR rates of loans today. So, when we look at our interest rates, the one that we need to deal with first is the KPMG Tower, and at that rate, that is within line of where you could get financing today, the question is how much financing can you get?

Alex Contiti – Odeon Capital

Great. Thank you.

Nelson Rising

Thank you.

Operator

And our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Thank you. Just a couple of clarifications, just first on the new term loan, I guess the repurchase facility was converted. I noticed the language says that it is now an unsecured term loan. So does that mean that you have unencumbered assets as a result of that swish?

Nelson Rising

I wish that were the case. No, that did not free up an asset. It would have been if it was permitted the sale of separated the repurchase obligation from the mortgage and thereby permitted the sale and saving us the negative theory and costs. But there is no new asset that we could encumber as a result.

Jordan Sadler – KeyBanc Capital Markets

Is the hotel still pledged to that facility?

Nelson Rising

No, the hotel is Plaza Las Fuentes.

Jordan Sadler – KeyBanc Capital Markets

It is Plaza Las Fuentes, okay, it is still encumbered along with that.

Nelson Rising

It is encumbered a loan that we are – as we mentioned earlier, going to be looking to extend the maturity on that loan sometime in the summer. We are looking at September, but we have extension rights, and Shant paid down, depending on where we are, meeting various criteria, it may require some pay down, which we set aside in our budget.

Jordan Sadler – KeyBanc Capital Markets

Okay, and Shant, just – not to beat a dead horse on this cash flow, but I think it is an important point, your unrestricted cash flow seems to have picked up by about $30 million in aggregate, almost sequentially, I know you had about $25 million of cash proceeds from the asset sales. So there is an uptick of about $5 million dollars, which may, you know, I guess a portion of which is attributable to sort of the operations and sort of the comments that you had regarding those, but I am sort of curious, when you say you are breakeven cash flow at this point, that is of course excluding the obligation related to the preferreds, right? So it is net of, because that is not a cash obligation.

Shant Koumriqian

That is correct.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Shant Koumriqian

So the cash obligations, when you look at just results excluding money coming back from reserves, so I'm not counting money coming back from reserves, we are close to effectively cash flow neutral at this point, but again, we have some large lease expirations coming out in 2010. So it is a point in time to comment.

Jordan Sadler – KeyBanc Capital Markets

And maybe Nelson, do you have any commentary on the preferred obligation and given sort of – it looks like there is a little bit of light of the end of the tunnel here, maybe your thoughts on what will come of that obligation in 2010?

Nelson Rising

Well, under the terms of the preferred instrument, if we do not pay the dividend by April 30, which is not going to happen, we are just not going to pay it, the Board would automatically increase by two spots on that date, and the spots would be vacant until there would be an election. The new directors would be elected at a special meeting and that is yet to be scheduled. And in order to request that special meeting, 10% of the holders of the Series A need to make such a request. So from that standpoint, that is the right that they have, as preferred holders. It is also important to keep in mind that such elected directors would have the same obligation to represent all the shareholders as the existing directors have. At this point, as I said, we have no intention to making the next quarter dividend, which would be the sixth quarter without paying such a dividend and therefore, those rights to have representation on the Board would blossom [ph].

Jordan Sadler – KeyBanc Capital Markets

Okay, but at some point, do you – outside of what may happen on or after April 30, as it relates to the directors, as far as your vision is concerned, would you expect to flip that back to current day or how would you expect to deal with that preferred as obviously on a quarterly basis, it has, that accrual appears to erode the shareholder value at the current level?

Nelson Rising

I think that the accrual in fact is an obligation. It is there, it is not going to go away, but – and it will continue to add up. Obviously, at some point, we need to take a longer term view of this and determine what alternatives are available to us to generate third party capital in some form to address the whole capital stack in our company, and at this point, we are not prepared to talk about that, other than the fact that we are mindful of it and we are in fact thinking about it.

Jordan Sadler – KeyBanc Capital Markets

Thank you.

Nelson Rising

Thank you.

Operator

And our next question comes from John Guinee with Stifel. Please go ahead.

John Guinee – Stifel

I had just a couple of clarifications. Are you in negotiations or in discussions with Macquarie? My recollection is that the buy/sell kicks in fairly soon?

Nelson Rising

Well, no, we are not in discussions about that. You recall that recently Macquarie was acquired – their interest – not the Macquarie Bank, but the Macquarie Real Estate was acquired by Charter Hall, and we have since met with the representatives of the Austrian-based acquiring entity. But at this point, we have not had any more discussions.

John Guinee – Stifel

And then, on the particular assets in the joint venture, is One Cal off the market now?

Nelson Rising

Yes.

John Guinee – Stifel

Is Wells Fargo Tower off the market?

Nelson Rising

Wells Fargo in Denver, yes.

John Guinee – Stifel

Okay, great and the status of Two California, which is in your portfolio, but on a ground lease.

Nelson Rising

Yes, Two Cal is in our portfolio 100%, One Cal is 20% owned and the status is that the – we have leasing activity, we are trying to maximize our initial lease, but minimizing our out of pocket costs on leasing, the building, Shant, what is that lease now?

Shant Koumriqian

In the mid-80s lease, and it has leasing reserves, so we are using leasing reserves to try to lease out the building, so no change, it is just one of the core assets in our portfolio at this point.

John Guinee – Stifel

Great. Okay, thank you.

Operator

And our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Enrique Torres – Green Street Advisors

I just had a quick follow-up. I wanted to know if you could spell out how much of the restricted cash is related to the downtown assets?

Shant Koumriqian

We will have a disclosure in our K. I believe we had one for the last quarter in the Q that you can pull up as well. There is plenty of restricted cash, including taxes and insurance and collateral accounts. Those are all recurring restricted accounts that we do not really look at as a source of cash. Our leasing reserves for our Downturn LA assets, we have some; they are being depleted fairly quickly, and you will see that as we move forward, the majority of restricted cash flow is in the Orange County portfolio and as we dispose of those, what is left in downtown and the Tri-Cities is not either a significant number.

Enrique Torres – Green Street Advisors

And are you looking at recuperating any of that cash in the Orange County disposals or does that pretty much get put – is that going to fund guarantees and everything else?

Shant Koumriqian

Well, what is left there, we are 100% focused on using it until we lease some assets. So when I went through earlier, we have 1.2 million square feet of assets, those are all either covering all close to covering. So, our focus is to use those reserves as prudently as possible in the leased space, which is what we have been doing, and if you go back, you will see Brea was – occupancy of Brea has gone up significantly, occupancy of Chapman has gone up significantly. So, our goal is to use those reserves to lease space.

Enrique Torres – Green Street Advisors

Great, that is helpful. Thank you.

Nelson Rising

Thank you.

Operator

And our next question comes from Wilkis Graham [ph] with Compass Point. Please go ahead.

Wilkis Graham – Compass Point

Good morning. Thanks for the call. I just want to get back to leasing. Do you guys mind commenting on how the leasing environment has changed since the last call in Downtown LA and maybe specifically how you feel about the prospects for increasing occupancy at US Bank Tower.

Nelson Rising

Well, one of the things that we have noticed in the past month is a decided change in tenant interest. The number of tours we are taking or giving to potential tenants for whether it is 5,000 or 10,000 square feet has increased enormously over the past month or so. That I think is a very good indication that people are beginning to believe that the rents have bottomed out or are bottoming out. From the standpoint of major lease negotiations, we are involved in several of those, and we are encouraged by the results, obviously since they are negotiations, we don't want to be any more specific than that. I think that my personal perspective is that the overall attitude about the economy in California in general and Los Angeles in specific has bottomed out and is coming back and how soon that will manifest itself in more robust leasing, only time will tell, but I think it is headed in the right direction.

Wilkis Graham – Compass Point

Okay, that is helpful. And then just real quickly on the Brea and the Plaza extensions, I know that you are still working on those, but do you know already how long – is that a year extension or is it six months?

Nelson Rising

Well, we have three one-year extension possibilities at Plaza Las Fuentes, but that requires us to meet certain standards, and if we don't meet those tests, then the answer is we would have to make payments on that loan. With respect to Brea, the extension is automatic.

Wilkis Graham – Compass Point

And it is a year?

Nelson Rising

It is a year.

Wilkis Graham – Compass Point

Okay, thanks a lot.

Nelson Rising

Thank you.

Operator

Thank you. That concludes our question and answer session today. I will now turn the call over to the Maguire Properties management team for any closing comments they might have. Gentlemen?

Nelson Rising

Well, I want to thank everybody for participating today. We appreciate the questions, and I hope we were able to give answers that were useful and helpful to you. We look forward to being back on the call, which will be after our second quarter results and I am hopeful we will be able to continue with the very positive feeling that we now have. Thank you all.

Operator

Ladies and gentlemen that concludes our conference for today.

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Source: Maguire Properties, Inc. Q4 2009 Earnings Call Transcript
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