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Maguire Properties, Inc. (NYSE:MPG-OLD)

Q2 2008 Earnings Call

July 29, 2008 11:00 am ET

Executives

Peggy M. Moretti - Senior Vice President - Investor and Public Relations

Nelson C. Rising - President, Chief Executive Officer, Director

Douglas Gardner - Executive Vice President

Mark T. Lammas - Executive Vice President – Development

Shant Koumriqian - Principal Financial Officer, Principal Accounting Officer and Sr. VP of Fin. & Accounting

Analysts

Jordan Sadler - Keybanc Capital Markets

Jonathan Habermann - Goldman Sachs

Lee Cooperman – Omega Advisors

Michael Bilerman - Citigroup

David Aubuchon - Robert W. Baird & Co., Inc.

Mitchell Germain - Banc of America Securities

Ian Weissman - Merrill Lynch

Louis Taylor - Deutsche Bank Securities

John Guinee - Stifel Nicolaus & Company, Inc.

Michael Knott - Greenstreet Advisor

Chris Haley - Wachovia Capital Markets, LLC

Allen Adler – ARA Enterprises

David Rodgers - RBC Capital Markets

Operator

Welcome to the Maguire Properties conference call. (Operator Instructions) I would now like to turn the conference over to Peggy Moretti of Maguire Properties.

Peggy M. Moretti

Thank you for joining our second quarter 2008 earnings conference call. With us today are Nelson Rising, President and CEO, Doug Gardner, Executive Vice President of Operations, Mark Lammas, Executive Vice President of Investments, and Shant Koumriqian, Senior Vice President and Chief Accounting Officer.

During the course of today’s call, management will make forward-looking statements regarding, among other things, projected 2008 results of operations, leasing, competitive conditions, financing, and acquisition. 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.” Our supplemental package along with information required under SEC regulation G may be accessed in the Investor Relations section of the Maguire Properties website at www.maguireproperties.com.

Now I’d like to turn the call over to Nelson Rising, President and Chief Executive Officer.

Nelson C. Rising

I guess it’s still morning everywhere we’re talking today. It’s been less than 2.5 months since I assumed the role of President and CEO of Maguire Properties. I accepted the position without illusions of the challenges we face, but I must say I’m extremely pleased with the progress we have made on a number of fronts.

Clearly, I’m not pleased with the financial results for the quarter; however, we’ve already taken steps that should begin to improve these results for the rest of the year and beyond. We took a charge of $17.5 million for costs associated with our review of strategic alternatives, management changes, primarily contractual separation obligations for our former senior executives, and the exit costs and tenant improvement write offs associated with our lease at 1733 Ocean Avenue. I am confident that the reorganization of our management team and the relocation of our office from Santa Monica to downtown Los Angeles and our new management structure will create a more efficient and effective organization that will result in reduced overhead and increased productivity in the future.

As many of you know, I’ve been focused on the cash needs of the company and the company’s liquidity. At the end of the second quarter we had cash on hand of $308 million of which $210 million is restricted by various loan agreements for specific purposes. $121 million of which may be used to re-tenant the portfolio and we also have available to us approximately $41 million in leasing reserves in the form of undrawn loan commitments. This is very encouraging from a standpoint of our ability to lease space. In the aggregate, these funds will support up to 2.3 million square feet if we assume $50 per square foot in costs or up to 1.9 million square feet of leasing at $60 per square foot.

In addition, reserves that we have can accommodate approximately $40 million in existing leasing commitments. So from a lease up standpoint, the combination of these reserves and undrawn loan commitments do give us the cash resources to have a very aggressive lease program.

At the end of the second quarter we also had $90 million in cash available for other corporate purposes. We’ve been focused on two basic strategies to increase this liquidity, secured borrowing on our Plaza Las Fuentes property in Pasadena and the sale of selected Orange County assets. We previously announced that we were in advanced discussions with a lender to obtain $110 million in short term variable rate loans on Plaza Las Fuentes and the Westin Pasadena Hotel. As of this morning, all third party deliverables including appraisals and estoppels have been completed and loan documentation is nearing finalization.

We expect that a closing of the loan could occur as early as at the end of this week. Once that new borrowing is closed, it will replace the existing $130 million revolving credit facility. We’re doing that since the loan covenants in that facility are incompatible with our planned sales of certain Orange County assets.

As we previously announced, during the quarter we entered into the sale of Main Plaza for approximately $211 million to Shorenstein Properties LLC. This includes nearly $10 million of cash reserves and the assumption by Shorenstein of $161 million of project level financing. The sale is subject to the assumption of existing project financing and customer and closing conditions. We expect the sale will close in the third quarter and will yield approximately $48 million in cash. This again is a very important step for us as we try to build our cash reserves. You will notice on our second quarter earnings we took a charge for the sale of this asset. I’ll give you a little background on that. The carry in amount of the asset was based upon an allocation of the $2.9 billion purchase price paid for the acquisition of 24 office properties and 11 development sites from Blackstone Real Estate Advisors in April 2007. The price allocated to this property was determined using management’s best estimate of its fair value during 2007 and as I mentioned, we recorded a non-cash impairment charge totaling $51.9 million during the second quarter.

One very encouraging note about the sale: the purchase price of $211 million was only 6% lower than the pricing in November 2007. That’s very encouraging in what it says about the other assets we have in Orange County because obviously the overall economic situations are not as strong today as they were in November of ’07. We’ve also previously announced that we have been aggressively marketing the Park Place campus situated on 105 acres in Irvine adjacent to 500 acres of permanent open space and natural preserve in the back bay. The mixed use campus has 9 office buildings totaling 2.3 million square feet, retail shops, and entitlements for additional office, retail, residential, hotel, and other uses. We are encouraged by the interest we have seen and it is our current plan to request proposals by August 8th. It’s too early for us to have any feel on pricing but we are encouraged by the amount of interest that has been shown for this asset.

We have also been working on selected assets in Orange County. We believe we are close to finalizing terms for the sale of one of our central Orange County assets. We have a non-refundable deposit posted by the prospective buyer which has been released to the project lender to secure the right to pre-pay the project loan in connection with its purchase of the asset from us. As a result of such a sale, we would be relieved of the existing $101 million project loan and more than $1 million of funding obligations relating to the future infrastructure improvements. We will also receive a profit participation right in the future capital events proceeds generated by the asset. Based upon the annualized second quarter associated with the asset, we expect that GAAP FFO for the company because of this transaction to improve to $0.07 on account of the potential sale. That’s extremely significant to have that kind of result from an asset where we are relieved of the loan obligation, relieved of an obligation to put infrastructure, and improve our GAAP FFO by $0.07. We are not in the position to discuss further details of this transaction since we are now in the process of negotiating a similar transaction with the same group on a similarly situated asset.

One more thing before we go to questions. On July 7 through a 13-D filing, J&B informed the company of its intention to nominate individuals comprising at least the majority of the company’s board of directors at the annual meeting of stockholders. Since then we have had a series of very productive discussions with J&B and early this morning we announced that we had entered into a stockholders agreement with them, the details of which are set forth in that release. This agreement is very important to the company because we will be able now to focus our full attention on the strategic alternatives we have underway and to deliver value for our shareholders.

With that, we would be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jordan Sadler of Keybanc Capital.

Jordan Sadler - Keybanc Capital Markets

Thank you. Good morning, everybody. Nelson, could you just expand on one of your last comments there. You’ve got this asset expected to close and you’re finalizing terms on this OC project for sale and you expect it could improve FFO by $0.07 a share. I’m just trying to sort of back into the numbers. Maybe could you give us order of magnitude on the... I guess you relieve yourself of the debt is kind of what it sounds like with no net cash proceeds. I’m curious to get a sense of the benefit from both this project and Main Plaza together if maybe you could just give us a little more color.

Nelson C. Rising

Let me put the benefit of this project and the one we’re currently negotiating in context together and then put that in the overall context of the sale of Main Plaza. This is a property, $101 million in debt. The lender had written down the mortgage and had then offered it for sale. The prospective buyer of our property has now entered into a contract to purchase that note by releasing a significant cash deposit and we are in the closing stages of putting together a Purchase and Sale Agreement. There is a small operating loss that affects FFO and even though the debt service is funded by interest reserves, is a negative to FFO, so that makes up the $0.07. The transaction that we are now working on would have the same basic components but it would save about $0.11 because there’s a larger operating deficit. So in the aggregate, those two transactions would add $0.18, coincidentally, about what we earned in the first and second quarter. I think that’s really significant for several reasons, one of which it demonstrates our commitment to begin to run the company as focusing on FFO and also focusing on debt reduction and on eliminating assets which have an ongoing drain. The Main Plaza asset was different in the sense that there was significant cash equity above the debt and in that case, however, we still ended up by relieving ourselves of a significant debt obligation of $160 million and generated $48 million in cash liquidity so both types of transactions help enormously but they are different in that respect.

Jordan Sadler - Keybanc Capital Markets

Those numbers are annualized. Main Plaza, including the $48 million in cash, would increase your FFO by $0.11 --

Nelson C. Rising

No. Main Plaza, we received $48 million in cash and then we no longer own the asset and the asset had a very slight benefit to FFO so it was almost FFO neutral and so we then sell the asset, we eliminate the debt, we liberate $48 million in cash. On the other two assets, I don’t want to name them because of the negotiation on the signed property, but have the effect of eliminating operating deficit plus eliminating debt service and which we’re negative and hence we have the reversal of FFO.

Jordan Sadler - Keybanc Capital Markets

Okay, I think I got it. I’ll get back in the queue.

Operator

Your next question comes from Jay Habermann of Goldman Sachs.

Jonathan Habermann - Goldman Sachs

I’m here with Sloane as well of my team. Nelson, can you speak a bit about Orange County and give us a sense there in terms of leasing? I know you’re in the process of going through these asset sales and getting those completed but could you give us a sense in terms of expirations continue to exceed new leasing activity and I guess, what’s your one year target as you look forward I guess in terms of occupancy for the Orange County portfolio and just more broadly for the overall portfolio and just the second part of the restructuring plan, can you give us a sense of what you see are the near term challenges post these asset sales because you do have $600 million of debt that matures between now and next year.

Nelson C. Rising

That’s a number of questions here. Let me attempt to deal with just a very brief overview of the Orange County market. There are some who think that things are stabilizing. It was a perfect storm condition with the subprime and then the office sector building space because they perceived the subprime to be there forever, so as a result you have both vacancies created by the close down of those firms and new space that has not been released. So that came together at the same time and at the same time the Orange County economy was very, very badly hurt by the slow down in construction. I’ll go back three years ago. Orange County was perceived to be one of the greatest markets in the county. It’s my view that three years from now it’ll be similarly perceived. I don’t have visibility as to how long this malaise is going to continue but I think it’s partly national and international for that matter in scope and so I think right now it’s our view that things will be very slow for the rest of the year. We do understand that there was net absorption in the first quarter of office space which is very encouraging but I really wish I had a crystal ball but I don’t. Leasing is at this point slow although we’re negotiating leases in a number of buildings and we concluded an 80,000 square foot lease with Raytheon on our Brea campus and we are in negotiations with two major tenants in one of our buildings in Orange County that are very attractive, as well as two other leases in one of our properties in the city portion of Orange.

With respect to the overall portfolio, our tri-cities portfolio is 19.7% leased. Our downtown Los Angeles portfolio, if we for a moment pull out US Bank Tower, is about 93% leased. The reason I pull out for discussion US Bank Tower is that Latham Watkins has just moved from US Bank Tower to the KPMG Tower. Obviously both of them are buildings. The bad news is that they left from US Bank Tower, the good news is there is 11 contiguous floors in a market that has very, very few contiguous floors for large tenants. Overall, that would bring our occupancy in downtown to just under 90%. Orange County occupancy is in the 60s and we are very pleased with our asset on the west side Lantana which is 82% leased at extraordinarily attractive rents. With respect to San Diego, we have a property there which is in joint venture with Macquarie and that leasing is very solid and I don’t have an exact percentage on the tech center which is the asset I’m referring to in the Macquarie portfolio. With respect to Mission, we have a new building that construction is completed that is vacant so that occupancy is not terribly exciting, I think it’s in the 70 percentile.

You asked the question about maturities. There are, and Shant’s going to help me out on this if I misstate. There are maturities for the Lantana property. This is a construction loan. We are in the situation where the latest transaction we did there for example had a rent of $72, a very, very attractive rent, and it’s 82% leased. We are not at all worried about the ability to either extend that loan or to finance it with a permanent loan. The aggregate outstanding on the Lantana loan --

Shant Koumriqian

The current construction loan has $64 million outstanding and it will be fully drawn to $88 million upon completion of the building and buildout and tenant improvements.

Nelson C. Rising

So that’s $64 million of the maturity you referred to. 3161, which is also on the Park Place campus, it’s a beautifully done building both from the standpoint from architecture but also the grounds. We have four law firms already in the building including Gibson, Dunn & Crutcher from Los Angeles, who is one of our anchor tenants here at Wells Fargo Center. We have a three floor deal now under negotiations. This is a loan that is due in September but we do have the possibility of an extension and we are in the process now of negotiating with the lender on the terms that will be required to extend that loan. That property is also in Park Place and should we be successful in selling Park Place, that loan would be assumed by the buyer of the overall project and Shant, that total amount?

Shant Koumriqian

Currently $215 million, fully drawn will be $240 million.

Nelson C. Rising

Then there is the construction loan on a small building in Irvine next to the Wa Mu campus and that’s about 150,000 square foot building and the amount?

Shant Koumriqian

The loan is currently at about $29 million, fully drawn will be close to $40 million.

Nelson C. Rising

Then we have another maturity in Mission in San Diego and this is on a newly completed building. There is no leasing activity there yet.

Shant Koumriqian

That loan matures in February of 2009 with a current balance of approximately $20 million, fully drawn $27 million.

Nelson C. Rising

And you mentioned $600 million in maturities so I’m missing a few. Shant, what am I missing?

Shant Koumriqian

In addition, in 2009, we have approximately a $100 million loan at City Parkway that’s coming due in May of 2009 which we do have three one-year extensions and we would approach the lender and start discussing extensions on that shortly, then we have $109 million variable rate loan on our Brea campus. Again, that matures in May of 2009. We have three one-year extensions and we did just have some leasing activity on that project, taking one of the buildings from 50% leased to 90% leased with a lease sign with Raytheon in the quarter.

Nelson C. Rising

I think that gets closer to 600,000 square feet. While we’re always concerned about maturities, I think these are positioned well, but again, one of the reasons we’re focused on increasing our cash is because in many cases the paydowns of mortgages will help us extend term. Did that answer all your questions?

Jonathan Habermann - Goldman Sachs

That’s helpful. Thank you.

Operator

Your next question comes from Lee Cooperman with Omega Advisors.

Lee Cooperman – Omega Advisors

Thank you. First let me say to Nelson, it’s nice to be back in partnership with you and hope we have the same good outcome we had together at Catellus. Lots of people writing different things regarding financial liabilities, solvency, etc. Without getting overly specific, you mentioned a bunch of things you’re working on. I’m sure there are other things you’re working on that we have not discussed. Do you feel comfortable overall that you’ll be able to stabilize this financially and have the time to work out these problems and create value long term?

Nelson C. Rising

Yes. I think I really do. As I mentioned in my opening comments, it’s a little over two months and it seems like two years, and I’m more encouraged every day about how our team is working, how we’re able to be working on so many different fronts at the same time, and I’m very optimistic. I think that particularly the conversations we’re now having on these two assets which were a drain and appeared to be set to be a drain for a while and to be able to get those loans off the books and have some upside participation in the asset and eliminate those costs, that’s a big one. Just as I mentioned the sale to Main Plaza, $48 million, that helps a lot. The $110 million loan will go a long way, and then whatever we liberate out of Park Place. In addition to that, what we’re doing on the other side, and that is a reduction of costs, so I’m feeling very optimistically about how much progress we’ve made in the last two months.

Lee Cooperman – Omega Advisors

Congratulations and we’ll hope for a good outcome.

Operator

Your next question comes from Michael Bilerman of Citigroup Investments.

Michael Bilerman - Citigroup

Good morning. [inaudible] is on the phone with me as well. Just on the $101 million and the other assets that you’re targeting in terms of structuring a transaction, there’s about $10 million of FFO potential pick up at $0.18. Is that the same for cash flow?

Nelson C. Rising

The cash flow, no, because those interest payments are... It will be cash flow if we didn’t do these transactions. Right now the interest is being paid for out of interest reserves, but what that means is increased borrowing, so the borrowing is going up as we pay those interest payments but those reserves run out in which case then the company would be bare and have to deal with this.

Michael Bilerman - Citigroup

And what led to that transaction you talked about, the bank selling off the loan at a discount to the potential acquirer, are you aware of other loans that you have where the banks are marketing those loans?

Nelson C. Rising

Yes.

Michael Bilerman - Citigroup

And what sort of magnitude are we talking about?

Nelson C. Rising

I can’t go much further than that because I don’t want to give an impression that this goes across the portfolio of the assets that are more challenged. We’ve been taking them one at a time but there have been unsyndicated loans that have been key pieces that have been sold. Not the same as these two loans we’re talking about, they’re still on the books with the bank of the originating lender. It makes it easier to deal with. Once it’s syndicated, it becomes a little bit more of a challenge.

Michael Bilerman - Citigroup

What’s the dollar volume of debt that’s securing the other asset that you can sell for the $0.11?

Nelson C. Rising

I’m sorry, what is it?

Michael Bilerman - Citigroup

You mentioned the debt that’s securing the first asset is $101 million. What’s the dollar volume of debt that’s securing the other asset, the one that you mentioned could be $0.11 accretive?

Nelson C. Rising

I mentioned we don’t want to get into that in detail because we’re trying to negotiate that deal.

Michael Bilerman - Citigroup

And just the final question, Nelson, during [Nerig] you talked about an addition to exploring the asset sales, potentially exploring equity raises and you were sort of reviewing the full menu of options on the equity side. Where’s your mindset today now that you’ve sort of been there for two months and are starting to execute on the asset sales? Where does the common equity need come in?

Nelson C. Rising

The context in which I mentioned that in [Nerig] was talking about over time Maguire looking like, acting like, and functioning like a REID and I said when we get to that point we would probably need additional equity capital. I’m afraid to some I gave the impression I was talking short term. I wasn’t. We think that we’re going to evaluate all of our capital needs and requirements as we proceed with the initiatives we’re now undertaking. If we’re successful with Orange County, which I think we will be, if we’re successful in increasing the leasing and the cash flow for the company, if we’re successful in the financings I’ve just mentioned and in the other transactions we’ve been discussing about the debt relief, I don’t see a short term need for equity will have generated that way. Ultimately when we have the company where I want it to be and the stock price is closer to what the value of the assets are, that may be a time to look at it, but right now I was looking forward but not around the corner when I made that comment at [Nerig].

Michael Bilerman - Citigroup

Okay, thank you.

Operator

Your next question comes from Dave Aubuchon of Baird.

David Aubuchon - Robert W. Baird & Co., Inc.

Yes, thank you. Just as a point of clarification, when you talk about a sale of Park Place, you are including 3161 Michelson, 2600 Michelson, and the retail asset as well as the Park Place campus?

Nelson C. Rising

Yes. It’s the land, 105 acres of land, all the entitlements, and the entitlements are for a variety of uses, expanded retail, more office, hotel, and residential.

David Aubuchon - Robert W. Baird & Co., Inc.

And your goal at this point is to sell everything and you mentioned that you were pleased with the interest you’ve seen so far? This is a very large --

Nelson C. Rising

That’s correct. Mark Lammas would like to make a comment here.

Mark T. Lammas

One point of clarification. I think we heard you say 2600 Michelson and I just want to make sure you know that’s not part of the Park Place campus, so it was 3161 and 3121, the retail, and the former Fluor Corp headquarters buildings, along with all the developments surrounding that.

David Aubuchon - Robert W. Baird & Co., Inc.

And is the sale contingent on securing the extension options on 3161?

Mark T. Lammas

The answer is it will follow from who the sort of high bidders are and how they intend to capitalize their acquisition.

David Aubuchon - Robert W. Baird & Co., Inc.

Okay, and my last question is related to the Macquarie joint venture. What sort of discussions have you had with those folks and are they potential bidders in this asset?

Nelson C. Rising

We’ve had a very good relationship with Macquarie and our discussions basically have been dealing with the assets we have in partnership with them. To my knowledge, this would not be the kind of alternative that they would be looking for because one of the key components to value of Park Place is its development potential.

David Aubuchon - Robert W. Baird & Co., Inc.

Thank you.

Operator

Your next question comes from Mitch Germane of Banc of America.

Mitchell Germain - Banc of America Securities

Good morning, guys. Can I get some details on the Main Plaza bidding process since a number of potential buyers and maybe comp position.

Mark T. Lammas

This is Mark Lammas. I’ll shed a little light on that. You may be aware that we went out in the latter part of ’07 on a marketing effort for Main Plaza and received expressions of interest. We then considered those expressions of interest but didn’t follow up on a sale. We about two months ago looked at that group of leading bidders and re-engaged in that process, ultimately leading to the selection of one of the bidders who had expressed interest in the later part of ’07.

Mitchell Germain - Banc of America Securities

And Nelson, just one more question, can you provide us an update on the formalization of the organizational structure?

Nelson C. Rising

One of the key ingredients in the organizational structure changes is the role that Doug Gardner is playing. This was a very flat organization before we got here and now we have leasing, development, and asset management reporting to Doug. That does wonders for coordination and for efficiency and for decision making, so that’s a real key ingredient. The other thing that’s going to be happening as we finish the budgeting process for 2009 is we’re going to revise compensation plans so that they are consistent with our goals for the upcoming year and so the individual employees are motivated by the same thing goals that we have set for the company. So those two ingredients I think are among the most important. Doug, do you have something to add to that?

Douglas Gardner

I’d just like to add also one general statement and one specific one. Specifically, I appreciate Nelson’s comments, but my colleagues here at the table, Peggy, Mark Lammas, Shant Koumriqian, have all done an outstanding job, which leads to my general comment which is on arriving at this company, again just 10 weeks ago, Nelson did ask me to help assess the talent here and I’m pleased but not surprised to report that this is a very strong organization with terrific talent. Those of you who know Maguire organization over the years know that there are an outstanding number of graduates in real estate business out there and it’s largely due to the quality of people that come through this office, so we have felt very encouraged by the capability and talent of this staff and we’re able to hit the ground running with them.

Mitchell Germain - Banc of America Securities

Thank you.

Operator

Your next question comes from Ian Weissman of Merill Lynch.

Ian Weissman - Merrill Lynch

Good morning. A follow up to some other questions earlier about the goal of reducing some of the debt issues of the company. In addition to equity raises and asset sales which to me in this environment seems to be a significant challenge given the credit markets, can you just update us on your thought process about giving the keys back on some of these more troubled assets and maybe clarify conflicting reports about master lease agreements that may or may not prevent you from doing so?

Nelson C. Rising

Well first of all, our goal is to if we have a situation where a loan is basically in trouble, to work with a lender on that, and I think that working with a lender is a far better way as we’re doing in the two examples that I just mentioned so I think that we are going to take them one at a time and each one is different. Each one has a different set of facts but in some cases you want to match a buyer at the same time you’re having the negotiation. One of the things that’s very clear is that the lending community today is very sensitive to the value of the asset supporting a loan and in many cases they are more than encouraged by the regulators to acknowledge those facts and that makes a discussion easier to have when a lender already recognizes what we would tell them if we had a chance to tell them and so that’s the process. We’ve made great progress in two months and I think we’ll be able to accelerate that as we get some of these other matters done.

Ian Weissman - Merrill Lynch

I’ve heard conflicting reports about there being master lease agreements which may make it very difficult to give keys back. Is that true or untrue?

Nelson C. Rising

I’ll say this. There are master lease agreements and we’ve had that question asked by a number of people and so what we’re thinking about, what we are going to do in our Q, is provide a schedule. The information has been in the material but it’s not been as easy to track, so we will put a schedule on response to this and other questions we’ve had on it that will illustrate where the obligations are. A typical example would be a building where in order to maximize the loan amount, a number of floors were master leased or more typically, the situation where a tenant was in the building went under, and then to make up for that loss of rent, there was a master lease for that number of floors. Under those obligations, usually they were all different, but usually any leasing of that space would on a foot by foot basis eliminate the guarantee or the master lease, so this schedule which will be, our Q is due b the 11th, it will contain a schedule that will deal with this.

Ian Weissman - Merrill Lynch

Okay. Thank you very much.

Mark T. Lammas

I’d like to just clarify something for you. The couple of instances that Nelson has mentioned both of those arrangements are cooperative negotiations with the lender and so in neither instance would you look at those as a sort of a give back of keys so to speak. To the extent that there is any recourse type obligation like a master lease, since it is a cooperative arrangement, that ends up folding into the overall outcome of this three party deal that we’re trying to strike. I do think that there’s a little misunderstanding from what I’m reading on how these recourse obligations are actually factoring into these deals because again there’s been no undertaking on our part to do anything like give back keys. It’s been cooperative arrangements with the lenders.

Ian Weissman - Merrill Lynch

It sounds like your goal though is then first to target asset sales, so what is your aggregate dollar amount of asset sales that you’re targeting over the next 12 months which would sort of get you out of the bind?

Nelson C. Rising

What we’ve got now is three assets that are on the market. One is in escrow and about to close, the other, that’s Park Place, to give you the parameters on Park Place... Main Plaza is in escrow. Park Place is 105 acres with multiple buildings, 9 buildings, retail and residential hotel and other sites. The total aggregate debt on this site, there are three mortgages on it, when fully drawn, will be $510 million and we don’t know, and I won’t venture a guess as to what the pricing will be in excess of that debt. We’re encouraged by the activity but I won’t go further than that. Obviously if we were to be able to sell that, that would eliminate a big chunk of indebtedness and would also be helpful because there’s a slight negative carry on that property and more importantly, significant negative impacts to AFFO if we try to develop it. So those two have been identified obviously. We have another property which I’d just as soon not mention where we are in the process of negotiating with the tenant and so at this point, those will be the three. Main Plaza was $211 million, sale price, Park Place, the debt is $510 million, I can’t project what the proceeds will be for the equity, and the other assets under $50 million. That’s what we’ve targeted now. We don’t want to flood the market. We don’t want to go to the market with too many offerings at the same time. Then we have the two buildings in another part of Orange County which I just described. So that’s a total of 5 buildings of our 14.

Ian Weissman - Merrill Lynch

Would you say that the demand that you’re finding in the two months that you’ve been there, because I thought you said when you came in you were looking to target 5 to 6 Orange County asset sales, where would you sort of put the level of demand, above or well below your expectations?

Nelson C. Rising

From a standpoint of Main Plaza, above, and I just gave you four, so we weren’t too far off with that. We’ve got the two that are in a different part of Orange County in Irvine and then we have the Park Place and Main Plaza. Based on the number of potential buyers looking at Park Place, I’m pleasantly surprised. As I said, I’m also very, very excited about what we’re doing with the lenders and another buyer on the assets in Orange County.

Ian Weissman - Merrill Lynch

Okay, thank you.

Operator

Your next question comes from Lou Taylor of Deutsche Bank

Louis Taylor - Deutsche Bank Securities

You focused on the capital raising and the cash generating ability of these sales. Can you focus on the burn rate. It looks like Q2 is around $38 million. What do you think that looks like six months out or pro forma after some of these sales and at what point do you think you get to break even?

Nelson C. Rising

Well, that’s a very complicated question to answer. Shant, help me out here, because you’ve got a little more information about the numbers.

Shant Koumriqian

Without projecting what might happen going forward if we sell individual assets, because it all depends, but let’s just go back to Q1. We had a $69 million burn rate in the first quarter. We eliminated a $21 million dividend which gets you down to $48 million. Current quarter burn was about $37 million. The drop off there were a number of non-recurring discretionary expenditures so many of you are aware that we are re-doing the lobbies here at KPMG Tower. We completed that renovation during the quarter. We had a lobby renovation in another building in Orange County. We had some pre-development activities that have been slowed down, and we have significant TI build outs in the first couple of quarters, primarily the Latham space here at KPMG Tower. So looking forward, the significant impact on the burn is going to be how quickly we lease and what type of monies we spend on tenant improvements, which Nelson referred to previously, will be paid for primarily with reserves. So the $37 million burn rate during the quarter likely going forward, something in that line, maybe $35 n to $45 million in gross, but then we do have reserves on the books that we’ll use to pay for some of that CapEx, so you’re probably looking at like a $20 million burn rate for the next number of quarters before we get rid of assets.

Louis Taylor - Deutsche Bank Securities

Okay, but in terms of as you kind of look at the asset sales and if things go somewhat as hoped, where does that get you?

Shant Koumriqian

If things go as planned, the burn rate slows down.

Louis Taylor - Deutsche Bank Securities

Can you help us, does it go to $15 million or does it go to zero? Where does it really go to?

Nelson C. Rising

We have not been giving, for a variety of reasons, including lack of visibility, we are not prepared to give guidance. It would be my hope at some point we’ll change that but there’s just too many moving parts we still haven’t completely understood and also the market conditions are such that I would rather not give you any direction than give you the wrong direction and at this point I fear it would be the latter if I venture to guess.

Louis Taylor - Deutsche Bank Securities

Okay, I’ll leave it at that. Thank you.

Operator

Your next question comes from John Guinea of Stifel.

John Guinee - Stifel Nicolaus & Company, Inc.

Broad based, one single question with a little preamble. A lot of people have run the NAV on the company. It’s somewhere between $18 and $25 a share. We’ve been bouncing around between $9 and $12 a share which is unfortunately 50% of NAV and we all know in this world that the best companies trade at NAV or more and the worst companies trade at significant discounts. Now the rededicated investors are clearly on the sidelines with your stock right now and it’s impossible to get the stock up as long as the rededicated investors stay on the sidelines. Having said that, it looks to us like your Orange County disposition program, if you can execute on Main Plaza, Park Plaza, the two other assets, that’s about 3.7 million square feet of your total 7.3 million square feet in Orange County. By our analysis, the remaining 3.6 million square feet are underwater in value relative to the debt. Can you fast forward to give us some clarity as to what you think this portfolio will look like at the end of 2008?

Nelson C. Rising

Well, as I said to the last question about projecting out, I’m reluctant to do that at this point. Although I would disagree with the notion that all the other assets in Orange County are underwater, I don’t think that’s the case. It’s now July, almost August, and we would hope to close the four transactions we talked about, three of them in the third quarter, one probably in the fourth. If we started marketing something new right now, it’s not likely it would change the picture by the end of the year. So from a standpoint of where would be at the end of 2008, we have been cautious about marketing too many assets at the same time for a variety of reasons and I think that’s a strategy that has kept us in good stead. We’re trying to lease everything that’s there, but we’ll make a decision as we see how things go with the Park Place marketing efforts as to what if any other asset we put on the market before the end of this year, so at this point I would think it’s going to be four less what we had before and then take a hard look come September.

John Guinee - Stifel Nicolaus & Company, Inc.

Thank you.

Operator

Your next question comes from Michael Knott of Greenstreet Advisor.

Michael Knott - Greenstreet Advisor

Can you just comment on your appetite for raising potentially equity capital through joint ventures or other activities downtown and whether or not the couple of recent building sales influenced your opinion on that matter one way or the other?

Nelson C. Rising

The building sales, there’s two in downtown, so that everyone can understand that. There was a $440 square foot sale at the Mellon Bank building, the home of my former law firm, O'Melveny & Myers. The other is now called The City, formerly Wells Fargo, formerly 4-4-4, and I’m not sure of the pricing per square foot on that. I think it was in the 3s but I don’t know the exact number. Those are, especially the 4-4-4, the Mellon Bank at $440 a foot, is in interesting number. But as to whether or not that would motivate us to do something with downtown, we’re not looking at a joint venture in our downtown assets at this point, and also I think that there are other ways for us to deal with cash needs other than putting assets in joint ventures. We did that with Macquarie but that’s not really high on our list right now. We’ve had one asset in Orange County that we are talking about doing a joint venture with a buyer but that’s not in downtown.

Michael Knott - Greenstreet Advisor

Thank you.

Operator

Your next question comes from Chris Haley of Wachovia.

Chris Haley - Wachovia Capital Markets, LLC

Good morning, Nelson. Welcome back to the public company fishbowl on your first return conference call. Could you maybe just step back and maybe just give us a timetable that we should be thinking about all these items over the next 3, 6 months referencing or at least looking for maybe an update or at least a conference call comment as a follow up to some of the discussions you may have had in New York earlier last month. The three or four main points that we should be focusing on over the next 3, 6, 9, 12 months.

Nelson C. Rising

That’s a good question. We’re focused on leasing our portfolio. When it’s all said and done, that’s the engine that drives everything, so we’re focused on the revenue generated from our lease activities. We are focused obviously on liquidity and from a standpoint of liquidity, the Plaza Las Fuentes loan and the liberation of capital from the Orange County sales. Then the other two transactions we spoke of, very important, because I think they set a tone for getting out of a debt situation which does not have much upside. I think those are the things that have most of our attention right now because of the importance of what success there would do for our liquidity and our ability then to manage the company more aggressively.

Operator

Your next question comes from Allen Adler of ARA Enterprises.

Allen Adler – ARA Enterprises

Could you just talk to what your exit strategy is in your head, whether it’s near or long term? Are you there to sell or are you there to build and merge and then buy eventually?

Nelson C. Rising

You’re referring to me?

Allen Adler – ARA Enterprises

Yes. You’ve come into a troubled situation. You must have something on your mind. You didn’t need to do this this week.

Nelson C. Rising

You’re right about that. Some people were asking me what I had in my mind.

Allen Adler – ARA Enterprises

I’m asking you now.

Nelson C. Rising

It was my intent when I undertook this assignment, and it is my intent now, to help this company become a leading REIT up in the office sector. One of the questions earlier was basically implying the question of how do you get the dedicated REIT investor into the stock and stock ownership and the answer is act like a REIT and do the things you need to do, which means getting the debt to market cap in line, have funds from operation and available funds from operation sufficient to pay a dividend that’s attractive, and a story for growth of allowing multiple on that FFO to be attached to the stock. I signed on for five years and my incentives are geared that way. That’s my expectation. Obviously if something happens along the way it’s an event that was not anticipated, that would be, if it was good for the shareholders, it would be very good to do, but my intent is to run this company as if it is going to be a functioning REIT and if you look at the history of the firm for the five years in which the REIT has been in existence, it’s been more talk about sales than it has been operating as a REIT and I think that can be very disruptive, so we’re focused on functioning as a REIT and that’s why I signed up.

Allen Adler – ARA Enterprises

Bu t you have recognition of the pressures of it having been for sale and with the stock now 10 as opposed to 19 and offer it at 18 or 19 or 23, would be pretty attractive to most of the existing shareholders. What’s your reaction to that?

Nelson C. Rising

We would be very responsive to an obligation to have the shareholders make a decision like that.

Allen Adler – ARA Enterprises

Thank you. Good luck.

Operator

Your next question comes from Dave Aubuchon of Baird.

David Aubuchon - Robert W. Baird & Co., Inc.

Thank you. Could you talk about relative to your ability to save cash whether or not it makes sense to continue to develop the asset in Glendale, whether or not you have any pre-leasing and your current plans for the preferred?

Nelson C. Rising

The asset in Glendale, if I’m good, it’s topped out. They’re starting to put the mechanical in the building. It’s probably a year away from completion. At this point there is no pre-leasing. The Tri-Cities market is a good market and within it, Pasadena had a little bit of a hit, but prior to that, it was one of the strongest markets in Southern California, and it’s still very strong, and Burbank’s very strong, and Glendale’s right there in the middle. But we don’t have any tenants leasing at this point.

David Aubuchon - Robert W. Baird & Co., Inc.

Why do you suppose you don’t have tenants if the market’s strong? Is it high teens vacancies in the Glendale area?

Nelson C. Rising

Our other buildings in Glendale are all very highly occupied. I think they’re close to 95%. I guess the question of asking price. I mean, this is a brand new building, and so we obviously have to look at that, but at this point, we’ve had lots of people interested and you have great signage from the freeway, but we just, I can’t give you an answer why, I can just say that at this point we don’t have leasing activity.

David Aubuchon - Robert W. Baird & Co., Inc.

You’re committed to the project. What about the preferred dividend? Any comment there?

Nelson C. Rising

The preferred dividend, we have every intention to pay the dividend and we have, other than that, I don’t have anything to add. I know a lot of people are very pleased with that way as a vehicle to own part of Maguire.

Operator

Your next question comes from Dave Rogers of RBC Capital Markets.

David Rodgers - RBC Capital Markets

Nelson, in your opening comments, you had commented that part of the sale or the rationale for the sales upcoming were infrastructure improvements or capital expenditures necessary in the future. Excluding your development pipeline in Lantana as well as excluding recurring TIs, do you have any other capital expenditures in the future that may have already been committed but not spent that aren’t otherwise apparent?

Nelson C. Rising

Not otherwise apparent. I don’t think so. I think the [solider] is pretty robust on that. We do have a lot of land that has development potential but at this time we are not actively spending money on the development cycle. We have one in particular we’re looking at but it’s not something that’s going to be consuming a great deal of cash unless we had some pre-leasing.

David Rodgers - RBC Capital Markets

Second question, not to go through asset by asset, but on the master lease comments you made earlier, could you give us the total square footage that might be under a master lease agreement, and then we’ll wait for the schedule to see the individual break out?

Nelson C. Rising

I think it might be better to wait for the schedule because this was very complicated in that there was a... Here’s a hypothetical. A master lease was entered into on four floors and then there’s a floor leased or two floors leased, so what we need to do is go through, and this schedule will do that, calculate the current status. It’s a legitimate question and one of the reasons that I suggested we would be doing this is that we’ve heard the question enough times to make it clear that people aren’t getting the answers out of the currently published material.

David Rodgers - RBC Capital Markets

Fair enough, and if you sell those assets, would the buyers assume those provisions or would that be one of your goals in the sale I assume?

Mark T. Lammas

This is Mark. It’ll just stem from the sale. It’s part of whether or not alone debt relies on that underlying master lease gets assumed or not assumed, right?

David Rodgers - RBC Capital Markets

That makes sense. Thank you.

Operator

Your next question comes from Michael Knott of Greenstreet Advisor.

Michael Knott - Greenstreet Advisor

Two quick questions. One, can you comment on the CFO search and two, how much in reserves or restricted cash would be lost from the two buildings in central Orange County that you’re going to be relieving yourself of the debt associated with those properties?

Nelson C. Rising

The reserves that would be on both of those properties would be in two categories. They would be in interest reserve and a tenant improvement or lease up reserve. The total amount, I’m going to ask Shant for some help here, the total amount, we don’t want to identify the buildings for reasons I just mentioned.

Shant Koumriqian

Total amount is probably in the $17 million to $20 million range.

Nelson C. Rising

That’s for both buildings.

Shant Koumriqian

Leasing reserves.

Nelson C. Rising

Then you asked a question about CFO search. We are very pleased to have Shant as our principal accounting officer and we’re at a point where he has been extraordinarily helpful to me as the CEO and getting to understand this company better. We do not have an active search on at this point for that reason.

Michael Knott - Greenstreet Advisor

Thank you.

Operator

Your final question comes from Jordan Sadler of Keybanc Capital.

Jordan Sadler - Keybanc Capital Markets

Could you clarify just where you are in the life cycle of the sale of Park Place?

Nelson C. Rising

Where we are in the life cycle.

Jordan Sadler - Keybanc Capital Markets

Of the sale. You’ve received first round bids, second round bids, when do you think it’ll come to --

Nelson C. Rising

What’s happened so far is books have been put together, confidentiality agreements have been signed, tours have been given. Those who qualify have been admitted to the electronic [batter] room. Those are the steps so far. We have been trying to gauge based on the volume of interest whether we close the process the end of July which we obviously decided not to do, the end of the first, or the end of the second week in August. At this point, we are looking at, although we haven’t announced, August 8. What will be the process after that, is I presume your question, and we don’t know. We’ll see what happens and if there are a number of bidders that are close, we’ll go one way. We really don’t know what to expect and we certainly don’t want to raise expectations with anybody on this call that there’s going to be, that we have any expectations as to numbers other than the facts which we described which people can interpret themselves.

Jordan Sadler - Keybanc Capital Markets

And just on the leasing side, when did the Latham lease commence?

Nelson C. Rising

Latham commenced occupancy of this building two weeks ago. They moved out of the US Bank Tower into here, so the commencement of the lease was late June.

Jordan Sadler - Keybanc Capital Markets

Late June. So we really didn’t see the pickup.

Nelson C. Rising

You haven’t seen the pick up yet. You will.

Shant Koumriqian

It’s in the numbers, if you look at our portfolio table, you’ll see US Bank Towers lease rate has dropped and KPMG Tower has increased to 92%, but point being you haven’t seen a pick up in earnings yet.

Jordan Sadler - Keybanc Capital Markets

When did US Bank stop? Was it --

Shant Koumriqian

They moved out the end of June from one building to the other and the lease at US Bank Tower stopped on that date and commenced on KPMG Towers instead.

Nelson C. Rising

But there is a gap because of the – is there no gap?

Jordan Sadler - Keybanc Capital Markets

That’ll be a little bit of a drag on the third quarter.

Shant Koumriqian

On the third quarter, the net rents they are paying at US Bank Tower were a little bit higher so you will see a drop starting the third quarter.

Jordan Sadler - Keybanc Capital Markets

Okay, and then Shant, do you have sort of a current sort of cap rate implied by the Main Plaza sale just to give us an idea of what the earnings yield was, the NOI yield was on the $210 million?

Mark T. Lammas

This is Mark. We’re obviously not, sensitivity to Shorenstein and for other reasons we’re obviously not disclosing what the implied cap rates are.

Jordan Sadler - Keybanc Capital Markets

That’s helpful and just lastly, is there any other update you can provide us on the sort of core leasing effort, specifically in Orange County and downtown, what the prospects look like for the balance of this year?

Nelson C. Rising

As I said, in Orange County, we’ve had leasing activity. Orange County is a generic term and so as we go from place to place within Orange County where it’s different. In the mid Orange County area, the leasing has been very slow, although we have a couple of deals we’re looking at in central Orange. Brea, we mentioned an 80,000 square foot deal with Raytheon, that’s in the northeast corner of Orange County. The leasing activity has been very, very good at 3161. We’re very pleased with not only the activity but the quality of the tenants that are moving into that building. We’re negotiating one that’s quite attractive. Overall, what I’m hearing anecdotally is that leasing is slow and what we’re also, whether it’s the summer taking effect or not, there’s been a marked slow down in activity over the last few weeks across the board, not just at our properties. As far as downtown, we are very encouraged about what’s going to happen in the downtown market with the price of rents in the west side being in some cases double what it is here, with the traffic and the inability to get from the west side to downtown where the courthouse is and all the other courthouses are, I think a lot of people are re-looking whether or not they’re going to stay on the west side when they come to relocate. We can’t underestimate the impact of the gas price issue on people utilizing mass transit which is centered here in downtown, so for all of those reasons, we’re very, very optimistic. What we’ve seen in the first quarter we leased about 600,000 square feet compared to 500,000 square feet in the preceding quarter and then looking Further, we have very few rollovers in ’09 and ’10 and that’s encouraging. We do have some big rollovers coming out after that. The market is tightening and as I mentioned in a different context, if you look at the number of full floors available downtown, there aren’t many and that’s a very good sign as well. I guess the best proof of what I’m saying is that the rents seem to be holding in this market although low activity is a little slower than it was a couple of months ago.

Jordan Sadler - Keybanc Capital Markets

That’s helpful. Thank you.

Operator

Thank you. That concludes our question and answer session today. I will now turn the call over to the Maguire Properties management team for any closing comments they might have.

Nelson C. Rising

Thank you for your questions and for your interest in Maguire Properties. Each day I’m here I’m getting more and more excited about our prospects in the future and I look forward to sharing those with you at the next call or at the next [Nerig] stop which I guess is going to be in November, so thank you all very much and good day.

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Source: Maguire Properties, Inc. Q2 2008 Earnings Call Transcript
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