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Executives

Peggy Moretti – EVP, Investor and Public Relations

David Weinstein – President and CEO

Shant Koumriqian – EVP and CFO

Analysts

Jordan Sadler – KeyBanc Capital Markets

Erin Aslakson – Stifel

Jed Reagan – Green Street Advisors

David Busker – Sorin Capital

Joe Bishop [ph] – Private Investor

MPG Office Trust, Inc. (MPG) Q4 2011 Earnings Conference Call March 6, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MPG Office Trust Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this call is being recorded today, March 6, 2012.

I would now like to turn the conference over to Ms. Peggy Moretti of MPG Office Trust. Please proceed.

Peggy Moretti

Good morning. 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 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. 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, maybe accessed in the Investor Relations section of the MPG Office Trust website at www.mpgofficetrust.

And now, I would like to turn the call over to David Weinstein, our President and Chief Executive Officer.

David Weinstein

Good morning, and thank you for joining our fourth quarter call. Shant Koumriqian, our Chief Financial Officer, is here with me, along with Fred Chin, our Acting Chief Operating Officer; Jon Abrams, our General Counsel; Chris Norton, our Head of Transactions; and Peggy Moretti, our Head of Investor Relations.

The company continued to make progress during and subsequent to the fourth quarter of 2011. On November 1, 2011, we announced that the company entered into an agreement with Charter Hall Office REIT and Beacon Capital relating to the transfer by Charter Hall of its interest in a joint venture with the company to an affiliate of Beacon Capital, as well as the terms of a new joint venture between MPG and an affiliate of Beacon Capital.

As a reminder, as part of the transfer, affiliates of Beacon Capital will purchase Wells Fargo Center, located in Denver; San Diego Tech Center, located in San Diego; and development rights and the land parcel adjacent to San Diego Tech Center.

The new joint venture between the company and Beacon will continue to own interests in each of One California Plaza, located in downtown Los Angeles; Cerritos Corporate Center, located in Cerritos, California; and Stadium Gateway, located in Anaheim, California. We are in the process of obtaining lender consents required to complete this transaction. We expect the transaction to close this month.

Stadium Gateway is currently being marketed for sale and we will comment on that transaction once we have determined a definitive course of action.

The company expects to receive approximately $45 million in total net proceeds from these transactions, which will improve our liquidity position. Any proceeds will be used for general corporate purposes.

On December 2, 2011, the company completed an $11.25 million mezzanine financing secured by our Plaza Las Fuentes office property in Pasadena, California.

On February 2nd, trustee sales foreclosures of two of our Glendale assets, 700 North Central and 801 North Brand, were completed. As a result, the company was relieved of the $27.5 million mortgage loan secured by 700 North Central and the $75.5 million mortgage loan secured by 801 North Brand. MPG received full releases on these assets pursuant to previously negotiated agreements with the special servicer.

As of January 17, 2012, Glendale Center was in default. We are having discussions with LNR, the special servicer for Glendale Center. We have nothing to report at this time with respect to such discussions.

Following a notice of imminent default from us in December 2011, the 3800 Chapman loan was transferred into special servicing. We are having discussions with CWCapital, the special servicer for 3800 Chapman. We have nothing to report at this time with respect to such discussions.

On behalf of CWCapital, Eastdil Secured continues to market Stadium Towers and 500 Orange Tower in Orange County. It is unclear at this time whether CWCapital will decide to sell these assets. In the event that CWCapital chooses not to sell these assets, they require pursuant to previously negotiated agreements to acquire the properties either by foreclosures or deeds-in-lieu of foreclosure by June 2012 on Stadium Towers and by September 2012 on 500 Orange Tower. MPG would receive a general release of any potential liability.

We continue to have discussions with CWCapital, the special servicer for Two California Plaza. We have nothing to report at this time with respect to such discussions.

As to our leasing efforts, we completed new leases and renewals for approximately 278,000 square feet, including our pro rata share of our joint venture properties. A few highlights include the renewal of Bingham McCutchen for approximately 80,000 square feet at KPMG Tower; and Richards Watson for approximately 45,000 square feet, also at KPMG Tower. At 777 Tower, Arnold & Porter renewed approximately 50,000 square feet and Wilmer Cutler renewed approximately 25,000 square feet at Two California Plaza.

Turning to our cash position, as of December 31, 2011, we had $172.9 million of cash on hand excluding assets in default, and $117.9 million was unrestricted and available for general corporate purposes. $9.9 million of our $55.1 million of restricted cash is collateral under a swap agreement, with the remainder restricted for specific purposes such as leasing commissions, tenant improvements, property taxes, and insurance.

We recently hired a Chief Accounting Officer. She will be joining the company on April 2, 2012. Her prior experience includes over four years at the Irvine Company [ph] and 15 years at the John Buck Company [ph].

This concludes my prepared remarks, and we'll now open up the lines for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). One moment please for the first question. Your first question comes from Jordan Sadler, KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thank you. Just wanted to start off by just maybe if we can explore further what's going on – what you are seeing fundamentally in downtown LA. You did a small amount of new leasing during the quarter and a pretty nice move on the renewal side. I'm just curious, if new lease prospects and pipeline are picking up or maybe if you could just provide some color?

David Weinstein

Yes, we'd say that the downtown LA office market remains very competitive. There are new leases and there are new leases actually coming from outside of downtown. Very shortly, we expect to sign approximately 40,000 square foot lease for a new tenant that was not downtown in the past. But I would sort of characterize it consistent with the numbers you see, which is we are completing a lot of renewals. There are new leases going on, but there is – it still remains very competitive in the market.

Jordan Sadler – KeyBanc Capital Markets

Can you maybe offer a little bit more insight on the KPMG Tower renewals in the quarter? What – sort of how rents are rolling and the types of TIs that you are – you need to do in order to get those renewals completed?

David Weinstein

We don't comment on forward renewal leases.

Jordan Sadler – KeyBanc Capital Markets

On – no, I mean, the ones that you've already – you completed during the quarter. Just speak – if you can speak generically about them.

Shant Koumriqian

Hi, Jordan. This is Shant. I think in terms of the leases that we completed during the quarter, consistent with what we've said in prior quarters, I mean, rental rates are holding up in the low $20 range and concessions are being maintained, again somewhere in the $5 to $6 per square foot per year range. So we've been fairly successful in holding rate and holding concessions.

As David mentioned, there is pretty fierce competition in downtown LA and there are certain landlords in downturn LA that are fairly aggressive in concessions, but so far we have been hold our ground.

Jordan Sadler – KeyBanc Capital Markets

Cash rents rolling down 5%, like you basically saw in the quarter. That's representative, you would say?

Shant Koumriqian

Yes, generally representative. The last major lease that was above market was The Gas Company Tower lease, which expired in the fourth quarter. So when you look at our supplemental package, you can see where our in-place net rents are. And leases are generally being renewed at approximately those rates or slightly lower.

Jordan Sadler – KeyBanc Capital Markets

Okay. And Shant, while I have you, just the usual on the cash burns and maybe expectations for year-end cash at this point?

Shant Koumriqian

Sure. For the quarter, for cash burn – and I'll exclude the impact of Two California Plaza. During the quarter, cash NOI less debt service, less G&A was slightly positive, approximately $1 million. And we had approximately $3 million of leasing costs. So, we were $2 million negative for the fourth quarter.

Looking forward into the first quarter of 2012, cash NOI less debt service, less G&A will likely be slightly negative, approximately $1 million negative. That is the result of the full impact of the roll-down of The Gas Company Tower lease during the fourth quarter. That lease expired in mid-November. So for the first quarter, we'll have the full impact of that lease rolling down.

In terms of a projection of cash at the end of the year, we are not going to reflect any assumptions on the amount of cash. It's going to – we are going to be required to address the KPMG Tower loans. So let me address just our normal recurring burn.

To start off with, we have about $118 million of unrestricted as of 12/31. When we look to next year, our cash NOI less debt service will be positive in the $10 million range. We expect to spend approximately $25 million on capital expenditures after reimbursements from reserves. Our G&A should be in the $22 million range and plus or minus, and then approximately $10 million of other costs, working capital changes and disposition costs. That will be offset by approximately $10 million return of swap collateral.

So in terms of a range, I'd say our burn would be about $35 million to $45 million. Some of the big variables would be leasing costs and then disposition costs. That should be offset by the proceeds we expect to receive from the sale of the assets to Beacon, which we previously stated, is approximately $45 million. And again, that does not reflect any cash paydown associated with KPMG Tower loan or any other transactions during the year.

Jordan Sadler – KeyBanc Capital Markets

Okay. And the $45 million excludes anything you may get from Stadium Gateway, right?

David Weinstein

Correct.

Jordan Sadler – KeyBanc Capital Markets

Okay. Thank you.

Operator

Your next question comes from Erin Aslakson from Stifel.

Erin Aslakson – Stifel

Good morning. So the – I assume that there is about 134,000 square feet set to expire in Two Cal Plaza in 2012. I was wondering if you had an idea of how much of that space you expected to retain or is expected to be lost.

Shant Koumriqian

Yes, we had a – I believe it's probably a little bit less than that. We are in front of those tenants today. We are talking to them all. Some of the tenants – as we are experiencing, some of our professional services tenants are renewing, although they are downsizing. I guess all I can say is that we are in front of all of those tenants today, we are talking to them. In terms of success rate, you might look at our historical success rate of retaining most, if not all, of our existing tenants on renewals.

Erin Aslakson – Stifel

Okay. What's your historic percentage on that?

Shant Koumriqian

We've been in the last year, I think, in the 50% to 60% range, although that is reflective of tenants that we knew have vacated, so for example, The Gas Company Tower. So, when you back out tenants that we knew were vacating, we've, for the most part, retained all of our major tenants. There has been some amount of downsizing in connection with renewals.

Erin Aslakson – Stifel

Right, right. Okay. Is there any update at all on the Two Cal Plaza loan modification?

David Weinstein

No, there is no update at this time.

Erin Aslakson – Stifel

Okay. And is there any update on the Brea – Corporate Brea Financial, loans maturing in May?

David Weinstein

No, we have nothing to say on that unfortunately either.

Erin Aslakson – Stifel

Okay. And then kind of a cleanup type issue. What's the current default interest accrued in the – on the balance sheet, less any related assets that were given back to lenders?

Shant Koumriqian

Erin, can you repeat the question? I don't quite understand it.

Erin Aslakson – Stifel

You are accruing default interest on your balance sheet?

Shant Koumriqian

That's correct.

Erin Aslakson – Stifel

What is that amount today?

Shant Koumriqian

We'll have that amount disclosed in our 10-K. We'll have a footnote disclosure.

Erin Aslakson – Stifel

Okay.

Shant Koumriqian

Default interest is approximately 5% on all of our assets.

Erin Aslakson – Stifel

Yes, yes.

Shant Koumriqian

You might be able to back into it.

Erin Aslakson – Stifel

Okay. And then would you be able to provide the approximate cash value of your other liabilities in your balance sheet today or as of 12/31?

Shant Koumriqian

Again, I think that information will be disclosed in the 10-K.

Erin Aslakson – Stifel

Okay. When do you think you will be filing that?

Peggy Moretti

We are due to file that, Erin, by March 15.

Erin Aslakson – Stifel

Okay. All right. Thank you, guys.

Shant Koumriqian

You're welcome.

Operator

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

Jed Reagan – Green Street Advisors

Good morning, guys. It's Jed Reagan here with Michael. Question on same-store cash NOI. It looked like in the fourth quarter it was quite a bit better than some of the recent results. Can you just talk about the drivers of that and how indicative that result might be as we look out to 2012?

Shant Koumriqian

In same-store cash NOI there was a $4.7 million termination fee at Two Cal Plaza, which is a non-recurring item, which is driving some of that improvement.

Jed Reagan – Green Street Advisors

Okay. And anything going on with expenses? Last year, it looked it like there was – some higher expenses last year.

Shant Koumriqian

Nothing indicative now.

Jed Reagan – Green Street Advisors

Okay. Can you talk a little bit about the lease-up prospects for a few specific assets, US Bank Tower and then some of the newly vacated space at Gas Company? And I guess just more broadly, are you seeing more interest in certain downtown LA buildings than others?

David Weinstein

Yes, we can't say a lot about that. I would say we have interest in all of our buildings. There are a lot of tenants touring US Bank Tower. But we are not going to comment on specific future leasing.

Jed Reagan – Green Street Advisors

Okay. What kind of vacancy rate does – do you think you need in downtown before you start seeing the potential for rent growth and how far away do you think you are from that point?

David Weinstein

I don't have a crystal ball. So, I can't really comment on when rent is going to start to move. As Shant talked about, rents are holding steady in the low $20s. I would say that I don't expect them to start moving up at the current vacancy rate. So, I would imagine they have to move 3% to 4% at a minimum before they start moving. But I don't know the answer to that question.

Jed Reagan – Green Street Advisors

So that's sort of 13%-ish or lower-teens or sort of –?

David Weinstein

It's just a guess.

Jed Reagan – Green Street Advisors

Okay. Just one last sort of more broad question. How are you guys thinking about some of the state's fiscal challenges folks up in Sacramento are dealing with? And how do you – is the – does California's economic health give you a lot of concern as you look to your longer-term outlook?

David Weinstein

We obviously are concerned about it, but we haven't seen any impact with any of our tenants right now. I'd imagine as the state's issues continue, it will affect future leasing demands.

Jed Reagan – Green Street Advisors

Okay. Thanks very much.

Operator

Your next question comes from David Busker with Sorin Capital.

David Busker – Sorin Capital

Good morning, guys.

David Weinstein

Good morning.

David Busker – Sorin Capital

Can you give me some color on the status with KPMG with that loan maturing in October. Have you started conversations with the syndicate group or other potential lenders?

David Weinstein

We've had conversations on and off with Eurohypo for a long time now. We don't know what's going to happen there. Our plan is, to the extent we cannot get an extension done with Eurohypo, we will likely wait until the swap burns off in August before we go out and try to refinance that loan.

David Busker – Sorin Capital

Okay. So you haven't started conversations with other potential lenders?

David Weinstein

No, we haven't.

David Busker – Sorin Capital

Okay. Also, have you guys considered any asset dispositions that – for buildings that don't have the tax indemnification associated with them?

David Weinstein

The only major asset without a tax indemnification – for instance, 777 Tower and the land associated with it. And we are not considering at this time selling that asset.

David Busker – Sorin Capital

Okay. Also, could you guys break out the parking allocation in the supplemental?

Shant Koumriqian

It's – already, if you look at it, it's broken out between downtown LA as a total and the other properties.

David Busker – Sorin Capital

Right. Do you have that – what revenues associated with individual buildings?

Shant Koumriqian

No, that's not broken out separately.

David Busker – Sorin Capital

Is that something that we could get?

Shant Koumriqian

It's not something that we've historically put out there.

David Busker – Sorin Capital

Okay. Thank you.

Operator

Our next question comes from Joe Bishop [ph], private investor.

Joe Bishop

A couple of – unrestricted cash you'd need to see before considering starting to pay some of the accumulated preferred dividends and the second part would be, can preferred holders convert to common, like the two customers did during the year 2011?

David Weinstein

First off, we have no intention right now of paying any preferred dividends. On the second question, we do field calls from preferred shareholders about swapping to common, and we take those calls. So, obviously, if someone wants to call us, we are happy to have a discussion about it.

Joe Bishop

Thank you.

Operator

Thank you. That concludes our question-and-answer session today. I'll now turn the call over to the MPG Office Trust management team for any closing comments they might have. Gentlemen?

Peggy Moretti

Thank you for participating in our fourth quarter 2011 call. We will continue to keep you apprised of our efforts. Thank you.

Operator

Ladies and gentlemen, that concludes our conference call for today. You may all disconnect, and thank you for participating.

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