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Executives

David Weinstein - President and CEO

Fred Chin - Acting Chief Operating Officer

Chris Norton - EVP, General Counsel and Secretary

Jeanne Lazar - Chief Accounting Officer

Peggy Moretti - Head, IR

Analysts

Erin Aslakson - Stifel

Michael Knott - Green Street Advisors

Wilkes Graham - Compass Point Research & Trading

Andrew Sole - Esopus Creek Advisors

MPG Office Trust Inc. (MPG) Q3 2012 Results Earnings Call November 6, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MPG Office Trust Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this call is being recorded today, November 6, 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’d like to turn the call over to David Weinstein, our President and CEO.

David Weinstein

Good morning, and thank you for joining our third quarter 2012 call. Fred Chin, our Acting Chief Operating Officer, is here with me along with Chris Norton, who is recently promoted to Executive Vice President, General Counsel and Secretary; Jeanne Lazar our Chief Accounting Officer, and Peggy Moretti, our Head of Investor Relations.

During the quarter and subsequent to quarter end, the company continues to make progress towards exiting non-core assets. On August 3rd a trustee sale was held with respect to Glendale Center. As a result of the trustee sale, the company was relieved of $125 million of debt and received a general release of claims under the loan documents.

On September 6th, the trustee sale was held with respect to 500 Orange Tower. As a result of the trustee sale, the company was relieved of $110 million of debt and received a general release of claims under the loan documents.

Additionally on October 1st, a trustee sale was held with respect to Two California Plaza. As a result of that trustee sale, the company was relieved of $470 million of debt and received a general release of claims under loan documents.

During the quarter, the company reported that it received notices of redemption from Robert MacGuire III, and related and these requesting the redemption of a total of 5.176,251 million operating partnership units in exchange for the same number of shares of the company’s common stock. At Mr. MacGuire’s request, the company issued approximately 4.5 million shares to a party not related to Mr. MacGuire and approximately 680,000 shares to Mr. MacGuire directly. Approximately 170,000 operating partnership units remain outstanding and the company now owns approximately 99.7% of MPG Office Trust LP, it’s operating partnership.

To redemption of these units and subsequent issuance of the common stock to party not related to Mr. MacGuire caused Mr. MacGuire and related entities to fall below the 50% ownership requirement set forth in his contribution agreement. Therefore all tax protection in favor him and related entities as well as all remaining limited partners will now expire on June 27, 2013.

As to leasing, during the third quarter 2012 we completed new leases and renewals for approximately 362,000 square feet including our pro-rata share of our joint-venture properties. Included in that amount is the renewal of Wells Fargo Bank at Wells Fargo Tower as previously announced Wells Fargo Bank agreed to a 10 year lease renewal for the entirety of its current office retail and museum space totaling approximately 291,000 square feet.

Wells Fargo has the option exercisable over the next three years to contract the space by 89,000 square feet. Wells Fargo also has the option exercisable over the next two years to expand its office space by 25,000 square feet.

Turning to our cash position, as of September 30, 2012, we had $158.6 million of cash-on-hand, excluding cash related to assets in default. $117.4 million is unrestricted and available for general corporate purposes. $41.2 million is restricted for specific purposes such as leasing commissions, tenant improvements, property taxes and insurance.

At year-end, we expect to have between $95 million and a $100 million of unrestricted cash. This assumes we make a projected $7 million to $8 million combined federal and state tax payment. The bulk of these taxes are due to the resulting gains from the give-back of assets to lenders and the sale of assets during 2012 offset by our 2012 losses.

While we can use federal net operating losses to offset these gains, there is a net 2% federal alternative minimum tax for such use. In addition, in 2010 and 2011, California suspended the use of net operating loses. If California continues the suspension in 2012 and beyond, we will be subject to an 8.84% California franchise tax. The $7 million to $8 million projected payment assumes that California will act such suspension for 2012.

The future suspension of the use of net operating losses by California will have a significant impact on MPG in the future, if we decide to sell or give back any assets as the effective basis in our assets is approximately $1.5 billion. We also potentially have approximately $200 million of capital losses that can be realized upon the dissolution of our tax or REIT subsidiaries. The remaining basis in our assets and the potential capital losses from the dissolution of our tax or REIT subsidiaries will be disclosed in our upcoming Form 10-Q that we filed on November 9, 2012.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of [Erin Aslakson] of Stifel.

Erin Aslakson - Stifel

Hey, good morning.

David Weinstein

Good morning.

Erin Aslakson - Stifel

I wanted to ask about the TI components for the Wells Fargo lease, it looks like it’s about totals about $15.6 million, when do you expect to actually spend that cash?

David Weinstein

Well, that the tenant has the right, I don’t know the numbers are exactly right, I am not saying its wrong but the tenant has the right to pull those TIs when they build out the space and it’s not clear when they are going to build out their space, there is still space planning.

Erin Aslakson - Stifel

Okay. Do you think is that over next year or is it over the next couple of quarters?

David Weinstein

I am sorry?

Erin Aslakson - Stifel

Do you think that would be over the next year or is that over just next couple of quarters?

David Weinstein

I don’t think, firstly I don’t know when they are going to remodel their space but it takes a while to plan space and build space. So I would not expect, it would be over the next few quarters.

Erin Aslakson - Stifel

Okay. And then the next question is actually what -- is related to your cash burn rate and what would that be on a stabilized basis going forward and would you - are you and also are you including in that number the Wells Fargo TI/LC spend?

David Weinstein

Well, let me walk you through instead of - because I normally get this question on many, walk you through our projected cash for year end.

Erin Aslakson - Stifel

Sure.

David Weinstein

Because I didn’t mentioned that and the reason we broke it out this quarter is one because we asked a lot and two we want to make sure people understood the taxes but on a very simple basis, if we store with $117.4 million, the taxes are potentially $7 million to $8 million, so you subtract $8 million. The G&A run rate has been about $5 million to $5.5 million, so let’s just subtract $5.5 million and then of existing - we have existing TI obligations this quarter, we expect to spend between $6 million to $8 million for those and that’s not including the Wells Fargo lease. So if you subtract all those numbers from $117.4 million, you get about $96 million.

Now the properties are give or take break-even, my guess is a little bit positive. So that’s the simplicity of how to get to the numbers.

Erin Aslakson - Stifel

Okay. So possibly positive going forward after these things, after these other items?

David Weinstein

Yeah, the properties are about break-even, slightly positive.

Erin Aslakson - Stifel

Okay. And then the final question I guess is the $1.5 million effective basis you just mentioned, does that include any of the assets that are currently in default?

David Weinstein

No.

Erin Aslakson - Stifel

Okay.

David Weinstein

We only have one asset left that’s in default.

Erin Aslakson - Stifel

Right, that’s the big, you know.

David Weinstein

Get back this quarter.

Erin Aslakson - Stifel

Right, okay. Thank you.

David Weinstein

You’re welcome.

Operator

Our next question comes from the line of Michael Knott of Green Street Advisors.

Michael Knott - Green Street Advisors

Hey good morning, hey David.

David Weinstein

Hi Michael, how are you doing?

Michael Knott - Green Street Advisors

Good, thanks. Hey can you just, I think I’d like to give you a chance to say anything about this process that is reportedly going on, is there any comment you’d like to share on that and any update?

David Weinstein

No, we have no comment on that.

Michael Knott - Green Street Advisors

Okay. And then can you just help me better understand the tax situation?

David Weinstein

Sure, if you have a specific question.

Michael Knott - Green Street Advisors

Just help me understand just the nature of the liability and just walk me through that?

David Weinstein

The liability is generated by the fact - predominately by the fact that we gave back assets to lenders, so we have gains from those results and givebacks. So that’s the source of it also a little bit from asset sales, historically, although we haven’t had gains, we only in loss but historically we could have used California and federal net operating losses to offset those gains but it hasn’t happened yet this year but the prior two years California suspended the use of NOLs. So if they don’t do that this year then we won’t pay the tax but if they do suspend the use again, it $7 million to $8 million.

And the reason we disclosed the $1.5 billion, we just to make sure everyone is aware that we had no control what California does but if we were to sell assets on an individual basis or give assets back to lenders, we would have this issue going forward.

Michael Knott - Green Street Advisors

Okay. And then just with respect to the debt that matures over the next year or so, it seems like about $900 million, can you maybe just comment on where you perceive yourself to be on that?

David Weinstein

We’ve no comment on that. As historically we don’t disclose what we’re working on. But clearly, we’re well aware that those three [billings] have debt coming due.

Michael Knott - Green Street Advisors

Right, okay. And then I guess last question would be just going back to the process question, what would be your take on MPG as a going concern in terms of, can you pitch us on the vision that you have as to why and how MPG can prosper in the future?

David Weinstein

Well, I’m not going to do that. I can tell you that as a going concern, we are going concern and whatever we choose to do we’ll continue to be a going concern. So we have assets, we have debt maturities coming up which we have to deal with. So that’s all I can say about that. I mean we have $170 million of cash. So we’re going to use our cash prudently to continue to lease up the assets and that’s really what the most important thing obviously these to get done at this company and so lease up our assets.

Michael Knott - Green Street Advisors

Right. And if I can ask one more question, sorry what is your comment on state of Downtown L.A. leasing fundamentals and how it is faring versus what you may have expected say at the beginning of the year?

David Weinstein

Well I don’t think it’s any secret that leasing in Downtown L.A. is very, very challenging. We need in migration, folks ask about on every call. When you look at our leasing over the first three quarters, we have about 100,000 sq ft of leasing that we would think of its to new tenants and that’s really new tenants entering the market and expansions. Probably of that 100,000, I mentioned probably 25% was expansion. So we only have 75,000 sq ft in the first three quarters coming into the market in our buildings.

To me that’s a pretty bleak outlook, we are doing a lot of renewals, the Wells Fargo Bank renewal was great for us but they have the option to downsize, I don’t know if they’re going to downsize but downsizing continues to be a problem in this market. They also have the option upsize so hopefully they’ll choose that over downsize. So I would describe the leasing market in Downtown L.A. right now is very, very challenging.

Michael Knott - Green Street Advisors

Yeah thanks a lot, I appreciate it.

Operator

Our next question comes from the line Wilkes Graham of Compass Point Research & Trading.

Wilkes Graham - Compass Point Research & Trading

Hi good morning. I just want to clarify a couple of things, can you just clarify again what the $1.5 billion is?

David Weinstein

The $1.5 billion is and this will all be disclosed as I said in the Q. The $1.5 billion is our bases in our assets and it’s actually fairly complicated but it’s our tax bases in the assets.

Wilkes Graham - Compass Point Research & Trading

And so the point is normally if you were to sell those then any taxes you might owe on gains, you were going to be able to offset with net operating losses, but if you’re not able to do that then there’s some taxes and it’s on that basis of $1.5 billion.

David Weinstein

Correct. Now there are a couple of things, so there is the 2% the net 2% federal turn of minimum tax even if we could have used net operating losses in California, there is I think it’s 2% also, tax in California, the net tax. But you’re right, now we have other things we can do, we have, we have TRSs that have about $200 million of capital losses in them. So, if we were to do something, we can offset some of the gains with those losses but the point is that there will be some tax leakage if we were to sell or give back any of the remaining assets.

Wilkes Graham - Compass Point Research & Trading

Okay. And is the, because I think people are probably unfamiliar with this issue in California. Is 2013, is that decision for the state up for debate anytime soon or up for a decision?

David Weinstein

The decision has not been made yet. It’s minus 10, they have to make decision before the end of the year and it’ll be retroactive for the year. But we have not heard anything on this decision at all.

Wilkes Graham - Compass Point Research & Trading

Okay. And then the last…

David Weinstein

So hopefully they’ll decide not to suspend this year. But given that they suspended last two years and I’m not sure the California economy has improved much. I would be surprised, if they’re going to suspend it again.

Wilkes Graham - Compass Point Research & Trading

Okay. And then the last question is just to clarify an earlier question. Does the $1.5 billion include Two Cal Plaza, which is now off the books, as of October?

David Weinstein

No, no. Two Cal Plaza is again we’re going to recognize this year.

Wilkes Graham - Compass Point Research & Trading

Yeah.

David Weinstein

That’s a big piece of the $7 million to $8 million that we’re going to have to pay this year.

Wilkes Graham - Compass Point Research & Trading

So the only defaulted asset it includes is 3800 Chapman?

David Weinstein

It doesn’t include 3800 Chapman either because that will be exited this year.

Wilkes Graham - Compass Point Research & Trading

Okay, so there’s no defaulted assets included?

David Weinstein

None.

Wilkes Graham - Compass Point Research & Trading

Okay, cool, thanks.

Operator

Your next question is a followup from the line of Erin Aslakson of Stifel.

Erin Aslakson - Stifel

Hi, thanks for taking my question again. The applicable rate for assuming you were to dispose off an asset, would that be the 8.84% California franchise tax plus the 2% federal AMT tax you mentioned or is the 2%--

David Weinstein

Yes.

Erin Aslakson - Stifel

So it’s 8.84% plus 2%?

David Weinstein

Yes.

Erin Aslakson - Stifel

Okay, all right. Thank you.

David Weinstein

No problem.

Operator

Our next question comes from the line of Andrew Sole of Esopus Creek Advisors.

Andrew Sole - Esopus Creek Advisors

Good morning David, thank you. Actually my question was both asked and answered. So I will withdraw from the queue.

David Weinstein

Okay.

Operator

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

Peggy Moretti

Thank you for participating in this morning’s call. We will continue to keep you apprised of our results.

Operator

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

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