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MPG Office Trust's (MPG) portfolio consists of high-end, Class A office space primarily located in Downtown Los Angeles. Encumbered with high leverage and declining rental revenues, MPG has been forced to allow many of their properties to go to foreclosure.

On 03/23/12, MPG consented to allowing a court appointed receiver to take over Two California Plaza. Since the property had $470.0 million in mortgage debt, MPG's new management felt their cashflows would be better allocated elsewhere. The company also sold ownership interests in the Wells Fargo Center and San Diego Tech on 03/30/12. Proceeds of approximately $44 million were to be used for general corporate purposes. David Weinstein, CEO of MPG Office Trust, views these properties as non-core assets with intentions to focus on maintaining market position in Downtown Los Angeles.

These dispositions serve as nice examples, but are in no way inclusive as many more properties have been lost. To get an idea as to the financial trouble MPG is in, we can look at their finances of 2011. With 72,675,000 in earnings and 231,851,000 in combined fixed interest charges and preferred dividends, there is a deficiency of 159,176,000. This deficiency, along with those accumulated in the preceding years, has cause MPG to submit to numerous foreclosures. Since the company is struggling with debt and unable to maintain all of its properties, MPG's management is strategically sacrificing its weaker positions.

As another means of liability management, dividend payments on the Series A Preferred were suspended on 12/19/08. Since then payments have accrued for 13 straight quarters at a rate of $1.9064/share/annum and now total $6.195 per share. With 9,730,370 shares outstanding, the debt from just the accrued dividends totals $60.287mm through the most recent quarter. Weinstein stated on the 4Q11 conference call that MPG has no intentions of paying the preferred dividends but the company is open to the possibility of exchange of preferred stock for common. This statement was made on a later date than the following two exchanges indicating the possibility of similar transactions in the future.

On 7/25/11 MPG announced an Exchange Agreement in which 218,635 shares of Series A Preferred were exchanged for 1,127,597 shares of Common Stock. Another Exchange Agreement took place on 7/28/11 in which MPG gave 262,981 shares of common in exchange for 50,995 shares of its Preferred A. The negotiated values of exchange were $19.00 and $16.50 respectively, which due to variance in the price of the common yielded an exchange ratio of 5.157 (common to preferred) for both transactions.

There is no outstanding offer for exchange by MPG but preferred shareholders can approach management and negotiate an independent exchange. An exchange of this nature is plausible because both parties could benefit. To illustrate the mutual appeal, let us consider a negotiated value of $16.50/Preferred A share

Appeal of Exchange to MPG: It would be accretive to the common in 2 ways: 1) it would allow preferred shares to be retired for less that their $25.00 liquidation preference. 2) it would effectively remove the accrued dividend. The savings to MPG per share of preferred exchanged would total the disparity between the negotiated price and the $25.00 liquidation preference. Additionally, MPG would save $6.195 per preferred share exchanged by forgoing payment of accrued dividends. If all outstanding shares were exchanged using the hypothetical negotiated price of $16.50, MPG would save $142.987mm.

Appeal of Exchange to shareholder: While the accrued dividend and natural high yield of the Preferred A add to its value, one must consider the possibility that said dividend will in fact never be paid. Given the foreclosures and terrible debt coverage of MPG with an estimated EBITDA/interest ratio of 0.9 this is a very real possibility. So, to shareholders of the Preferred A it could in fact be beneficial as owning the common instead provides room for growth and better liquidity. Additionally, if shareholders were to receive the hypothetically negotiated $16.50, it provides more immediate value than the preferred share which currently trades at $14.55.

MPG Office Trust has a long road ahead before stability and profitability, but this management team seems to be on the right track by mitigating damage and reducing debt. Investors would be wise to keep an eye on MPG with hopes of catching it at rock bottom and profiting on its recovery (in the event that it does recover). While it may not be a strong company, a severely discounted price could provide investment opportunity.

Source: MPG Office Trust: Maneuvers In Liability Management