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Executives

Jonathan Abrams – SVP, General Counsel and Secretary

David Weinstein – President and CEO

Shant Koumriqian – EVP and CFO

Analysts

Jordan Sadler – KeyBanc Capital Markets

Suzanne Kim – Credit Suisse

Wilkes Graham – Compass Point

Aaron Asklexen – Stifel Nicolaus

Michael Knott – Green Street Advisors

MPG Office Trust, Inc. (MPG) Q1 2011 Earnings Call May 10, 2011 11:00 AM ET

Operator

Good morning. My name is Calando and I will be your conference operator today. At this time, I would like to welcome everyone to the MPG Office Trust First Quarter Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded today May 10, 2011.

I would now like to turn the conference over to Mr. Jonathan Abrams of MPG Office Trust. Please proceed, sir.

Jonathan Abrams

Good morning. Thank you for joining us for our first quarter 2011 earnings conference call. During the course of today’s call, management will make forward-looking statements regarding among other things, projected 2011 results of operations, leasing, competitive conditions, financing and cash.

The company’s projections are affected by many factors outside of its control. For discussions 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. MPG Office Trust does not intend to update these statements prior to our next quarterly earnings release, and we expressly disclaim any obligation 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 MPG Office Trust website at mpgoffice.com.

And now I’d like to turn the call over to David Weinstein, President and CEO. David?

David Weinstein

Good morning. I am joined here by our CFO by Shant Koumriqian. I have some prepared remarks that discuss the company’s ongoing progress thus far in 2011. At the conclusion of my remarks, Shant and I will be available to answer any questions you may have regarding the company and its operating results.

Since our earnings call in March, we’ve continued to make progress with respect to our objectives of exiting non-core assets and improving our overall corporate liquidity position. We disposed of approximately 6.4-acre vacant land parcel located adjacent to 500 Orange Tower in Orange County that resulted in net proceeds to MPG of approximately $4.7 million.

We entered into an agreement with CWCapital as special servicer with respect to 500 Orange Tower. The agreement insulates us against potential claims, establishes a definitive outside date by which we’ll exit the asset and provides for cooperation in any sale of the asset. The outstanding principal amount of the loan on this asset is $110 million.

We transferred 701 North Brand in Glendale, California to the lender. We received modest cash proceeds in connection with the transfer and will continue to manage the asset on behalf of the lender for up to 18 months. We were relieved of $33.8 million of debt as a result of the transfer. We were relieved of $200 million of debt resulting from the sale of 550 South Hope by CWCapital, a special servicer. We have worked cooperatively with CWCapital on the disposition of this asset since our default in August 2009.

We placed 700 North Central and 801 North Brand, both located in Glendale, California into special servicing. It is premature to speculate as to the outcome on these assets at this time. We are close to completing the sale of the 350-room Westin Pasadena Hotel. A buyer has been selected and the buyer has completed its due diligence. The purchase contract has a non-refundable deposit in place.

We are pursuing approval of the buyer with the city of Pasadena. We expect the transaction to close within two weeks of that approval. Once we complete the sale, we intend to fully repay the $78.6 million loan that presently encumbers both the hotel and the 193,000 square foot Plaza Las Fuentes office building and retail components.

The net proceeds after the repayment of the loan will be disclosed once the transaction has been completed. There is no assurance that the buyer will be approved by the city of Pasadena or that the sale will close as expected. We are currently working with the lender to finance the Plaza Las Fuentes office building and retail components. The financing, which will occur after the closing of the Westin Pasadena sale, will generate significant additional net proceeds which will be used for general corporate purposes. While we are optimistic that financing will occur, there is no assurance that the financing will be completed.

As part of our overall corporate objective to initiate restructuring discussions involving our core downtown Los Angeles assets, we placed Wells Fargo Tower and US Bank Tower into special servicing, which occurred in March, 2011. This is a critical first step in order to have a meaningful dialogue with lenders. We also sent an immediate default notice on Gas Company Tower in March. The master servicer is still completing its analysis of the asset. None of these assets are in default. Our goal of these assets is to achieve a successful modification to loan agreements. There can be no assurance that we’ll be successful.

As you may recall, we placed two California Plaza into special servicing at the end of 2010. We are now on default under that loan. It is premature to speculate as to the outcome on this asset. As to corporate liquidity, we continue to aggressively monitor, and where possible, enhance our corporate cash position. We are prudently managing cash, so that is available for leasing, capital expenditure requirements, and other general corporate purposes.

As of March 31st, 2011, we had $151 million of cash on hand, excluding assets in default. About 96 million of this cash was restricted for specific purposes such as reserves for leasing commissions, tenant improvements, property taxes and insurance. 55million was un-restricted and available for general corporate purposes.

In terms of debt maturities, we continue to work with our 80% joint venture partner Charter Hall to refinance the loan on One California Plaza. Metlife our current vendor has accepted our loan application and we are working towards completing a refinance of this property.

We currently have a short term extension to July 1st, 2011. While refinancing discussions are moving along productively, there could be no assurance that this refinancing will be completed.

As to other corporate finance matters, we fully repaid our $15 million unsecured term loan on May 1st, 2011. Also on May 1st, we extended our $109 million mortgages on (inaudible) Campus. We’ve no further extensions available on this loan and it now matures on May 1st, 2012.

Our only other upcoming debt maturity is alone on KPMG Tower, which matures in October 2012. We remain focused on this debt maturity, but have nothing to report at this time.

As to leasing activity, we leased 140,000 square feet in the first quarter. During the remainder of 2011, we will continue to work actively to renew current tenants and secure new tenants. We believe that we have sufficient leasing reserves and cash availability to be competitive.

That concludes my prepared remarks. We’ll now open the lines for any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instruction) And your first question comes from Jordan Sadler KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Good morning. First question is just regarding two California and then the other core assets were placed into special servicing. What is the ultimate strategy when you go into default on Two California for instance? And what is the potential to go into default on Wells Fargo, US Banking and Gas Company Tower?

David Weinstein

First, we are not going to go into default on US Bank Tower, at Well Fargo or Gas Company Tower. So, you should really think of those separately. On two Cal we wanted to default, because we didn’t have adequate cash flow to paid interest. And the goal is to retain the asset. So, we’re in the middle of conversations on that asset and can’t disclose more about those conversations.

Jordan Sadler – KeyBanc Capital Markets

Okay. The goal is to retain it and keep it, but I guess the negotiating – is it fair to say that the negotiating position is just a little bit stronger given sort of the negative cash flow? Is that about the way -?

David Weinstein

I don’t know if I would characterize it as stronger or not stronger. I mean the negative cash flow is what created us putting it in, actually into default, while the other three assets are not in default and we do not intend to put them into default.

Jordan Sadler – KeyBanc Capital Markets

Each of those three in a positive cash flow position?

Shant Koumriqian

Yes, currently those are in a positive cash flow position. And as David said, Two Cal Plaza is no longer covering debt service. We had a reduction in occupancy in the fourth quarter, primarily tenants that – a couple of tenants that left the building and therefore the asset is no longer covering and therefore we defaulted.

Jordan Sadler – KeyBanc Capital Markets

Okay. And as it relates to the hotel obviously, you’re waiting until you’ve got money hard. Can you tell us the size of the deposit?

David Weinstein

We can’t disclose that at this time, but we believe it’s significant.

Jordan Sadler – KeyBanc Capital Markets

Okay. And can you give us any sense of sort of valuation on the hotel? You don’t have to give us a dollar amount, but maybe sort of, either a cap rate or some other parameter.

David Weinstein

We really can’t disclose terms – any more terms of that sale right now. Hopefully, we’ll be able to give you very detailed information in short order.

Jordan Sadler – KeyBanc Capital Markets

Okay. And as it relates to PLF and the financing, can you maybe give us some sense of what you’re working with, in terms of that financing?

David Weinstein

Unfortunately, we can’t give you information on that at this time either.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Shant Koumriqian

And Jordan, I’ll just add that the asset itself is now 100% leased subsequent to quarter end. We really suggesting they can spaced. So what you have is 100% leased building with a very good – and we’re out in the market trying to obtain market financing. So hopefully, that’ll give you a little bit more flavor.

Jordan Sadler – KeyBanc Capital Markets

So we should, I guess expect that to be a bilateral mortgage at this point, is it sort of what you are working toward within individual lender?

David Weinstein

What is a bilateral morning?

Jordan Sadler – KeyBanc Capital Markets

Are you working with an individual lender or trying to work with?

David Weinstein

Yes. It will be a single asset financing.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then, just lastly, on the leasing, the volume seems to be a bit light and I’m curious, is that a function of sort of the cash position or is that just a seasonal item or maybe just some color around what you’re seeing in the downtown markets?

David Weinstein

It’s actually a great question. Our leasing activity was actually a little bit better than reported. We have like through the second quarter, including our pro rata share of leasing on the joint venture assets, probably 250,000 square feet of leasing already. And some of that is attributable to leases that happened in the first quarter, but had not been approved by the special servicers. So when we put the assets into special servicing, there was a little bit of a transition to getting leases approved. And that’s why the number is a little light. In reality, it wasn’t that low.

Jordan Sadler – KeyBanc Capital Markets

So the total number would be 250 rather than incremental 250?

David Weinstein

No, it’s actually incremental 250 already up to this point in the second quarter.

Jordan Sadler – KeyBanc Capital Markets

Okay. And just can you give us a sense of what portion of that would be outside of the JV?

Shant Koumriqian

Approximately one-third. Outside of the JV what that the question?

Jordan Sadler – KeyBanc Capital Markets

Or within the JV, the share of the JV, either way.

David Weinstein

The number that David disclosed was our effective share. Approximately 200,000 is outside the joint venture.

Jordan Sadler – KeyBanc Capital Markets

You said 250 is your effective share.

Shant Koumriqian

250 includes our 20% share of the joint venture.

Jordan Sadler – KeyBanc Capital Markets

Okay, great. Thank you.

Operator

Your next question comes from Suzanne Kim with Credit Suisse.

Suzanne Kim – Credit Suisse

Good morning. Couple of questions. First, regarding your Charter Hall situation, I’m just wondering what the implications will be if they do want to dissolve that JV. I mean, it sounded like right now that you’re trying to work through financing, but I am just trying to get a sense of what the implications would be if they wanted to dissolve it on your company?

David Weinstein

Well, first of all, we are actually working cooperatively with them to refinance the asset. Charter Hall is in the market right now to sell their entire U.S. portfolio. It’s unclear whether that’s going to happen or not. If they do so, I think the implications to us are unclear we have very strong rights in our existing joint venture agreement. So it’s really going to be in our court to decide what happens as a result of any sale.

Suzanne Kim – Credit Suisse

So you would have a say as to what sort of terms that the sale would occur?

David Weinstein

We would have a say as so what terms they sold their asset, but we would – we have rights that are triggered by any sale.

Suzanne Kim – Credit Suisse

I see. Second of all, is there an update to what you believe would be your un-restricted cash balance for the year end?

David Weinstein

No. At this point it’s – we are projecting it to be consistent with prior quarter somewhere in the mid-$25 million range. That does not include any sales proceeds from the Westin hotel to the extent that the close occurs and that does not include any additional financing proceeds on the PLF office component there were currently out in the marketplace trying to secure.

Big components of the roll forward of cash as of March 31, we have $55 million of cash. We paid the $15 million repurchase facility on May 1 of this month. We expect 13 to $15 million return of swap collateral, approximately $20 million plus or minus for the leasing costs in addition to funds that were in reserves and then another 7.5 to $10 million in working capital changes and disposition costs associated with the non-core assets that we’re trying to work through.

That will get you to about a $25 million balance at the end of the year and again, there is some variability in some of these items particularly swap collateral and leasing costs which are incurred as tenants submit for reimbursements, and we have no control over when tenants will or will not submit for reimbursement of tenant improvement allowances.

Suzanne Kim – Credit Suisse

Okay. Also, in terms of other land sales, do you have anything else under LOI or anything that’s being marketed right now?

David Weinstein

We do not.

Suzanne Kim – Credit Suisse

Okay. And then finally, with regards to rents and how are they sort of stacking up in downtown L.A right now. I mean, how are the concessions and what sort of level of concessions are you seeing and what sort of net rents are you seeing in L.A. right now?

David Weinstein

We are seeing net rents effectively holding again similar to prior quarter in the low $20 range, we are doing deals anywhere from 20 to $24. Concessions are – depending on the lease concessions again, continue to be in the 4 to $6 per square foot per year range. We along with other landlords have been focused on reeling tenants, investment back just tend to be a little bit lower, you get to the higher end of the range that I gave you when going after new tenants and again that’s on a per square foot per year basis depending on the term of the lease.

Suzanne Kim – Credit Suisse

Okay. Great. Thank you so much.

David Weinstein

Thanks.

Operator

Your next question comes from Wilkes Graham with Compass Point.

Wilkes Graham – Compass Point

Good morning. Just a couple of questions. Can you maybe just describe the process of why the city of Pasadena needs to approve the sale and is that just a customary thing or is that something specific to Pasadena?

David Weinstein

Well, we have a ground lease or air lease in Pasadena and pursues at least, they have the right to approve the buyer. The lease does say that they can’t earn reasonably withhold their consent. So it’s just part of the lease.

Wilkes Graham – Compass Point

Okay. And then is there – I think you said you’d expect a close of the hotel to be within two weeks of that approval. Do you have any sort of timing on the approval itself?

David Weinstein

We don’t. We are hopeful that it’s going to happen within the next month.

Wilkes Graham – Compass Point

Okay. Fair enough. Great. Thanks.

Operator

Your next question comes from Aaron Asklexen with Stifel Nicolaus.

Aaron Asklexen – Stifel Nicolaus

Good morning. Thank you for...

David Weinstein

Good morning.

Aaron Asklexen – Stifel Nicolaus

Taking my question. I was wondering if you could characterize why or what the rent, what was the cause of the rent roll downs, rather large I guess outside of downtown L.A. and what proportion of that was due to assets currently in default versus assets kind of on the balance sheet?

David Weinstein

Well, I think if you were to look at the – I assume you are referring to cash, cap rent growth schedule?

Aaron Asklexen – Stifel Nicolaus

Correct.

David Weinstein

The majority of that is in Orange County. We did have some light leasing activity in Glendale. The majority of that is in Orange County

Aaron Asklexen – Stifel Nicolaus

And then in terms of the 550 South Hope sale or disposition, how would you characterize that disposition relative to kind of a fully marketed sale in the market today?

David Weinstein

I’m not sure. First so just to be clear we did not market the asset. CW Capital did. I think it was fully marketed. So it was a very broad sale. I’m not sure exactly your question is.

Aaron Asklexen – Stifel Nicolaus

And I think that’s answers my question. And in terms of discounted loan payoff or reduction of a loan on any of the assets currently in special servicing, specifically, the ones with tax, you know, tax incentives to Maguire. How would I discount it – a discount on those loans be treated for tax purposes?

David Weinstein

Well, first of all, I’m not sure we want to discuss at this point what our conversations are with the special servicers. So we’re not going to get into whether there’s going to be a discounted payoffs or not. So I’m not sure we need to address right now the tax consequences of that.

Aaron Asklexen – Stifel Nicolaus

Okay. Fair enough. Thank you.

David Weinstein

All right. Thanks.

Operator

Your next question comes from Michael Knott Green Street Advisors.

Michael Knott – Green Street Advisors

Hey, guys. Just to be clear, the possibility of triggering any tax liability seems remote. But I guess can your just maybe address head on how you’re thinking about that. Does it seem remote to you guys as well?

David Weinstein

Yes. Absolutely very remote. The only way we would trigger the tax liability would be if we sold the assets which we’re not going to do or if we didn’t provide some debt guarantees which we do provide.

Shant Koumriqian

You know, our obligations under debt guarantees are to not sell the assets and to be able to provide the opportunity for the contributors of the assets to guarantee that. Those guarantees are in place. I guess, to indirectly answer the prior question, any discount on loan would be considered taxable income, but indemnification obligations are related to a disposition of the assets. So while we have taxable income, we currently generate taxable income and losses operating our assets and a discounted payoff would be a normal course taxable income.

David Weinstein

And we are not in default on any assets on which we have provided tax protection.

Michael Knott – Green Street Advisors

I guess going back to the downtown L.A. leasing question, I was a little surprised to see the new rents of 32 bucks on a cash basis. That’s still a roll down of course in your disclosure. But can your just talk about maybe the particulars of that space? Was it high floor space or?

David Weinstein

No, what it was, we did not have a lot of activity in downtown L.A. during the quarter. There were a number of retail leases that renewed and those are retail rental rates which were higher than office rental rates that’s causing that skew. So backing those out you would see a more reasonable or expected rental rate in downtown L.A.

Michael Knott – Green Street Advisors

Got you, okay. And then last question for the David or Shant, how are you thinking about raising – the possibility of raising any new equity to a joint venture potentially or maybe can you comment?

David Weinstein

We can’t talk about that at this time unfortunately.

Michael Knott – Green Street Advisors

Okay. Thank you.

David Weinstein

Thanks.

Operator

(Operator Instruction) Your next question is a follow-up from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thanks. Shant, the tax – excuse me – the cash burn rate maybe would be helpful during the quarter?

Shant Koumriqian

Jordan, I didn’t hear your question, you broke up. Can you repeat it?

Jordan Sadler – KeyBanc Capital Markets

What was the cash burn rate during the quarter and your expectation for the rest of the year?

Shant Koumriqian

Yeah. During the quarter, the cash burn rate was similar to last quarter. Cash NOI less debt service, less G&A was positive. We had capital expenditures of about $5 million during the quarter on a net basis after CapEx. We were slightly negative during the quarter. The increase in cash was a result of the sale of the land that $4.7 million in that proceeds for the 500 Orange tower land.

We received about $5 million in swap collateral. And then that was slightly offset by payments or decrease in working capital during the quarter. So from operations, we’re effectively flat. Those three components, which are non-recurring, are what drove the cash balance from $47 million to the end of the year to $55 million at the end of the quarter.

Jordan Sadler – KeyBanc Capital Markets

Is that a good assumption as we sort of roll forward through the rest of the year, or is...?

Shant Koumriqian

Basically, as we roll into the second half of the year, slight deterioration in cash generated by the portfolio because of occupancy declines. The larger decline is in the fourth quarter with the gas company. That will be offset by new leasing activity and contractual rent increases that we have in all of our leases. And they might increases in the 3% to 4% range.

So slight deterioration as we get to the latter part of the year. And the biggest impact will be the gas company tower lease renewing and space coming back, which we’ve anticipated.

Jordan Sadler – KeyBanc Capital Markets

Okay. And as it relates to putting these assets into special servicing, I’m just curious, is a Chapter 11 filing still on the table if these negotiations are unsuccessful, or is there something in particular about the tax protection that makes a filing prohibitive, maybe just some commentary sort of that surrounding that?

David Weinstein

No, the Chapter 11 filing was never on the table. So we have no intention of filing Chapter 11. It’s not part of our conversations with the special services at all.

Jordan Sadler – KeyBanc Capital Markets

To the extent you were unsuccessful in negotiating a reduced principal balance hat you wouldn’t pursue that route or wouldn’t necessarily need to, I’m just...?

Shant Koumriqian

We’re not pursuing Chapter 11. So I can’t answer...

Jordan Sadler – KeyBanc Capital Markets

Okay. Thank you.

David Weinstein

Okay. Thanks.

Operator

Your next question is a follow-up from Wilkes Graham from Compass Point.

Wilkes Graham – Compass Point

Thanks. David, or Shant, just from a historical perspective, are there any assets in the portfolio that in years past were put in special servicing in order to modify the loans and then taken back out?

David Weinstein

No. In the past, the loans that went into special servicing were assets that we identified as disposition assets, assets that we did not intend to hold onto.

Wilkes Graham – Compass Point

Okay. Thanks.

Operator

Your next question is a follow-up from Michael Knott with Green Street Advisors.

Michael Knott – Green Street Advisors

Yeah just a follow-up on the Charter Hall question from earlier. I was a little surprised that you guys don’t seem more enthusiastic about potentially joining them and the liquidation of that portfolio if that’s what happens why not just take your liquidity, add to your liquidity and move on?

David Weinstein

First of all, Charter Hall is not out marketing, or – they’re out marketing the entire portfolio. So we can’t discuss right now what we would do if they did approach us to sell alongside them. But as of right now, that hasn’t come up.

Michael Knott – Green Street Advisors

Got you. Thanks.

Operator

Your next question comes from Suzanne Kim Credit Suisse.

Suzanne Kim – Credit Suisse

Hi, just a follow up. If you did a potential JV on the tax impairment verification sort of assets like U.S. Bank Tower, Wells Fargo and Gas Company and do you think that would trigger a taxable event?

David Weinstein

It depends on the transaction. A joint venture where cash comes into the asset to fund the capital expenditures or principal paydowns would not be taxable structured properly. Any time you’re pulling cash out, you’re taking on more risk. So as long as you’re bringing cash into the asset and using the capital at the asset level, it’s a very low risk.

Shant Koumriqian

Let me state that we have no intention right now of bringing joint venture partners into those assets.

Suzanne Kim – Credit Suisse

Okay. Thank you so much.

David Weinstein

Thanks.

Operator

At this time, there are no further questions. I’m sorry. Just one moment. Sir, there are no further questions at this time. Do you have any closing remarks?

Jonathan Abrams

On behalf of David and Shant, thank you for the participating in this morning’s call. We’ll continue to keep you posted on our progress. Thank you.

Operator

Thank you. And this does conclude today’s conference call. Thank you for the participating. You may now disconnect.

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