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
Jed Reagan – Green Street Advisors
Wilkes Graham – Compass Point
MPG Office Trust, Inc. (MPG) Q2 2012 Earnings Call July 24, 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, July 24, 2012.
I would now like to turn the conference over to Ms. Peggy Moretti of MPG Office Trust. Please go ahead.
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, may be accessed in the Investor Relations section of the MPG Office Trust website at www.mpgoffice.com.
And now, I would like to turn the call over to David Weinstein, President and CEO.
David Weinstein
Good morning and thank you for joining our second quarter 2012 call. Fred Chin, our acting Chief Operating Officer is here with me along with Chris Norton, our Head of Transactions, Jeanne Lazar, Chief Accounting Officer and Peggy Moretti, our head of investor relations.
This quarter the company made significant progress towards exiting non-core assets addressing the KPMG tower debt maturity, eliminating contingent liabilities and improving our cash position. In April, we disposed the Brea Corporate Place and Brea Financial Commons pursuant to a deed-in-lieu of foreclosure agreement with the lender. As a result, the company was relieved of a $109 million of debt and received a general release of claims under the loan documents.
Also in April, Glendale Center was cooperatively placed into receivership. The agreement with the special servicer provides for a cooperative foreclosure and a general release of claims under the loan documents at the conclusion of the foreclosure process. The special servicer has commenced foreclosure proceedings on this asset and we expect these proceedings to be finalized in the third quarter of 2012 but there can be no assurance that the foreclosure proceedings will be completed in this timeframe.
In May, Two California Plaza was cooperatively placed into receivership. We entered into an agreement with the special servicer through which the company will temporarily remain the title holder of the asset until Two California Plaza is transferred to another party or there is a completed foreclosure, with a definitive outside exit date of December 31, 2012.
Pursuant to the agreement, we will receive a general release of claims under the loan documents at the time of our exit. In connection with this agreement, we paid approximately $1 million to the special servicer related to certain historical operational liabilities .
Also in May, we disposed of the City Tower development site located in Orange, California. We received net proceeds from this transaction of $7 million, which will be used for general corporate purposes.
Also in May, a trustee sale was held with respect to Stadium Towers Plaza. As a result of the foreclosure, the company was relieved of a $100 million of debt and received a general release of claims under the loan documents.
In June, 3800 Chapman was cooperatively placed in receivership. We entered into an agreement with the special servicer pursuant to which the company will temporarily remain the title holder of the asset until 3800 Chapman is transferred to another party or there is a completed foreclosure, with a definitive outside exit date of December 31, 2012.
Pursuant to the agreement, we will receive a general release of claims under the loan documents at the time of our exit. Also pursuant to the agreement, we received a release of all claims under the guaranty of partial payment related to the loan in return for a payment by the company of $2 million.
In July, we completed the one-year extension of the mortgage loan on KPMG Tower. The new maturity date is October 2013. The extension required a $35 million principal paydown, reducing the outstanding principal balance of $365 million. We also contributed $5 million to a leasing reserve. A full cash sweep goes into effect in September 2012 for the remaining term of the loan to first fund capital reserves and leasing reserves and then amortize the loan.
Also in July, we disposed of Stadium Gateway, a joint venture property of which we owned 20%. We received net proceeds from this transaction of approximately $1 million, including reimbursement of loan reserves which will be used for general corporate purposes.
As to leasing, during the second quarter 2012, we completed new leases and renewals for approximately 50,000 square feet, including our pro-rata share of our joint venture properties. Of note was an expansion with General Block (ph), an existing tenant at US Bank Tower for 11,266 square feet.
Turning to our cash position, as of June 30, 2012, we had approximately $194 million of cash on hand, excluding cash related to assets in default. These amounts are prior to our paydown of the KPMG Tower loan. Approximately $167 million is unrestricted and available for general corporate purposes. $27 million is restricted for specific purposes, such as leasing commissions, tenant improvements, property taxes and insurance.
This concludes my prepared remarks, and we will now open up the lines for any questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Jordan Sadler with Keybanc.
Jordan Sadler - Keybanc Capital Markets
Just overall looking at sort of the quarter, not much talk about leasing, you continue to sort of whittle down the portfolio to the downtown assets making progress there. Can you maybe give us a little bit of color on what the game plan is from here, what your sort of plan of attack is, maybe a few things you’re focused on?
David Weinstein
As always, we are working hard and we are focused on maximizing shareholder value and managing leasing our portfolio. But consistent with my response on previous calls, we don’t comment on next steps.
Jordan Sadler - Keybanc Capital Markets
I guess I am looking at the 2013 roll, it’s got 15% of rent upon expiration rolling at about $22.74 a foot. How would you characterize that relative to market today? What would you say the mark-to-market would be on that? May Fred or –
David Weinstein
Well, I can answer that. I think it’s pretty close to market. I mean the market hasn’t changed, it’s still $21-$22. And it depends, I don’t know what date exactly is coming up. But I can tell you we are always focused on maximizing value and future leasing. We don’t comment specifically about leasing but we are in dialogue with many tenants for whose expirations are coming up.
Jordan Sadler - Keybanc Capital Markets
Any insights you could offer on the leasing pipeline, or traction you have seen, direction?
David Weinstein
Well, we don’t comment about our specific leasing pipeline. I will say that and you can see it in our quarter, we leased 50,000 square feet. That reflects two things really. One is a lot of which happening in the market are renewals of existing tenants, and just given our profile, we didn’t have a lot of renewals coming up this quarter. But there was, I would say, consistent with what’s happening in across the country, there was a little bit of a freeze this quarter, and most people that don’t have to make decisions on leasing happened to making decisions.
That’s not to say that there is no leasing going on in the market, and there are some new leases being signed. But the activity this quarter certainly slowed.
Jordan Sadler - Keybanc Capital Markets
And just then following up on that, you say you signed 50,000, if you look at page 40, it’s easy to see that. Page 41 right after that, it shows which is your tenant improvement leasing commission page, just 22,000 square feet of leases. What’s the primary differences between those two pages?
Jeanne Lazar
The primary difference is that we executed a renewal with MPG for our headquarter space. And that’s really the main difference between page 40 and page 41.
Jordan Sadler - Keybanc Capital Markets
So there is 30,000 or so square feet, 27,000 square feet?
Jeanne Lazar
Yes.
Jordan Sadler - Keybanc Capital Markets
That’s a company.
Jeanne Lazar
Correct.
Jordan Sadler - Keybanc Capital Markets
And then G&A, you are running at a run rate here of I think $6 million or so. It’s $24 million annualized which equates to something like 20% of assets which seems like disproportionately high number. I know you’ve whittled the portfolio down. Could you maybe break down your G&A into a few parts or maybe elaborate on what’s in those numbers, why it’s so high?
Jeanne Lazar
We generally don’t break out G&A any more than what we’ve disclosed in the supplemental.
Jordan Sadler - Keybanc Capital Markets
Would you expect it to go down on a run rate basis? Is there some amount of professional services in there related to everything that’s gone into administratively from handing back the keys on the properties?
Jeanne Lazar
Yeah, there were some one-time charges in this quarter that are showing up. But generally speaking, I think that the run rate is pretty flat with what you are seeing.
David Weinstein
Yeah, I will tell you that in this particular quarter, I don’t know the exact number but I don’t know whether it’s $300,000 to $500,000 of costs that I wouldn’t expect to see on a run rate basis. It’s 300,000 to 500,000. There are costs obviously related to – with a lot of activity this quarter, and there were costs related to giving back all these assets.
Jordan Sadler - Keybanc Capital Markets
So even if you back out $1 million, it’d have to be $20 million, 20 million sounds like a big number to run six properties that are all right next to each other in downtown LA. Is there something – can you break it out between public company expenses and other? I mean what am I missing?
Jeanne Lazar
Yes, we are not going to commend on the breakout any further than we have already said.
David Weinstein
Yeah, I will tell you we have done, and this is unfortunate part of downsizing a company. We’ve been pretty aggressive about rightsizing personnel, and I think from personnel standpoint, we’re sort of where we are, and the public company costs are the public company costs. So I would not expect aside from some one-time costs related to disposition of assets, I would not expect to significant reduction in G&A going forward.
Operator
Our next question comes from John Guinee with Stifel.
John Guinee – Stifel
Well, congratulations, you guys have done a great job. It looks like you are down to four downtown LA assets, four of which have tax protection, Pasadena which has tax protection, One Cal Plaza which doesn’t have tax protection, your debt stabilized, you’ve got plenty of cash. Are the next assets to be addressed Plaza Las Fuentes and Wells Fargo Tower in 2Q ’13 when the tax protection burns off or are there any assets we are missing?
David Weinstein
Well, first, I don’t think we are missing assets. We only have seven assets. We have a few more assets that are selling our books that obviously won’t be here by year end. But aside from that, we don’t comment on what’s next as I said. So I don’t really have a comment on I think you are talking about Plaza Las Fuentes. But you are right, the tax protection does burn off on Plaza Las Fuentes and Wells Fargo Tower June 2013.
John Guinee – Stifel
Is there any land left on the balance sheet?
David Weinstein
There is. We own a piece of land next to 777 Tower.
John Guinee – Stifel
Is that being actively marketed or no comment?
David Weinstein
We are not actively marketing that piece of land.
John Guinee – Stifel
And then your JV income on page 17 was historically about $1.5 million high, kind of reimbursements were 6 or 800,000 high, interest was a high for this quarter. Any unusual activity there that we are not fully understanding? For example, your rental revenue went from about $6 million run rate to $7.5 million this quarter.
Jeanne Lazar
Nothing unusual that stands out.
David Weinstein
I don’t have in front of me. We will look into that but there is nothing unusual happening at the joint venture. So I am not sure why the numbers are higher. We will have to look into that.
John Guinee – Stifel
And then it looks to us like your AFFO number was up alarmingly, negative about $60 million without much leasing commissions, and your EBITDA number quarter over quarter went down about $15 million to $20 million. Are those run rates that we should expect going forward a AFFO number north of $10 million and an EBITDA number of around $35 million?
Jeanne Lazar
The EBITDA number, I think that’s what the expectation should be going forward. On the AFFO, what you are seeing is the default interest that’s showing up in that number. And this is primarily Q cow for this quarter. So we’re going to monitor that and see where the run rate goes going forward.
David Weinstein
So that number sounds like it's being skewed by the default interest, so I would not think of the AFFO number as a run rate number.
John Guinee – Stifel
Well what you’ve got is, you’ve got default interest accruing on mortgages in defaults for the last four quarters, so now we are seeing right around $10 million. So this is not unusually high for this quarter. All right. Lastly, we have some questions about liabilities and swap collateral call a little later. Last question, I am sorry, Wells Fargo Bank, a big lease expiration next year about the same time the tax protection burns off. How do you plan on handling that?
David Weinstein
We don’t discuss leasing. So as you can imagine, as with all tenants, we are actively pursuing keeping tenants in buildings.
Operator
Our next question comes from Michael Knott from Green Street Advisors.
Jed Reagan – Green Street Advisors
Good morning. It’s Jef Reagan here with Michael. I am wondering if you can talk a little bit about the strategy behind the KPMG loan extension and would you look to do something similar for the US Bank and 777 Tower on maturities that are coming up next year?
David Weinstein
I am going to answer the second part of that first. I don’t think you can read anything into how KPMG turned out into US Bank Tower. I can’t really comment on US Bank Tower and 777. I would say that on KPMG, we obviously would prefer a longer term extension. We are happy with the one-year extension. We think it’s very favorable – the paydown amount was favorable. There is a consortium of I think eight German Banks in that loan and just given what’s happening with the German banks, it was difficult to round them all together to get a long term extension. And that’s what we end up with the one year.
Jed Reagan – Green Street Advisors
Can you comment at all on maybe ongoing conversations that are reportedly taking place with Rob Maguire and/or any potential buyers looking at your portfolio?
David Weinstein
As I said, we don’t comment on anything like that.
Jed Reagan – Green Street Advisors
Any new tenant demand you guys are seeing in the downtown market, particularly related to technology entertainment?
David Weinstein
I would say in this quarter, there are new tenants kicking the tires but there is not a lot of new tenant demand right now. As I said before, a lot of people are on the sidelines. So I don’t want you to reason that there is none. But most of the activity that’s occurring in downtown are for existing tenants downtown renewals.
Jed Reagan – Green Street Advisors
And how are concessions trending downtown, is there any movement in there as a pretty steady?
Jeanne Lazar
Generally we are still seeing the $5 to $7 per year per square feet. In some cases, in new transactions the concessions may be higher. Renewals may be a little bit lower but generally really in the $5 to $7 range.
Jed Reagan – Green Street Advisors
And there is a report that Morrison & Foerster is moving to a competitive building. Can you talk at all about sort of the reasons they might have chosen the move, is there cost issue, and any prospects for rebuilding that space?
David Weinstein
Yeah, I will tell you that Morrison & Foerster, the lease expiration is not till September 2013. I don’t know the terms of any lease they may or may not have signed but I would say it’s a very, very high probability that they do leave our building. I don’t know specifically why they decide to leave but I can tell you that they have been in our building in very long time. They are downsizing, remodeling all their space, and one of the things – one of the issues that we got is leaving for a remodel is very difficult of that size.
But you can imagine that we actively like with all of our tenants would have preferred and tried to keep them. But it’s a high probability that they are leaving.
Jed Reagan – Green Street Advisors
And just two more quick ones here. The 777 Tower land piece, is that the only piece of land you guys have left at this point?
Jeanne Lazar
We have one small parcel in Orange County, but other than that, that’s it.
Jed Reagan – Green Street Advisors
And is that adjacent to an existing property or –
David Weinstein
No, no, it’s very small. This is 4050 Metro. It’s 4050 Metro, it’s got a building on it. That’s ground leased out to someone else which reverts back to us I think in three years.
Jed Reagan – Green Street Advisors
And then lastly, are you guys providing any guidance at all on year end unrestricted cash 2012?
Jeanne Lazar
Yeah, we expect to utilize between $25 million and $30 million through the end of this year. That excludes the impact of transaction with the KPMG.
David Weinstein
Jed, so obviously you have to take out KPMG which we already spent which is probably $42 million and then adjusted with the numbers that Jeanne just referred to.
Operator
Our next question comes from Wilkes Graham from Compass Point.
Wilkes Graham – Compass Point
Just curious is that right that the777 Tower loan and the US Bank loan do not have swaps against them?
David Weinstein
They do not have swaps. We only have this up on KPMG which burns off in the next month or so.
Wilkes Graham – Compass Point
And if that’s the case, I know you can’t talk about the future refinancings or future maturities but –
David Weinstein
They are fixed rate loans though.
Wilkes Graham – Compass Point
Yes, and I am just curious if there is a potential that you could address those earlier than you did KPMG given that there is this swap?
David Weinstein
Well, the issue we have with those are the defeasance costs, so which we couldn’t address them now, I think it’s three months before, Chris, is that right – three to six months before the defeasance costs burn off and they are open to repayment. I don’t remember which is with those individual loans. But we do – it’s not like – we can’t address those here in advance, to answer your question.
Wilkes Graham – Compass Point
And back on KPMG, there was good color on the eight German banks and just how difficult it is to round them all up now. Do you envision trying to go over – go back over that same process with the same banks a year from now and/or any of that getting a full refinancing or trying to get another one year extension?
David Weinstein
Quite frankly, we just got that extension done. I can tell you that there were some banks in the group that would have – were open to a longer term extension. So I don’t want to – it’d all be conjecture.
Operator
Our next question comes from Steve Liu with Forest Capital.
Unidentified Analyst
Hi, I wanted to ask about US Bank Tower, given that it’s only about 55% leased, is it NOI positive?
Jeanne Lazar
Yeah it is positive.
Unidentified Analyst
Can you give me a margin on that?
Jeanne Lazar
In our supplemental, we disclosed the margin in our financial highlights about 60.7%, 60.8%, you can use that as a proxy.
Unidentified Analyst
As a proxy for US Bank as well?
Jeanne Lazar
We don’t disclose building level margins.
David Weinstein
That’s a little portfolio, we don’t disclose building by building.
Operator
Our next question comes from Jordan Sadler with Keybanc Capital Markets.
Jordan Sadler - Keybanc Capital Markets
Just wanted to follow up on the cash burn rate. So you have $25 million, $30 million to spend by year end, which it sounds like $15 million a quarter or so, plus $15 million a quarter of burn. Is that pro forma the KPMG extension? It seems like that would save you a few million bucks a quarter.
David Weinstein
It does it all. Anything from KPMG is swept. There is a cash sweep in the KPMG loans starting September.
Jordan Sadler - Keybanc Capital Markets
So is this basically your new cash burn rate or is there some TI in there that’s been allocated and I am not thinking of –
Jeanne Lazar
Yeah there is capital costs included in that number as well.
Jordan Sadler - Keybanc Capital Markets
But is that a good burn rate number on a go forward basis, sort of on a run rate basis?
David Weinstein
Yeah, through the end of the year, we think that’s a good number. That doesn’t include if we sign a bunch of leases, that’s existing leases and some projected leasing. If leasing picked up, we might spend more money.
Jordan Sadler - Keybanc Capital Markets
And there was – in other expense it was like a $3 million number, was there anything one-time in there?
Jeanne Lazar
Yes, that was the $2 million guarantee payment on 3800 Chapman that David mentioned.
Jordan Sadler - Keybanc Capital Markets
And lastly, can you guys confirm that you’ve hired East Dale (ph) to run the process?
David Weinstein
We have no comment on that.
Operator
Our next question comes from John Guinee from Stifel.
John Guinee – Stifel
One question I forgot to ask. You’ve got about 1.8 million square feet of on-site parking about 1.3 million square feet of off-site. When you add that all together, it’s about 1.25 spaces per thousand. The question is, is any of that parking not directly attributable to specific assets and not encumbered by specific debt, or should it all be valued within the envelope of the individual building?
David Weinstein
All of the parking is encumbered by debt.
Operator
Currently, there are no questions in queue. Thank you ladies and gentlemen, at this time this concludes our question and question session today. I will turn the call over to MPG Office Trust management team for any closing comments they might have. Gentlemen?
Peggy Moretti
Thank you again for your continued support. 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.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!