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MPG Office Trust, Inc. (NYSE:MPG)

Q1 2012 Earnings Call

May 1, 2012 11:00 am ET

Executives

Peggy Moretti - Head, IR

David Weinstein - President and CEO

Fred Chin - Acting COO

Chris Norton - Head of Transactions

Jeanne Lazar - CAO

Analysts

Jordan Sadler - Keybanc Capital Markets

John Guinee - Stifel

Erin Aslakson – Stifel

Jed Reagan – Green Street Advisors

Wilkes Graham – Compass Point

Andrew Sole - Esopus Creek Advisors

Gordon Watson - GLG Partners

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, May 1, 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 2012 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 first quarter 2012 call. Fred Chin, our Acting Chief Operating Officer, along with Chris Norton, our Head of Transactions; and Peggy Moretti, our Head of Investor Relations. I'm also pleased to have with me Jeanne Lazar, our new Chief Accounting Officer.

The company continues to make progress toward non-core assets and did so during and subsequent to the first quarter of 2012. On February 2, two trustee sales of our Glendale assets, 700 North Central and 801 North Brand were completed. As a result, the company was relieved of $103 million of debt including the $27.5 million mortgage loan secured by 700 North Central and the $75.5 million mortgage loan secured by 801 North Brand. In addition, MPG received the general lease of claims under the loan documents for these assets pursuant to previously negotiated agreements with a special servicer.

On March 23rd, MPG and the special servicer cooperatively placed 2 California Plaza into receivership. We are presently working with the special servicer towards an orderly exit from this asset. While there is no assurance that a successful resolution will be achieved whether MPG will be fully released we remain optimistic.

On March 30, the company completed the previously disclosed transaction among MPG, Charter Hall Office REIT and affiliates of Beacon Capital Partners LLC. This transaction include the sale of Wells Fargo Center in Denver, San Diego Tech Center stripped development rights and the joint parcel land at San Diego Tech Center and certain fees payable to the company. The company received net proceeds of approximately $45 million which will be used for general corporate purposes.

As a result of this transaction a new joint venture was formed between the company and Beacon. This new joint venture owns interest in 1 California Plaza located in downtown Los Angeles, Cerritos Corporate Center located in Cerritos, California, and Stadium Gateway located in Anaheim, California.

Stadium Gateway was marked for sales and is currently under contract. Closing of this sale is subject to customary closing conditions including obtaining lender consent. If the transaction closes, net proceeds to the company are expected to be approximately $600,000 and will be used for general corporate purposes. While we expect this transaction to close during the third quarter there is no assurance that this will occur.

On April 10, MPG and the special servicer cooperatively placed Glendale Center into receivership. As part of the receivership the agreement between the parties provides for cooperative foreclosure and a general lease of claims under the loan documents for MPG at the conclusion of the foreclosure. The foreclosure is expected to occur during the third quarter of 2012 but there can be no assurance that this will occur.

On April 19, we disposed the Brea Corporate Place and Brea Financial Commons pursuant to deed-in-lieu foreclosure. As a result of the disposition we're relieved of the obligation to pay the $109 million mortgage loan secured by these properties and received a general lease of claims under the loan documents for these properties.

As to leasing, during the first quarter 2012, we completed new leases and renewals for approximately 64,000 square feet including our pro-rata share of our joint venture properties. Notable leasing highlights including new 40,000 square foot ten year lease with Towers Watson, a global professional services firm by One California Plaza. Towers Watson is a new tenant to downtown Los Angeles. The new lease consolidates Towers Watson's space in the universal city of Century City into its new downtown location.

Turning to our cash position as a of March 31, 2012 we had $212.8 million of cash on hand, excluding cash related to assets in the fall. $166.7 million is unrestricted and available for general corporate purposes.

Of our $46.1 million of restricted cash, $4.6 million of collateral under a SWAP agreement with the remainder restricted for specific purposes such as leasing commissions, tenant improvements, property taxes and assurance.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jordan Sadler with Keybanc Capital Markets.

Jordan Sadler - Keybanc Capital Markets

Just wanted to first discuss sort of fundamentals. I guess looking at the downtown portfolio it looks like occupancy generally remained stable with sort of most of the upside coming at One California in a quarter at least. I'm just, if you could give us a little bit more color on what your seeing in downtown, obviously you've got the Towers Watson lease, and what the prospects look like as we look forward for the rest of the year?

David Weinstein

Well I think it's consistent with what we said on past calls, we expect occupancy in our portfolio to stay flat, generally flat for the year. Obviously, leasing for this quarter was a little light part of it is just because of the first quarter of the year and part of it just reflects the way our rollovers in our buildings. So, I would say that not much has changed from last quarter in downtown they continue to renew leases. Activity remains constant and still a very competitive environment.

Jordan Sadler - Keybanc Capital Markets

Okay. And you've on sort of a separate note you've handed back a significant number of properties during the quarter in sort of on a or disposed of during the quarter or post quarter end. And the same-store portfolio looks like its on page 29 left with 9 core properties, is that sort of how we should think about the overall portfolio going forward? Or is that same-store portfolio comprised of sort of essentially what this will be little down to for the rest of 2012 and going forward?

David Weinstein

Well, I'm looking over each of them and have a stage informing. Yes, the portfolio there isn't much less to little down. I would say, we announced that Stadium Gateway for sale, we own Cerritos in joint venture, with Beacon there is not a value in that asset, we talked about that. And then there is only 3800 Chapman. So we're sort of getting close to where we're going to be.

Jordan Sadler - Keybanc Capital Markets

Okay. And is 3800 Chapman a hold in your mind or is that sort of?

David Weinstein

It's -- I would describe it as not a core asset if we end up holding it is fine, if we end up exiting is fine also.

Jordan Sadler - Keybanc Capital Markets

Okay. And is that up for sale or not yet?

David Weinstein

No, no it's not up for sale.

Jordan Sadler - Keybanc Capital Markets

Okay. And then lastly, I guess on the leasing, there is some large leases on page 34 if I look at your sort of top tenants schedule. Can you maybe offer some insight these leases some of these larger tenants tend to have longer lead times and you get usually get notice, so I'm most curious you probably as if today basically within the 12 month window for Microsoft, Morrison & Forester, Wells and American Home Insurance. Can you give us any insight into whether or not we will see renewals on these or explorations maybe your best guess?

David Weinstein

Yeah, as you know we do not comment on forward leasing. So unfortunately I can't comment. I can tell you that we're actively covering all our tenants not just with maturities coming up in the next year but even forward from that. So we're on top of it but I can't comment.

Jordan Sadler - Keybanc Capital Markets

Okay last question just the administrative one, the interest and other income line, what was in cause of the significant increase this quarter it was $13.9 million?

Jeanne Lazar

Yeah the bulk of that Jordan was due to a management determination payment that we received as part of the Beacon transaction.

Jordan Sadler - Keybanc Capital Markets

Okay. Thank you.

David Weinstein

You're welcome.

Operator

And your next question comes from John Guinee with Stifel.

John Guinee - Stifel

Just following on that question was there any lease term fees in this quarter?

Jeanne Lazar

There was a small amount of lease termination fees that we recorded this quarter.

John Guinee - Stifel

Okay. Anything to -- its essential when we walkthrough this it looks to us like the assets left with the U.S. Bank Tower, Wells Fargo Tower, Gas Company Tower, KPMG Tower, 777 Tower all are 100% ownership interest plus 1 Cal at 20% plus Plaza Les Funtes at a 100%, Stadium Gateway goes away, and it looks to us as if there is not much value above the debt on 3800 Chapman. Is that a fair way to look at this?

David Weinstein

I'm not going to comment on the value of 3800 Chapman but you certainly listed the properties we will be left with.

John Guinee - Stifel

Okay and then status on the KPMG rebounce or paydown?

David Weinstein

Yeah as I told you last quarter we continued our conversation with your IPA. I don't have any status updates for you to the extent that those conversations are not successful, as it gets closer to maturity we'll go out to the market and refinance KPMG or we continue to have conversations in attempt to achieve something with your IPA.

John Guinee - Stifel

Okay. And is that correct, am I correct in saying that that is a current pay 7.16% interest on the KPMG Tower loan?

David Weinstein

It's -- there is a SWAP in place which effect we get to that place. There is a LIBOR based loan but it was swapped with a different counterparty. So through August I think it's 7.11% and then it dropped after August down to the LIBOR base rate.

John Guinee - Stifel

Okay and then can you talk through the status on the 400 South Hope transaction to the extent you are aware of what's going on there and then how that makes you think about assets that may not have any tax protection such as 777 Tower?

David Weinstein

Well, actually I don’t think that process is done yet. So, don’t have a lot of comments on it. I think the second and third round being I heard that the pricing is going to be good from our perspective, but I don’t really have specific details yet.

John Guinee - Stifel

Okay. And then is it safe to say that mid next year when they pass on this when they tax it, protection burns off as well as the Wells Fargo Tower tax protection burns off that those assets come in to play?

David Weinstein

I don’t know if that means kind of play we don’t discuss or forward intention what we are going to do with assets. But certainly at that time that when tax protection burns off we have more flexibility to do like with those assets.

Chris Norton

I think Erin has a question here.

Erin Aslakson – Stifel

Do you have any update on any remaining recourse liabilities as you guys have with assets that may or may not be going back to bank?

David Weinstein

Recourse liability, the only liability we have assets on 3800 Chapman, which is the partial payment guarantee. So, there is no update on that. We don’t have any others beside from standard recourse carve-outs and loans.

Erin Aslakson – Stifel

Perfect. Well, this has been very helpful. Thank you very much.

David Weinstein

Thank you.

Operator

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

Jed Reagan – Green Street Advisors

Good morning Jed Reagan guys. It’s Jed Reagan here with Michael. Can you talk a little bit about the leasing pipeline downtown LA and just are you seeing more requirements in the market then say a year ago?

Jeanne Lazar

When you say requirements you mean concessions?

Jed Reagan – Green Street Advisors

No, sorry it’s a sort of potential kind of requirements folks out there looking for space downtown.

David Weinstein

I don’t really want to comment on leasing. I’ll just tell you that not much is changed downtown over the past couple of quarters.

Jed Reagan – Green Street Advisors

Okay. How about concessions and leasing costs, how would you describe those are tending these days?

Jeanne Lazar

Generally we are in the $4 to $6 per square foot per year range Dell was consistent with what we said on previous calls and where rates are holding in the low 20s.

David Weinstein

Yes, I don’t think concessions haven’t changed much. You can certainly bid individual lease that either higher concession at lower concessions than that, but an average it would be consistent.

Jed Reagan – Green Street Advisors

At that level you competitive with other sort of motivated landlords downtown?

David Weinstein

Well, absolutely we certainly have enough cash and we are competing with all the landlords for the space.

Jed Reagan – Green Street Advisors

Okay. Are you seeing demand from technology or sort of “creative” type tenants in the downtown market coming through at all?

David Weinstein

Not particularly, no.

Jed Reagan – Green Street Advisors

Okay. And as far as there has been a fair amount of rent leasing about office tenants becoming more efficient with their space requirements. Are you seeing renewing tenants taking less space for employee these days?

David Weinstein

I think there has been a general trend in our portfolio fortunately over the last year while we have been fortunate enough to renew lot of these tenants while they downsize we are able to back fill the space. In most cases, which is why occupancy stays flat, but there is definitely the trend towards more efficient use of space.

Jed Reagan – Green Street Advisors

And that’s not only sort of less employees, but more efficient space per employee.

David Weinstein

Actually I don’t think it necessarily less employees at all. In most cases the experiments are growing and we are hopeful that go back into space, but it’s really just reducing the square footage allocation employee and some tenants are applying with more open formats so more efficiently use their space

Jed Reagan – Green Street Advisors

Okay. That’s helpful. And last question just looking at your first quarter cash same-store and I know numbers it look like it was lower than most of 2011 is that a number that you think is going to be sort of representative of 2012 or is that an anomaly. How should we think about that?

Jeanne Lazar

I think it’s fairly representative of about 2012. I think the big change quarter over quarter is you are seeing the full impact to get our lease in the 2012 numbers.

Jed Reagan – Green Street Advisors

Okay, great. Thank you very much.

David Weinstein

You are welcome.

Operator

Your next question comes from Wilkes Graham from Compass Point.

Wilkes Graham – Compass Point

Hey, thanks guys. Just three quick questions, one I’m curious can you say what the run rate would be for management fees going forward?

David Weinstein

For management fees?

Wilkes Graham – Compass Point

Yeah, because I guess some of them were cancelled from Charter Hall. Are there any management fees in the Beacon Hill?

David Weinstein

(Indiscernible) management fees.

Wilkes Graham – Compass Point

Yeah.

David Weinstein

The only place we earned third-party management fees going forward is up One Cal. So, that number roughly it looking at historical statements will come down.

Wilkes Graham – Compass Point

Sure, okay. On 3800 Chapman it look like there was some leasing down there in the quarter it look like occupancy went from 76 to 88 just curious can you talk about that at least?

Jeanne Lazar

We acquired 21,000 square foot lease with American Advisors that was the main driver of that.

Wilkes Graham – Compass Point

And is that raise does that covers there enough to take that asset out of receivership?

David Weinstein

Well, first it's not in receivership. What we have on that asset is if we had achieved the certain debt service coverage ratio by a certain time then the partial payment guarantee would go away.

Wilkes Graham - Compass Point

Okay.

David Weinstein

But that lease will not bring us above that ratio. So the partial payment guarantee, it obviously litigates any guarantee we would have just because we are filling up the building.

Wilkes Graham – Compass Point

Sure.

David Weinstein

But the guarantee will not go away.

Wilkes Graham – Compass Point

Okay. And then lastly, I certainly appreciate the swap against KPMG and the need to wait as long as you can on refinancing that one. And, I am curious if you have an appetite to start looking at refinancing 777 or U.S Bank that mature year?

David Weinstein

No, we are not spending any time on those. The U.S. Bank expires on July, 777 I think in September. There are substantial to seasons payment that will be required if we refinance those early.

Wilkes Graham – Compass Point

Okay.

David Weinstein

So it's just not economic to do that.

Wilkes Graham – Compass Point

Got it. Is that early that mean more than a month ahead of time or something like that?

David Weinstein

No, no, I am saying that we did it now. I think that's what you are asking, why (inaudible).

Wilkes Graham – Compass Point

It was, I was just wondering is there, can you do in six months ahead of time and you do not have to pay that defeasance cost?

David Weinstein

Well, I don't remember exactly they certainly go down overtime and there is a window where you can refinance I think in maybe three months. We refinance with no fees.

Wilkes Graham – Compass Point

All right. That's helpful. Thank you.

Operator

Your next question comes from Andrew Sole from Esopus Creek Advisors.

Andrew Sole - Esopus Creek Advisors

I guess my question is more about larger picture. To a certain extent the company competes with the west side of LA, the Santa Monica area. There is now this rail line, the Expo line that connecting up the west side to downtown and I guess it is can eventually extend in next couple years from Santa Monica to downtown. Are you guys expecting to see any benefit from this rail network that is connecting up the west side to downtown or is this is a much longer-term picture in terms of benefit to the company?

David Weinstein

Look, I think it can only be helpful to downtown, but I can tell you we are not focused on that right now. We are focused on other leasing process. But I think just access to the on the west side, can only be positive for downtown.

Operator

Your next question comes from Gordon Watson with GLG Partners.

Gordon Watson - GLG Partners

You historically have given -- tried to project unrestricted cash balances. Have you done in this quarter, if you haven't could you try to predict what is going to be around year end?

David Weinstein

We have and I can tell you generally we are on the same page, we have been for the first quarter, our best guess here is we would probably earn through $35 million to $45 million through the end of the year. So you're really looking at our best guess at the end of the year is $120 million to $130 million and that's probably doesn't work perfectly well. And that of course excludes any extraordinary transactions, any paydowns required to extend KPMG.

Gordon Watson - GLG Partners

So that's an operational burn here, your projected rate?

David Weinstein

Right, correct.

Gordon Watson - GLG Partners

Where is most of that going, to leases and so?

David Weinstein

Yeah, a portion goes to CapEx, a portion of it goes to G&A of the company.

Gordon Watson - GLG Partners

Okay, thanks.

Operator

Your next question comes from Jordan Sadler with Keybanc Capital Markets.

Jordan Sadler - Keybanc Capital Markets

Just following up on sort of last comments. So I guess is the cash burn rate about $10 million a quarter, fair to say?

David Weinstein

That certainly gets you to $35 million to $45 million, so.

Jordan Sadler - Keybanc Capital Markets

Yeah, okay, okay. Reddening question, sorry about that.

Jeanne Lazar

What is variable Jordan is capital cost of course?

Jordan Sadler - Keybanc Capital Markets

Okay, right capital cost. So and sort of a, I mean, previously we were at -- we talked about, before sort of G&A cash burn rate of basically negligible cash burn rate. So most of that is probably G&A and leasing costs downside?

Jeanne Lazar

That's correct.

Jordan Sadler - Keybanc Capital Markets

Okay.

David Weinstein

G&A leasing cost. There are some costs related to taxes, because we're recognizing gains on many of these assets we're disposing of. So there are some tax numbers in there. But you're right, it's mostly G&A and the biggest fluctuation which makes it hard to predict the number are the capital cost relating to leasing, new leasing, and certainly capital costs that we are obligated to under lease reverted sign, we don't know exactly when those are going to be full.

Jordan Sadler - Keybanc Capital Markets

Okay. And then, lastly the -- is it possible to get a current debt yield on KPMG, inclusive of parking?

David Weinstein

We don't have that now. I don't think we normally give that out either. But we have to calculate it anyway.

Jordan Sadler - Keybanc Capital Markets

OE is an opportunity?

David Weinstein

I can look forward to any opportunities.

Jordan Sadler - Keybanc Capital Markets

And you could always do the same when 777 or USB if you're so inclined?

David Weinstein

Okay.

Jordan Sadler - Keybanc Capital Markets

The, okay, and so and the parking income you're laying -- you laid out on page 30, which is the LACBD parking properties. At this point, should exclude through California, I think the footnote basically indicate that. But I just, and it looks like it did come down sequentially by a bit. But is that accurate that that basically the parking income is now tied back to the core properties that should remain?

Jeanne Lazar

That's correct.

Jordan Sadler - Keybanc Capital Markets

Okay. Thank you.

David Weinstein

You're welcome.

Jeanne Lazar

Thanks Jordan.

Operator

Your next question comes from John Guinee with Stifel.

John Guinee - Stifel

Any words of wisdom David for the preferred shareholders?

David Weinstein

Of course I don't have any. Our position hasn't changed a year ago. We're not paying the preferred covenant currently and we don't intend to do the same. So I don't, not to review by words of wisdom, but we don't have much to say about that.

John Guinee - Stifel

Great. Thank you.

David Weinstein

You're welcome.

Operator

Thank you. That concludes our question-and-answer session today. I will now turn the conference over to MPG Office Trust management team for any closing comments they might have, gentlemen.

Jeanne Lazar

Thanks for joining our call and we will continue to keep you apprised of our assets. 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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