fm10q03312010.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
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or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________
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Commission File Number: 001-31717
MPG OFFICE TRUST, INC.
(Exact name of registrant as specified in its charter)
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Maryland
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04-3692625
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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355 South Grand Avenue Suite 3300
Los Angeles, CA
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90071
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(Address of principal executive offices)
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(Zip Code)
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(213) 626-3300
(Registrant’s telephone number, including area code)
MAGUIRE PROPERTIES, INC.
(Former name, former address and former fiscal year, if changed since last report)
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
Common Stock, $0.01 par value per share
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Outstanding as of May 14, 2010
48,011,029 shares
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FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS
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Page
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PART I—FINANCIAL INFORMATION
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Item 1.
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Financial Statements.
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1
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2
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3
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5
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Item 2.
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29
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Item 3.
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55
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Item 4.
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55
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PART II—OTHER INFORMATION
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Item 1.
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56
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Item 1A.
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56
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Item 2.
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57
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Item 3.
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58
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Item 4.
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58
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Item 5.
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58
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Item 6.
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59
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60
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Exhibits
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PART I—FINANCIAL INFORMATION
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Financial Statements.
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MPG OFFICE TRUST, INC.
(In thousands, except share amounts)
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March 31, 2010
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December 31, 2009
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(Unaudited)
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ASSETS
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Investments in real estate:
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Land
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$ |
408,481 |
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$ |
461,129 |
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Acquired ground leases
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55,801 |
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55,801 |
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Buildings and improvements
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2,682,922 |
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2,801,409 |
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Land held for development and construction in progress
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186,046 |
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184,627 |
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Tenant improvements
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316,082 |
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329,713 |
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Furniture, fixtures and equipment
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19,584 |
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19,519 |
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3,668,916 |
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3,852,198 |
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Less: accumulated depreciation
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|
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(655,892 |
) |
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(659,753 |
) |
Investments in real estate, net
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3,013,024 |
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3,192,445 |
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Cash and cash equivalents
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91,235 |
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90,982 |
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Restricted cash
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138,044 |
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151,736 |
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Rents and other receivables, net
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8,399 |
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6,589 |
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Deferred rents
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66,606 |
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68,709 |
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Due from affiliates
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1,505 |
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2,359 |
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Deferred leasing costs and value of in-place leases, net
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104,742 |
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114,875 |
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Deferred loan costs, net
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17,772 |
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20,077 |
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Acquired above-market leases, net
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7,248 |
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8,160 |
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Other assets
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16,644 |
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11,727 |
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Assets associated with real estate held for sale
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52,099 |
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— |
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Total assets
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$ |
3,517,318 |
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$ |
3,667,659 |
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LIABILITIES AND DEFICIT
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Liabilities:
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Mortgage and other loans
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$ |
4,035,451 |
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$ |
4,248,975 |
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Accounts payable and other liabilities
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189,688 |
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195,441 |
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Capital leases payable
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2,271 |
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2,611 |
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Acquired below-market leases, net
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67,815 |
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77,609 |
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Obligations associated with real estate held for sale
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52,656 |
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— |
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Total liabilities
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4,347,881 |
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4,524,636 |
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Deficit:
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Stockholders’ Deficit:
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Preferred stock, $0.01 par value, 50,000,000 shares authorized;
7.625% Series A Cumulative Redeemable Preferred Stock, $25.00 liquidation
preference, 10,000,000 shares issued and outstanding
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100 |
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100 |
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Common stock, $0.01 par value, 100,000,000 shares authorized; 48,017,200 and
47,964,605 shares issued and outstanding at March 31, 2010 and
December 31, 2009, respectively
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|
480 |
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|
480 |
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Additional paid-in capital
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702,763 |
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701,781 |
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Accumulated deficit and dividends
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(1,397,328 |
) |
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(1,420,092 |
) |
Accumulated other comprehensive loss, net
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(36,727 |
) |
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(36,289 |
) |
Total stockholders’ deficit
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(730,712 |
) |
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(754,020 |
) |
Noncontrolling Interests:
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Common units of our Operating Partnership
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(99,851 |
) |
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(102,957 |
) |
Total deficit
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(830,563 |
) |
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(856,977 |
) |
Total liabilities and deficit
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$ |
3,517,318 |
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$ |
3,667,659 |
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See accompanying notes to consolidated financial statements.
MPG OFFICE TRUST, INC.
(Unaudited; in thousands, except share and per share amounts)
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For the Three Months Ended
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March 31, 2010
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March 31, 2009
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Revenue:
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Rental
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$ |
68,227 |
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$ |
67,394 |
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Tenant reimbursements
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25,107 |
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26,868 |
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Hotel operations
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5,237 |
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4,994 |
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Parking
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11,697 |
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11,593 |
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Management, leasing and development services
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961 |
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2,030 |
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Interest and other
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292 |
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|
778 |
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Total revenue
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111,521 |
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|
113,657 |
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Expenses:
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Rental property operating and maintenance
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24,195 |
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24,913 |
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Hotel operating and maintenance
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3,747 |
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3,449 |
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Real estate taxes
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9,114 |
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10,352 |
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Parking
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3,067 |
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3,557 |
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General and administrative
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|
7,607 |
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|
8,264 |
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Other expense
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1,439 |
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|
1,504 |
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Depreciation and amortization
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33,702 |
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36,980 |
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Interest
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|
66,710 |
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|
71,613 |
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Total expenses
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149,581 |
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160,632 |
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|
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Loss from continuing operations before equity in net loss of unconsolidated
joint venture and gain on sale of real estate
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(38,060 |
) |
|
|
(46,975 |
) |
Equity in net loss of unconsolidated joint venture
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|
201 |
|
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(1,739 |
) |
Gain on sale of real estate
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|
16,591 |
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|
20,350 |
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Loss from continuing operations
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(21,268 |
) |
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(28,364 |
) |
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|
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Discontinued Operations:
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Loss from discontinued operations before gain on settlement of debt
and gain on sale of real estate
|
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|
(1,923 |
) |
|
|
(30,426 |
) |
Gain on settlement of debt
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|
|
49,121 |
|
|
|
— |
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Gain on sale of real estate
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|
|
— |
|
|
|
2,170 |
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Income (loss) from discontinued operations
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|
47,198 |
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(28,256 |
) |
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|
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Net income (loss)
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25,930 |
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|
|
(56,620 |
) |
Net (income) loss attributable to common units of our Operating Partnership
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(2,584 |
) |
|
|
7,496 |
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|
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Net income (loss) attributable to MPG Office Trust, Inc.
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23,346 |
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|
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(49,124 |
) |
Preferred stock dividends
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|
|
(4,766 |
) |
|
|
(4,766 |
) |
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|
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Net income (loss) available to common stockholders
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$ |
18,580 |
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$ |
(53,890 |
) |
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Basic and diluted income (loss) per common share:
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|
|
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Loss from continuing operations
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$ |
(0.47 |
) |
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$ |
(0.61 |
) |
Income (loss) from discontinued operations
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|
0.85 |
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|
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(0.52 |
) |
Net income (loss) available to common stockholders per share
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$ |
0.38 |
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$ |
(1.13 |
) |
Weighted average number of common shares outstanding
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48,534,283 |
|
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47,788,028 |
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Amounts attributable to MPG Office Trust, Inc.:
|
|
|
|
|
|
|
|
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Loss from continuing operations
|
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$ |
(18,089 |
) |
|
$ |
(24,319 |
) |
Income (loss) from discontinued operations
|
|
|
41,435 |
|
|
|
(24,805 |
) |
|
|
$ |
23,346 |
|
|
$ |
(49,124 |
) |
See accompanying notes to consolidated financial statements.
MPG OFFICE TRUST, INC.
(Unaudited; in thousands)
|
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For the Three Months Ended
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|
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March 31, 2010
|
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|
March 31, 2009
|
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Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss):
|
|
$ |
25,930 |
|
|
$ |
(56,620 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities (including discontinued operations):
|
|
|
|
|
|
|
|
|
Equity in net loss of unconsolidated joint venture
|
|
|
(201 |
) |
|
|
1,739 |
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Operating distributions received from unconsolidated joint venture, net
|
|
|
— |
|
|
|
439 |
|
Depreciation and amortization
|
|
|
35,064 |
|
|
|
45,610 |
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
23,500 |
|
Gains on sale of real estate
|
|
|
(16,591 |
) |
|
|
(22,520 |
) |
Loss from early extinguishment of debt
|
|
|
379 |
|
|
|
211 |
|
Gain on settlement of debt
|
|
|
(49,121 |
) |
|
|
— |
|
Deferred rent expense
|
|
|
511 |
|
|
|
511 |
|
Provision for doubtful accounts
|
|
|
221 |
|
|
|
1,303 |
|
Revenue recognized related to below-market
|
|
|
|
|
|
|
|
|
leases, net of acquired above-market leases
|
|
|
(4,579 |
) |
|
|
(5,057 |
) |
Deferred rental revenue
|
|
|
(2,761 |
) |
|
|
(4,094 |
) |
Compensation cost for share-based awards, net
|
|
|
945 |
|
|
|
1,500 |
|
Amortization of deferred loan costs
|
|
|
2,035 |
|
|
|
2,259 |
|
Unrealized loss on forward-starting interest rate swap
|
|
|
— |
|
|
|
15,255 |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Rents and other receivables
|
|
|
(1,680 |
) |
|
|
299 |
|
Due from affiliates
|
|
|
854 |
|
|
|
(821 |
) |
Deferred leasing costs
|
|
|
(1,787 |
) |
|
|
(5,995 |
) |
Other assets
|
|
|
(5,464 |
) |
|
|
(7,151 |
) |
Accounts payable and other liabilities
|
|
|
16,681 |
|
|
|
1,378 |
|
Net cash provided by (used in) operating activities
|
|
|
436 |
|
|
|
(8,254 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from dispositions of real estate, net
|
|
|
106,885 |
|
|
|
1,833 |
|
Expenditures for improvements to real estate
|
|
|
(6,398 |
) |
|
|
(22,455 |
) |
Decrease in restricted cash
|
|
|
13,121 |
|
|
|
9,278 |
|
Net cash provided by (used in) investing activities
|
|
|
113,608 |
|
|
|
(11,344 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from:
|
|
|
|
|
|
|
|
|
Construction loans
|
|
|
1,632 |
|
|
|
10,794 |
|
Mortgage loans
|
|
|
— |
|
|
|
1,187 |
|
Principal payments on:
|
|
|
|
|
|
|
|
|
Construction loans
|
|
|
(17,633 |
) |
|
|
(3,499 |
) |
Unsecured term loan
|
|
|
(171 |
) |
|
|
(1,294 |
) |
Mortgage loans
|
|
|
(97,279 |
) |
|
|
(646 |
) |
Capital leases
|
|
|
(340 |
) |
|
|
(516 |
) |
Other financing activities
|
|
|
— |
|
|
|
69 |
|
Net cash (used in) provided by financing activities
|
|
|
(113,791 |
) |
|
|
6,095 |
|
Net change in cash and cash equivalents
|
|
|
253 |
|
|
|
(13,503 |
) |
Cash and cash equivalents at beginning of period
|
|
|
90,982 |
|
|
|
80,502 |
|
Cash and cash equivalents at end of period
|
|
$ |
91,235 |
|
|
$ |
66,999 |
|
MPG OFFICE TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$ |
47,291 |
|
|
$ |
62,780 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Debt forgiven by lender
|
|
$ |
49,121 |
|
|
$ |
— |
|
Increase in fair value of interest rate swaps and caps
|
|
|
392 |
|
|
|
3,368 |
|
Buyer assumption of mortgage loans secured by properties disposed of
|
|
|
— |
|
|
|
20,000 |
|
Accrual for real estate improvements and
|
|
|
|
|
|
|
|
|
purchases of furniture, fixtures, and equipment
|
|
|
2,024 |
|
|
|
7,536 |
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As used in these consolidated financial statements and related notes, the terms “MPG Office Trust,” the “Company,” “us,” “we” and “our” refer to MPG Office Trust, Inc. (formerly known as Maguire Properties, Inc.) Additionally, the term “Properties in Default” refers to our Stadium Towers Plaza, Park Place II, 2600 Michelson, Pacific Arts Plaza, 550 South Hope and 500 Orange Tower properties, whose mortgage loans are in default as of the date of this report. When discussing property statistics such as square footage and leased percentages, the term “Properties in Default” also includes Quintana Campus (a joint venture property in which we have a 20% interest), whose mortgage loan is in default as of the date of this report.
We are a self-administered and self-managed real estate investment trust (“REIT”), and we operate as a REIT for federal income tax purposes. We are the largest owner and operator of Class A office properties in the Los Angeles Central Business District (“LACBD”) and are primarily focused on owning and operating high-quality office properties in the high-barrier-to-entry Southern California market.
Through our controlling interest in MPG Office Trust, L.P. (formerly known as Maguire Properties, L.P.) (the “Operating Partnership”), of which we are the sole general partner and hold an approximate 87.8% interest, and the subsidiaries of our Operating Partnership, including MPG TRS Holdings, Inc., MPG TRS Holdings II, Inc., and MPG Services, Inc. and its subsidiaries (collectively known as the “Services Companies”), we own, manage, lease, acquire and develop real estate located in: the greater Los Angeles area of California; Orange County, California; San Diego, California; and Denver, Colorado. These locales primarily consist of office properties, parking garages, a retail property and a hotel.
As of March 31, 2010, our Operating Partnership indirectly owns whole or partial interests in 29 office and retail properties, a 350-room hotel and off-site parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 87.8% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in Maguire Macquarie Office, LLC, an unconsolidated joint venture formed in conjunction with Charter Hall Group (as successor to Macquarie Office Trust), our Operating Partnership’s share of the Total Portfolio is 13.5 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office, hotel and retail properties from which we derive our net income or loss, which we recognize in accordance with U.S. generally accepted accounting principles (“GAAP”). The aggregate square footage of our Effective Portfolio has not been reduced to reflect our limited partners’ share of our Operating Partnership.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Our property statistics as of March 31, 2010 are as follows:
|
|
Number of
|
|
|
Total Portfolio
|
|
|
Effective Portfolio
|
|
|
|
Properties
|
|
|
Buildings
|
|
|
Square
Feet
|
|
|
Parking
Square
Footage
|
|
|
Parking
Spaces
|
|
|
Square
Feet
|
|
|
Parking
Square
Footage
|
|
|
Parking
Spaces
|
|
Wholly owned properties
|
|
|
17 |
|
|
|
26 |
|
|
|
10,155,902 |
|
|
|
6,205,406 |
|
|
|
19,125 |
|
|
|
10,155,902 |
|
|
|
6,205,406 |
|
|
|
19,125 |
|
Properties in Default
|
|
|
7 |
|
|
|
27 |
|
|
|
2,942,924 |
|
|
|
2,727,880 |
|
|
|
9,973 |
|
|
|
2,611,248 |
|
|
|
2,403,240 |
|
|
|
8,543 |
|
Unconsolidated joint venture
|
|
|
5 |
|
|
|
16 |
|
|
|
3,466,866 |
|
|
|
1,865,448 |
|
|
|
5,561 |
|
|
|
693,373 |
|
|
|
373,090 |
|
|
|
1,112 |
|
|
|
|
29 |
|
|
|
69 |
|
|
|
16,565,692 |
|
|
|
10,798,734 |
|
|
|
34,659 |
|
|
|
13,460,523 |
|
|
|
8,981,736 |
|
|
|
28,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Properties in Default
|
|
|
|
83.8 |
% |
|
|
|
|
|
|
|
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
|
Properties in Default
|
|
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
Including Properties in Default
|
|
|
|
81.0 |
% |
|
|
|
|
|
|
|
|
|
|
81.3 |
% |
|
|
|
|
|
|
|
|
As of March 31, 2010, the majority of our Total Portfolio is located in eight Southern California markets: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the John Wayne Airport, Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa and Mission Valley submarkets of San Diego County. We also have an interest in one property in Denver, Colorado (a joint venture property). We directly manage the properties in our Total Portfolio through our Operating Partnership and/or our Services Companies, except for properties in receivership, Cerritos Corporate Center and the Westin® Pasadena Hotel.
Note 2—Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with GAAP applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments, consisting of only those of a normal and recurring nature, considered necessary for a fair presentation of the financial position and interim results of MPG Office Trust, Inc., our Operating Partnership and the subsidiaries of our Operating Partnership as of and for the periods presented have been included. Our results of operations for interim periods are not necessarily indicative of those that may be expected for a full fiscal year.
We classify properties as held for sale when certain criteria set forth in the Long-Lived Assets Classified as Held for Sale Subsections of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “FASB Codification”) Topic 360, Property, Plant, and Equipment, are met. At that time, we present the assets and liabilities of the property held for sale separately in our consolidated balance sheet. We cease recording depreciation and amortization expense at the time a property is classified as held for sale. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. As of March 31, 2010, our Mission City Corporate Center property was classified as held for sale. The Properties in Default do not meet the criteria to be held for sale as they are expected to be disposed of other than by sale. Accordingly, the assets and liabilities of Properties in Default are included in our consolidated balance sheets as of March 31, 2010 and December 31, 2009 and their results of operations are presented as part of continuing operations in the consolidated statements of operations for all periods presented. The assets and liabilities of these properties will be removed from our consolidated balance sheet and the results of operations will be reclassified to discontinued operations in our consolidated statements of operations upon ultimate disposition of each property.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Certain amounts in the consolidated financial statements for prior years have been reclassified to reflect the activity of discontinued operations.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could ultimately differ from such estimates.
The balance sheet data as of December 31, 2009 has been derived from our audited financial statements; however, the accompanying notes to the consolidated financial statements do not include all disclosures required by GAAP.
The financial information included herein should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on April 30, 2010.
Note 3—Liquidity
Our business requires continued access to adequate cash to fund our liquidity needs. In 2009, we focused on improving our liquidity position through cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, together with reductions in leasing costs, discretionary capital expenditures, property operating expenses and general and administrative expenses. During 2010, our foremost priorities are preserving and generating cash sufficient to fund our liquidity needs. Given the uncertainty in the economy and financial markets, management believes that access to any source of cash will be challenging and is planning accordingly. We are also working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, recourse obligations and leasing costs.
The following are our expected actual and potential sources of liquidity, which we currently believe will be sufficient to meet our near-term liquidity needs:
·
|
Unrestricted and restricted cash;
|
·
|
Cash generated from operations;
|
·
|
Cash generated from the contribution of existing assets to joint ventures;
|
·
|
Proceeds from additional secured or unsecured debt financings; and/or
|
·
|
Proceeds from public or private issuance of debt or equity securities.
|
These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate adequate cash from these sources, we will have liquidity-related problems and will be exposed to significant risks. While we believe that we will have adequate cash for our near-term uses, significant issues with access to the liquidity sources identified above could lead to our eventual insolvency. We face additional challenges in connection with our long-term liquidity position due to debt maturities and other factors.
In 2008, we announced our intent to sell certain assets, which we expect will help us (1) preserve cash, through the potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
through the potential disposition of strategically-identified non-core properties that we believe have equity value above the debt. In connection with this strategy, in 2009 we disposed of 3.2 million square feet of office space, resulting in the elimination of $0.6 billion of mortgage debt, the elimination of various related recourse obligations to our Operating Partnership (including repayment guaranties, master leases and debt service guaranties) and the generation of $42.7 million in net proceeds (after the repayment of debt) in unrestricted cash to be used for general corporate purposes.
Also as part of our strategic disposition program, certain of our special purpose property-owning subsidiaries are currently in default under six commercial mortgage-backed securities (“CMBS”) mortgages totaling approximately $0.9 billion secured by six separate office properties totaling approximately 2.5 million square feet (Stadium Towers Plaza, Park Place II, 2600 Michelson, Pacific Arts Plaza, 550 South Hope and 500 Orange Tower). As a result of the defaults under these mortgage loans, the special servicers have required that tenant rental payments be deposited in restricted lockbox accounts. As such, we do not have direct access to these rental payments, and the disbursement of cash from these restricted lockbox accounts to us is at the discretion of the special servicers. There are several potential outcomes on each of the Properties in Default, including foreclosure, a deed-in-lieu of foreclosure and a short sale. We are in various stages of negotiations with the special servicers on each of these six assets, with the goal of reaching a cooperative resolution for each asset quickly. We remain the title holder on each of these assets as of March 31, 2010.
During the first quarter of 2010, we disposed of Griffin Towers and 2385 Northside Drive, comprising a combined 0.6 million square feet of office space. While these transactions generated no net proceeds for us, they resulted in the elimination of $162.6 million of debt maturing in the next several years and the elimination of a $4.0 million repayment guaranty on our 2385 Northside Drive construction loan. With respect to the remainder of 2010, we are actively marketing several non-core assets, some of which may be disposed of at or below the debt and others which may potentially generate net proceeds. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of current economic conditions and the limited number of recently completed dispositions in our submarkets, we cannot predict:
·
|
Whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
|
·
|
Whether potential buyers will be able to secure financing; and
|
·
|
The length of time needed to find a buyer and to close the sale of a property.
|
With respect to recent and potential dispositions, the marketing process has been lengthier than anticipated and expected pricing has declined (in some cases materially). This trend may continue or worsen. The foregoing means that the number of assets we could potentially sell to generate net proceeds has decreased, and the amount of expected net proceeds in the event of any asset sale has also decreased. We may be unable to complete the disposition of identified properties in the near term or at all, which could significantly impact our liquidity situation.
In addition, certain of our material debt obligations require us to comply with financial and other covenants, including, but not limited to, net worth and liquidity covenants, due on sale clauses, change in control restrictions, listing requirements and other financial requirements. Some or all of these covenants could prevent or delay our ability to dispose of identified properties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As of March 31, 2010, we had $4.1 billion of total consolidated debt, including $0.9 billion of debt associated with Properties in Default. Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. During 2009, we made a total of $263.0 million in debt service payments (including payments funded from reserves), of which $42.8 million related to Properties in Default. During the three months ended March 31, 2010, we made debt service payments totaling $47.3 million (including payments funded from reserves), none of which related to Properties in Default.
As our debt matures, our principal payment obligations also present significant future cash requirements. We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic conditions. Because of our limited unrestricted cash and the reduced market value of our assets when compared with the debt balances on those assets, upcoming debt maturities present cash obligations that the relevant special purpose property-owning subsidiary obligor may not be able to satisfy. For assets that we do not or cannot dispose of and for which the relevant property-owning subsidiary is unable or unwilling to fund the resulting obligations, we will seek to extend or refinance the applicable loans or may default upon such loans. Historically, extending or refinancing loans has required principal paydowns and the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancings will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions will affect our ability to fund our other liquidity uses. In addition, the terms of the extensions or refinancings may include operational and financial covenants significantly more restrictive than our current debt covenants.
Note 4—Land Held for Development and Construction in Progress
Land held for development and construction in progress includes the following (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Land held for development
|
|
$ |
152,238 |
|
|
$ |
151,889 |
|
Construction in progress
|
|
|
33,808 |
|
|
|
32,738 |
|
|
|
$ |
186,046 |
|
|
$ |
184,627 |
|
In September 2009, we completed construction at 207 Goode, an eight-story, 188,000 square foot office building located in Glendale, California and received a certificate of occupancy. We are currently marketing this asset for sale.
We also own undeveloped land that we believe can support up to approximately 5 million square feet of office and mixed-use development and approximately 5 million square feet of structured parking, excluding development sites that are encumbered by the mortgage loans on our 2600 Michelson and Pacific Arts Plaza properties, which are in default.
A summary of the costs capitalized in connection with our real estate projects is as follows (in millions):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Interest expense
|
|
$ |
1.1 |
|
|
$ |
2.1 |
|
Indirect project costs
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
$ |
1.3 |
|
|
$ |
2.5 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 5—Rents and Other Receivables, Net
Rents and other receivables are net of allowances for doubtful accounts of $3.0 million and $3.4 million as of March 31, 2010 and December 31, 2009, respectively. For the three months ended March 31, 2010 and 2009, we recorded a provision for doubtful accounts of $0.2 million and $1.3 million, respectively.
Note 6—Intangible Assets and Liabilities
Our identifiable intangible assets and liabilities are summarized as follows (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Acquired above-market leases
|
|
|
|
|
|
|
Gross amount
|
|
$ |
39,771 |
|
|
$ |
40,236 |
|
Accumulated amortization
|
|
|
(32,523 |
) |
|
|
(32,076 |
) |
|
|
$ |
7,248 |
|
|
$ |
8,160 |
|
|
|
|
|
|
|
|
|
|
Acquired in-place leases
|
|
|
|
|
|
|
|
|
Gross amount
|
|
$ |
137,871 |
|
|
$ |
150,535 |
|
Accumulated amortization
|
|
|
(104,889 |
) |
|
|
(112,020 |
) |
|
|
$ |
32,982 |
|
|
$ |
38,515 |
|
|
|
|
|
|
|
|
|
|
Acquired below-market leases
|
|
|
|
|
|
|
|
|
Gross amount
|
|
$ |
(180,200 |
) |
|
$ |
(192,307 |
) |
Accumulated amortization
|
|
|
112,385 |
|
|
|
114,698 |
|
|
|
$ |
(67,815 |
) |
|
$ |
(77,609 |
) |
Amortization of acquired below-market leases, net of acquired above-market leases, increased our rental income in continuing operations by $4.3 million and $4.1 million for the three months ended March 31, 2010 and 2009, respectively. Rental income in discontinued operations benefited from amortization of acquired below-market leases, net of acquired above-market leases, by $0.3 million and $1.0 million for the three months ended March 31, 2010 and 2009, respectively.
Amortization of acquired in-place leases, included as part of depreciation and amortization, in continuing operations was $2.8 million and $4.7 million for the three months ended March 31, 2010 and 2009, respectively. Amortization related to discontinued operations was $0.2 million and $1.8 million for the three months ended March 31, 2010 and 2009, respectively.
Our estimate of the amortization of these intangible assets and liabilities over the next five years is as follows (in thousands):
|
|
Acquired Above-
Market Leases
|
|
|
Acquired
In-place Leases
|
|
|
Acquired Below-
Market Leases
|
|
2010
|
|
$ |
2,194 |
|
|
$ |
7,368 |
|
|
$ |
(14,589 |
) |
2011
|
|
|
2,104 |
|
|
|
7,498 |
|
|
|
(16,048 |
) |
2012
|
|
|
1,914 |
|
|
|
5,832 |
|
|
|
(13,437 |
) |
2013
|
|
|
928 |
|
|
|
4,510 |
|
|
|
(8,303 |
) |
2014
|
|
|
39 |
|
|
|
2,920 |
|
|
|
(5,172 |
) |
Thereafter
|
|
|
69 |
|
|
|
4,854 |
|
|
|
(10,266 |
) |
|
|
$ |
7,248 |
|
|
$ |
32,982 |
|
|
$ |
(67,815 |
) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
See Note 13 “Properties in Default—Intangible Assets and Liabilities” for an estimate of the amortization of intangible assets and liabilities during the next five years related to Properties in Default.
Note 7—Investment in Unconsolidated Joint Venture
We own a 20% interest in our joint venture with Charter Hall Group which owns the following office properties: Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, Quintana Campus, Cerritos Corporate Center and Stadium Gateway. We directly manage the properties in the joint venture, except Cerritos Corporate Center, and receive fees for asset management, property management, leasing, construction management, acquisitions, dispositions and financing from the joint venture. See Note 19 “Related Party Transactions” for a summary of income earned from the joint venture.
Balance Sheet Information
The joint venture’s condensed balance sheets are as follows (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Assets
|
|
|
|
|
|
|
Investments in real estate
|
|
$ |
1,049,896 |
|
|
$ |
1,048,502 |
|
Less: accumulated depreciation
|
|
|
(148,632 |
) |
|
|
(141,230 |
) |
Investments in real estate, net
|
|
|
901,264 |
|
|
|
907,272 |
|
Cash and cash equivalents, including restricted cash
|
|
|
21,882 |
|
|
|
21,415 |
|
Rents, deferred rents and other receivables, net
|
|
|
20,535 |
|
|
|
17,995 |
|
Deferred charges, net
|
|
|
31,809 |
|
|
|
33,953 |
|
Other assets
|
|
|
4,697 |
|
|
|
3,928 |
|
Total assets
|
|
$ |
980,187 |
|
|
$ |
984,563 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Members’ Equity
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$ |
803,317 |
|
|
$ |
804,110 |
|
Accounts payable, accrued interest payable and other liabilities
|
|
|
29,297 |
|
|
|
26,426 |
|
Acquired below-market leases, net
|
|
|
3,980 |
|
|
|
4,378 |
|
Total liabilities
|
|
|
836,594 |
|
|
|
834,914 |
|
Members’ equity
|
|
|
143,593 |
|
|
|
149,649 |
|
Total liabilities and members’ equity
|
|
$ |
980,187 |
|
|
$ |
984,563 |
|
During 2009, the joint venture defaulted on its $106.0 million mortgage loan encumbering the Quintana Campus by failing to make the required debt service payments. Through the date of this report, the joint venture has not made 12 debt service payments. As of March 31, 2010, the amount of unpaid interest on this loan totals $5.3 million. In November 2009, the property was placed into receivership. The Quintana Campus mortgage loan is not cross-collateralized or cross-defaulted with any other debt owed by Charter Hall Group or MPG Office Trust, Inc.
The weighted average interest rate on the joint venture’s mortgage loans was 5.27% as of both March 31, 2010 and December 31, 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Statement of Operations Information
The joint venture’s condensed statements of operations are as follows (in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Revenue:
|
|
|
|
|
|
|
Rental
|
|
$ |
19,699 |
|
|
$ |
20,389 |
|
Tenant reimbursements
|
|
|
5,443 |
|
|
|
6,439 |
|
Parking
|
|
|
1,488 |
|
|
|
2,035 |
|
Interest and other
|
|
|
6 |
|
|
|
27 |
|
Total revenue
|
|
|
26,636 |
|
|
|
28,890 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Rental property operating and maintenance
|
|
|
6,391 |
|
|
|
6,305 |
|
Real estate taxes
|
|
|
3,470 |
|
|
|
3,441 |
|
Parking
|
|
|
364 |
|
|
|
422 |
|
Depreciation and amortization
|
|
|
9,490 |
|
|
|
16,560 |
|
Interest
|
|
|
10,723 |
|
|
|
10,809 |
|
Other
|
|
|
1,263 |
|
|
|
1,247 |
|
Total expenses
|
|
|
31,701 |
|
|
|
38,784 |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,065 |
) |
|
$ |
(9,894 |
) |
|
|
|
|
|
|
|
|
|
Company share
|
|
$ |
(1,013 |
) |
|
$ |
(1,979 |
) |
Intercompany eliminations
|
|
|
252 |
|
|
|
240 |
|
Unallocated losses
|
|
|
962 |
|
|
|
— |
|
Equity in net loss of unconsolidated joint venture
|
|
$ |
201 |
|
|
$ |
(1,739 |
) |
We are not obligated to recognize our share of losses from the joint venture in excess of our basis pursuant to the provisions of Real Estate Investments–Equity Method and Joint Ventures Subsections of FASB Codification Topic 970, Real Estate—General. As a result, during the three months ended March 31, 2010, we did not record losses totaling $1.0 million as part of our equity in net loss of unconsolidated joint venture in our consolidated statement of operations because our basis in the joint venture has been reduced to zero. As of March 31, 2010, the cumulative unallocated losses total $5.0 million. We are not liable for the obligations of, and are not committed to provide additional financial support to, the joint venture in excess of our original investment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 8—Mortgage and Other Loans
Consolidated Debt
Our consolidated debt is as follows (in thousands, except percentages):
|
|
|
|
|
Principal Amount as of
|
|
|
Maturity Date
|
|
Interest Rate
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Floating-Rate Debt
|
|
|
|
|
|
|
|
|
|
Unsecured term loan (1)
|
5/1/2011
|
|
LIBOR + 2.75%
|
|
$ |
22,250 |
|
|
$ |
22,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans:
|
|
|
|
|
|
|
|
|
|
|
|
17885 Von Karman
|
6/30/2010
|
|
Greater of 5% or
(Prime + 0.50%)
|
|
|
25,310 |
|
|
|
24,154 |
|
207 Goode (2)
|
8/1/2010
|
|
LIBOR + 1.80%
|
|
|
22,792 |
|
|
|
22,444 |
|
Total construction loans
|
|
|
|
|
|
48,102 |
|
|
|
46,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Plaza Las Fuentes (3)
|
9/29/2010
|
|
LIBOR + 3.25%
|
|
|
91,200 |
|
|
|
92,600 |
|
Brea Corporate Place (4)
|
5/1/2011
|
|
LIBOR + 1.95%
|
|
|
70,468 |
|
|
|
70,468 |
|
Brea Financial Commons (4)
|
5/1/2011
|
|
LIBOR + 1.95%
|
|
|
38,532 |
|
|
|
38,532 |
|
Total variable-rate mortgage loans
|
|
|
|
|
|
200,200 |
|
|
|
201,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Swapped to Fixed-Rate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
KPMG Tower (5)
|
10/9/2012
|
|
7.16%
|
|
|
400,000 |
|
|
|
400,000 |
|
207 Goode (2)
|
8/1/2010
|
|
7.36%
|
|
|
25,000 |
|
|
|
25,000 |
|
Total variable-rate swapped to fixed-rate loans
|
|
|
|
|
|
425,000 |
|
|
|
425,000 |
|
Total floating-rate debt
|
|
|
|
|
|
695,552 |
|
|
|
695,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Tower
|
4/6/2017
|
|
5.68%
|
|
|
550,000 |
|
|
|
550,000 |
|
Two California Plaza
|
5/6/2017
|
|
5.50%
|
|
|
470,000 |
|
|
|
470,000 |
|
Gas Company Tower
|
8/11/2016
|
|
5.10%
|
|
|
458,000 |
|
|
|
458,000 |
|
777 Tower
|
11/1/2013
|
|
5.84%
|
|
|
273,000 |
|
|
|
273,000 |
|
US Bank Tower
|
7/1/2013
|
|
4.66%
|
|
|
260,000 |
|
|
|
260,000 |
|
City Tower
|
5/10/2017
|
|
5.85%
|
|
|
140,000 |
|
|
|
140,000 |
|
Glendale Center
|
8/11/2016
|
|
5.82%
|
|
|
125,000 |
|
|
|
125,000 |
|
801 North Brand
|
4/6/2015
|
|
5.73%
|
|
|
75,540 |
|
|
|
75,540 |
|
Mission City Corporate Center (6)
|
4/1/2012
|
|
5.09%
|
|
|
52,000 |
|
|
|
52,000 |
|
The City—3800 Chapman
|
5/6/2017
|
|
5.93%
|
|
|
44,370 |
|
|
|
44,370 |
|
701 North Brand
|
10/1/2016
|
|
5.87%
|
|
|
33,750 |
|
|
|
33,750 |
|
700 North Central
|
4/6/2015
|
|
5.73%
|
|
|
27,460 |
|
|
|
27,460 |
|
Total fixed-rate debt
|
|
|
|
|
|
2,509,120 |
|
|
|
2,509,120 |
|
Total debt, excluding Properties in Default
|
|
|
|
|
|
3,204,672 |
|
|
|
3,204,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties in Default
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Arts Plaza (7)
|
4/1/2012
|
|
9.15%
|
|
|
270,000 |
|
|
|
270,000 |
|
550 South Hope Street (8)
|
5/6/2017
|
|
10.67%
|
|
|
200,000 |
|
|
|
200,000 |
|
500 Orange Tower (9)
|
5/6/2017
|
|
10.88%
|
|
|
110,000 |
|
|
|
110,000 |
|
2600 Michelson (10)
|
5/10/2017
|
|
10.69%
|
|
|
110,000 |
|
|
|
110,000 |
|
Stadium Towers Plaza (11)
|
5/11/2017
|
|
10.78%
|
|
|
100,000 |
|
|
|
100,000 |
|
Park Place II (12)
|
3/11/2012
|
|
10.39%
|
|
|
98,482 |
|
|
|
98,482 |
|
Total Properties in Default
|
|
|
|
|
|
888,482 |
|
|
|
888,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties disposed of during 2010
|
|
|
|
|
|
|
|
|
|
|
|
2385 Northside Drive
|
|
|
|
|
|
— |
|
|
|
17,506 |
|
Griffin Towers
|
|
|
|
|
|
— |
|
|
|
145,000 |
|
Total properties disposed of during 2010
|
|
|
|
|
|
— |
|
|
|
162,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
|
|
|
|
4,093,154 |
|
|
|
4,255,726 |
|
Debt discount
|
|
|
|
|
|
(5,703 |
) |
|
|
(6,751 |
) |
Mortgage loan associated with real estate held for sale (6)
|
|
|
|
|
|
(52,000 |
) |
|
|
— |
|
Total consolidated debt, net
|
|
|
|
|
$ |
4,035,451 |
|
|
$ |
4,248,975 |
|
__________
(1)
|
In connection with the disposition of Griffin Towers in March 2010, the repurchase facility was converted into an unsecured term loan. This loan bears interest at a variable rate of LIBOR plus 2.75%, increasing to LIBOR plus 3.75% in June 2010.
|
(2)
|
This loan bears interest at LIBOR plus 1.80%. We have entered into an interest rate swap agreement to hedge this loan up to $25.0 million, which effectively fixes the LIBOR rate at 5.564%. This loan was extended to August 1, 2010. See Note 20 “Subsequent Events.”
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(3)
|
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75% during the loan term, excluding extension periods. Three one-year extensions are available at our option, subject to certain conditions, some of which we may be unable to fulfill.
|
(4)
|
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 6.50% during the loan term, excluding extension periods. This loan was extended to May 1, 2011. See Note 20 “Subsequent Events.” One one-year extension is available at our option, subject to certain conditions, some of which we may be unable to fulfill.
|
(5)
|
This loan bears interest at a rate of LIBOR plus 1.60%. We have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR rate at 5.564%.
|
(6)
|
As of March 31, 2010, Mission City Corporate Center is classified as held for sale.
|
(7)
|
Our special purpose property-owning subsidiary that owns the Pacific Arts Plaza property failed to make the debt service payments under this loan that were due beginning on September 1, 2009 and continuing through and including May 1, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement. See Note 13 “Properties in Default.”
|
(8)
|
Our special purpose property-owning subsidiary that owns the 550 South Hope property failed to make the debt service payments under this loan that were due beginning on August 6, 2009 and continuing through and including May 6, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement. See Note 13 “Properties in Default.”
|
(9)
|
Our special purpose property-owning subsidiary that owns the 500 Orange Tower property failed to make the debt service payments under this loan that were due beginning on January 6, 2010 and continuing through and including May 6, 2010. See Note 13 “Properties in Default.”
|
(10)
|
Our special purpose property-owning subsidiary that owns the 2600 Michelson property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement. See Note 13 “Properties in Default.”
|
(11)
|
Our special purpose property-owning subsidiary that owns the Stadium Towers Plaza property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement. See Note 13 “Properties in Default.”
|
(12)
|
Our special purpose property-owning subsidiary that owns the Park Place II property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement. See Note 13 “Properties in Default.”
|
As of March 31, 2010 and December 31, 2009, one-month LIBOR was 0.25% and 0.23%, respectively, while the prime rate was 3.25% as of March 31, 2010 and December 31, 2009. The weighted average interest rate of our consolidated debt was 6.51% (or 5.48% excluding Properties in Default) as of March 31, 2010 and 6.40% (or 5.56% excluding Properties in Default) as of December 31, 2009.
Excluding mortgage loans associated with Properties in Default, as of March 31, 2010, $0.7 billion of our consolidated debt may be prepaid without penalty, $1.4 billion may be defeased after various lock-out periods (as defined in the underlying loan agreements) and $1.1 billion may be prepaid with prepayment penalties or defeased after various lock-out periods (as defined in the underlying loan agreements) at our option.
In connection with the issuance of otherwise non-recourse loans obtained by certain special purpose property-owning subsidiaries of our Operating Partnership, our Operating Partnership provided various forms of partial guaranties to the lenders originating those loans. These guaranties are contingent obligations that could give rise to defined amounts of recourse against our Operating Partnership, should the special purpose property-owning subsidiaries be unable to satisfy certain obligations under otherwise non-recourse loans. These guaranties are in the form of (1) master leases whereby our Operating Partnership agreed to guarantee the payment of rents and/or re-tenanting costs for certain tenant leases existing at the time of loan origination should the tenants not satisfy their obligations through their lease term, (2) the guaranty of debt service payments (as defined in the applicable loan documents) for a period of time (but not the guaranty of repayment of principal), (3) master leases of a defined amount of space over a defined period of time, with offsetting credit received for actual rents collected through
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
third-party leases entered into with respect to the master leased space, and (4) customary repayment guaranties under construction loans. These are partial guaranties of certain otherwise non-recourse debt of special purpose property-owning subsidiaries of our Operating Partnership, for which the interest expense and debt is included in our consolidated financial statements.
Except for contingent obligations of our Operating Partnership, the separate assets and liabilities of our property-specific subsidiaries are neither available to pay the debts of the consolidated entity nor constitute obligations of the consolidated entity, respectively.
Dispositions
Griffin Towers¾
In March 2010, we disposed of Griffin Towers located in Santa Ana, California. We received proceeds of $89.4 million, net of transactions costs, which were combined with $6.5 million of restricted cash reserves released to us by the lender to partially repay the $125.0 million mortgage loan secured by this property. We were relieved of the obligation to pay the remaining $49.1 million due under the mortgage and senior mezzanine loans by the lender. The impact of this gain on settlement of debt was $1.01 per basic share for the three months ended March 31, 2010. We recorded a $0.4 million loss from early extinguishment of debt as a part of discontinued operations related to the writeoff of unamortized loan costs related to this loan.
In connection with the disposition of Griffin Towers, the repurchase facility was converted into an unsecured term loan. The term loan has the same terms as the repurchase facility, including the interest rate spreads and repayment dates. The term loan continues to be an obligation of our Operating Partnership.
2385 Northside Drive¾
In March 2010, we disposed of 2385 Northside Drive located in San Diego, California. We received proceeds of $17.7 million, net of transaction costs, which were used to repay the balance outstanding under the construction loan secured by this property. Our Operating Partnership has no further obligation to guarantee the repayment of the construction loan.
Amounts Available for Future Funding under Construction Loans
A summary of our construction loans as of March 31, 2010 is as follows (in thousands):
Project
|
|
Maximum Loan
Amount
|
|
|
Balance as of
March 31, 2010
|
|
|
Available for Future Funding
|
|
|
Operating
Partnership
Repayment
Guarantee
|
|
207 Goode
|
|
$ |
47,826 |
|
|
$ |
47,792 |
|
|
$ |
34 |
|
|
$ |
9,675 |
|
17885 Von Karman
|
|
|
33,600 |
|
|
|
25,310 |
|
|
|
8,290 |
|
|
|
6,720 |
|
|
|
$ |
81,426 |
|
|
$ |
73,102 |
|
|
$ |
8,324 |
|
|
|
|
|
Amounts shown as available for future funding as of March 31, 2010 represent funds that can be drawn to pay for remaining project development costs, including tenant improvement and leasing costs.
Each of our construction loans is subject to a partial guarantee by our Operating Partnership. The amounts guaranteed at any point in time are based on the stage of the development cycle that the project
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
is in and are subject to reduction when certain financial ratios have been met. These repayment guarantees expire if and when the underlying loans have been fully repaid.
On May 6, 2010, we made a principal payment of $9.7 million on our 207 Goode construction loan. In exchange for this payment, the lender agreed to substantially eliminate our Operating Partnership’s principal repayment guarantee. See Note 20 “Subsequent Events.”
Debt Covenants
The terms of our Plaza Las Fuentes mortgage require our Operating Partnership to comply with financial ratios relating to minimum amounts of tangible net worth, interest coverage, fixed charge coverage and liquidity. We were in compliance with such covenants as of March 31, 2010.
Note 9—Noncontrolling Interests
Common units of our Operating Partnership relate to the interest in our Operating Partnership that is not owned by MPG Office Trust, Inc. As of March 31, 2010 and December 31, 2009, our limited partners’ ownership interest in MPG Office Trust, L.P. was 12.2%. Noncontrolling common units of our Operating Partnership have essentially the same economic characteristics as shares of our common stock as they share equally in the net income or loss and distributions of our Operating Partnership. Our limited partners have the right to redeem all or part of their noncontrolling common units of our Operating Partnership at any time. At the time of redemption, we have the right to determine whether to redeem the noncontrolling common units of our Operating Partnership for cash, based upon the fair market value of an equivalent number of shares of our common stock at the time of redemption, or exchange them for shares of our common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distribution and similar events.
As of March 31, 2010 and December 31, 2009, 6,674,573 noncontrolling common units of our Operating Partnership were outstanding. These common units are presented as noncontrolling interests in the deficit section of our consolidated balance sheet. As of March 31, 2010 and December 31, 2009, the aggregate redemption value of outstanding noncontrolling common units of our Operating Partnership was $20.6 million and $10.1 million, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each common unit in the event of a termination or liquidation of the Company and our Operating Partnership. In the event of a termination or liquidation of the Company and our Operating Partnership, it is expected that in most cases each common unit would be entitled to a liquidating distribution equal to the amount payable with respect to each share of the Company’s common stock.
Net (income) loss attributable to noncontrolling common units of our Operating Partnership is allocated based on their relative ownership percentage of the Operating Partnership during the period. The noncontrolling ownership interest percentage is determined by dividing the number of noncontrolling common units outstanding by the total of the controlling and noncontrolling units outstanding during the period. The issuance or redemption of additional shares of common stock or common units results in changes to our limited partners’ ownership interest in our Operating Partnership as well as the net assets of the Company. As a result, all equity-related transactions result in an allocation between deficit and the noncontrolling common units of our Operating Partnership in the consolidated balance sheet and statement of equity/(deficit) to account for any change in ownership percentage during the period. During both the three months ended March 31, 2010 and 2009, our limited partners’ weighted average share of our net income (loss) was 12.2%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10—Comprehensive Income (Loss) and Deficit
Comprehensive Income (Loss)
The changes in the components of comprehensive income (loss) are as follows (in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Net income (loss)
|
|
$ |
25,930 |
|
|
$ |
(56,620 |
) |
Interest rate swaps assigned to lenders:
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized
gains included in net income (loss)
|
|
|
(1,048 |
) |
|
|
(565 |
) |
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
392 |
|
|
|
3,377 |
|
Reclassification adjustment for unrealized
losses included in net income (loss)
|
|
|
— |
|
|
|
15,255 |
|
|
|
|
392 |
|
|
|
18,632 |
|
|
|
|
|
|
|
|
|
|
Interest rate caps:
|
|
|
|
|
|
|
|
|
Unrealized holding losses
|
|
|
— |
|
|
|
(9 |
) |
Reclassification adjustment for realized
losses included in net income (loss)
|
|
|
158 |
|
|
|
27 |
|
|
|
|
158 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
25,432 |
|
|
$ |
(38,535 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to:
|
|
|
|
|
|
|
|
|
MPG Office Trust, Inc.
|
|
$ |
22,326 |
|
|
$ |
(33,248 |
) |
Common units of our Operating Partnership
|
|
|
3,106 |
|
|
|
(5,287 |
) |
|
|
$ |
25,432 |
|
|
$ |
(38,535 |
) |
The components of accumulated other comprehensive loss, net are as follows (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Deferred gain on assignment of interest rate swap agreements, net
|
|
$ |
3,924 |
|
|
$ |
4,972 |
|
Interest rate swaps
|
|
|
(37,264 |
) |
|
|
(37,656 |
) |
Interest rate caps
|
|
|
(163 |
) |
|
|
(321 |
) |
|
|
$ |
(33,503 |
) |
|
$ |
(33,005 |
) |
Accumulated other comprehensive loss, net attributable to:
|
|
|
|
|
|
|
|
|
MPG Office Trust, Inc.
|
|
$ |
(36,727 |
) |
|
$ |
(36,289 |
) |
Common units of our Operating Partnership
|
|
|
3,224 |
|
|
|
3,284 |
|
|
|
$ |
(33,503 |
) |
|
$ |
(33,005 |
) |
Interest Rate Swaps Assigned to Lenders
During the three months ended March 31, 2010, we wrote off $0.8 million of deferred gains associated with mortgage loans in default as of March 31, 2010 to interest expense as part of continuing operations based on management’s belief that it is probable that we will be unable to or do not intend to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
cure the default. This decrease in interest expense was fully offset by the related writeoff of the debt discounts associated with these loans to interest expense.
Deficit
Our deficit is allocated between controlling and noncontrolling interests as follows (in thousands):
|
|
MPG Office
Trust, Inc.
|
|
|
Noncontrolling
Interests
|
|
|
Total
|
|
Balance, December 31, 2009
|
|
$ |
(754,020 |
) |
|
$ |
(102,957 |
) |
|
$ |
(856,977 |
) |
Net income
|
|
|
23,346 |
|
|
|
2,584 |
|
|
|
25,930 |
|
Adjustment for preferred dividends not declared
|
|
|
(582 |
) |
|
|
582 |
|
|
|
— |
|
Compensation cost for share-based awards
|
|
|
982 |
|
|
|
— |
|
|
|
982 |
|
Other comprehensive loss
|
|
|
(438 |
) |
|
|
(60 |
) |
|
|
(498 |
) |
Balance, March 31, 2010
|
|
$ |
(730,712 |
) |
|
$ |
(99,851 |
) |
|
$ |
(830,563 |
) |
Balance, December 31, 2008
|
|
$ |
(19,662 |
) |
|
$ |
— |
|
|
$ |
(19,662 |
) |
Net loss
|
|
|
(49,124 |
) |
|
|
(7,496 |
) |
|
|
(56,620 |
) |
Compensation cost for share-based awards
|
|
|
1,537 |
|
|
|
— |
|
|
|
1,537 |
|
Other comprehensive loss
|
|
|
15,876 |
|
|
|
2,209 |
|
|
|
18,085 |
|
Balance, March 31, 2009
|
|
$ |
(51,373 |
) |
|
$ |
(5,287 |
) |
|
$ |
(56,660 |
) |
Note 11—Share-Based Payments
We have various stock compensation plans that are more fully described in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010.
Stock-based compensation cost recorded as part of general and administrative expense in the consolidated statements of operations was $0.9 million and $1.5 million for the three months ended March 31, 2010 and 2009, respectively.
As of March 31, 2010, the total unrecognized compensation cost related to unvested share-based payments was $11.3 million and is expected to be recognized in the consolidated statements of operations over a weighted average period of approximately three years.
Executive Equity Plan
Effective April 1, 2005, our board of directors adopted a five-year compensation program for senior management. The Executive Equity Plan provided for an award pool equal to a percentage of the value created in excess of a base value. The program, which measured our performance over a 60-month period (unless full vesting of the program occurs earlier) commencing April 1, 2005, provided for awards to be vested and earned based upon the participant’s continued employment and the achievement of certain performance goals based on annualized total stockholder returns on an absolute and relative basis. As of March 31, 2010, we did not achieve any of the total stockholder return targets defined in the plan. Consequently, no awards vested or were earned under the program.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12—Earnings per Share
Basic net income (loss) available to common stockholders is computed by dividing reported net income (loss) available to common stockholders by the weighted average number of common and contingently issuable shares outstanding during each period. As discussed in Note 9 to the consolidated financial statements in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010, we do not issue common stock in settlement of vested restricted stock unit awards until the earliest to occur of (1) the fifth anniversary of the grant date, (2) the occurrence of a change in control (as defined in the underlying grant agreements, or (3) the recipient’s separation from service. In accordance with the provisions of FASB Codification Topic 260, Earnings Per Share, we include vested restricted stock units in the calculation of basic earnings per share since the shares will be issued for no cash consideration, and all the necessary conditions for issuance have been satisfied as of the vesting date.
Diluted net income (loss) available to common stockholders is computed by dividing reported net income (loss) available to common stockholders by the weighted average number of common and common equivalent shares outstanding during each period. The impact of noncontrolling common units of our Operating Partnership outstanding is considered in the calculation of diluted net income (loss) available to common stockholders. The noncontrolling common units are not reflected in the calculation of diluted net income (loss) available to common stockholders because the exchange of common units into common stock is on a one-for-one basis, and the noncontrolling common units already receive their share of our net income (loss) in the consolidated statement of operations on a basis equal to that of our common stock. Accordingly, any exchange of noncontrolling common units would not have any effect on diluted income (loss) to common stockholders per share.
A reconciliation of earnings (loss) per share is as follows (in thousands, except share and per share amounts):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) attributable to MPG Office Trust, Inc.
|
|
$ |
23,346 |
|
|
$ |
(49,124 |
) |
Preferred stock dividends
|
|
|
(4,766 |
) |
|
|
(4,766 |
) |
Net income (loss) available to common stockholders
|
|
$ |
18,580 |
|
|
$ |
(53,890 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding (basic and diluted)
|
|
|
48,534,283 |
|
|
|
47,788,028 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
per share-basic and diluted
|
|
$ |
0.38 |
|
|
$ |
(1.13 |
) |
For the three months ended March 31, 2010, approximately 1,174,000 restricted stock units, 879,000 nonqualified stock options and 73,000 shares of nonvested restricted stock were excluded from the calculation of diluted earnings per shares because they were anti-dilutive due to our loss from continuing operations. For the three months ended March 31, 2009, approximately 879,000 restricted stock units, 216,000 shares of nonvested restricted stock and 140,000 nonqualified stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our loss position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 13—Properties in Default
Overview
As part of our strategic disposition program, certain of our special purpose property-owning subsidiaries are currently in default under six CMBS mortgages secured by the following office properties: Stadium Towers Plaza, Park Place II, 2600 Michelson, Pacific Arts Plaza, 550 South Hope and 500 Orange Tower.
A summary of the assets and obligations associated with Properties in Default is as follows (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Investments in real estate, net
|
|
$ |
622,731 |
|
|
$ |
625,721 |
|
Restricted cash
|
|
|
25,485 |
|
|
|
24,506 |
|
Deferred leasing costs and value of in-place leases, net
|
|
|
16,604 |
|
|
|
17,347 |
|
Other
|
|
|
16,093 |
|
|
|
13,055 |
|
Assets associated with Properties in Default
|
|
$ |
680,913 |
|
|
$ |
680,629 |
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$ |
888,482 |
|
|
$ |
888,482 |
|
Accounts payable and other liabilities
|
|
|
54,487 |
|
|
|
33,390 |
|
Acquired below-market leases, net
|
|
|
20,543 |
|
|
|
21,944 |
|
Obligations associated with Properties in Default
|
|
$ |
963,512 |
|
|
$ |
943,816 |
|
As a result of the defaults under these mortgage loans, the special servicers have required that tenant rental payments be deposited in restricted lockbox accounts. As such, we do not have direct access to these rental payments, and the disbursement of cash from these restricted lockbox accounts to us is at the discretion of the special servicers.
Intangible Assets and Liabilities
As of March 31, 2010, our estimate of the benefit to rental income of amortization of acquired below-market leases, net of acquired above-market leases, related to Properties in Default is $3.8 million, $3.1 million, $2.3 million, $1.9 million, $1.5 million and $7.4 million for 2010, 2011, 2012, 2013, 2014 and thereafter, respectively.
Mortgage Loans
The interest expense recorded in our consolidated statement of operations the three months ended March 31, 2010 related to mortgage loans in default is as follows (in thousands):
Property
|
|
Initial Default Date
|
|
No. of
Missed
Payments
|
|
|
Contractual Interest
|
|
|
Default
Interest
|
|
550 South Hope
|
|
August 6, 2009
|
|
8 |
|
|
$ |
2,835 |
|
|
$ |
2,500 |
|
2600 Michelson
|
|
August 11, 2009
|
|
8 |
|
|
|
1,566 |
|
|
|
1,375 |
|
Park Place II
|
|
August 11, 2009
|
|
8 |
|
|
|
1,318 |
|
|
|
1,240 |
|
Stadium Towers Plaza
|
|
August 11, 2009
|
|
8 |
|
|
|
1,446 |
|
|
|
1,250 |
|
Pacific Arts Plaza
|
|
September 1, 2009
|
|
7 |
|
|
|
3,478 |
|
|
|
2,700 |
|
500 Orange Tower
|
|
January 6, 2010
|
|
3 |
|
|
|
1,618 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
$ |
12,261 |
|
|
$ |
10,363 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Amounts shown in the table above reflect contractual and default interest calculated per the terms of the loan agreements. Management does not intend to settle these amounts with unrestricted cash. We expect that these amounts will be settled in a non-cash manner at the time of disposition.
The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. We are in discussions with the special servicers regarding a cooperative resolution on each of these assets, including through foreclosure, deed-in-lieu of foreclosure or short sale. There can be no assurance, however, that we will be able to resolve these matters in a short period of time. In addition to the loans in default as of March 31, 2010, other special purpose property-owning subsidiaries may default under additional loans in the future, including non-recourse loans where the relevant project is suffering from cash shortfalls on operating expenses and debt service obligations.
Fair Value of Mortgage Loans
The carrying amount of mortgage loans encumbering the Properties in Default totals $888.5 million as of March 31, 2010, and they bear contractual interest at rates ranging from 9.15% to 10.88%. As of March 31, 2010, we did not calculate the fair value of these loans as it was not practicable to do so as there is substantial uncertainty as to their market value and when and how they will be settled.
Note 14—Impairment of Long-Lived Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification Topic 360, we assess whether there has been impairment in the value of our investments in real estate whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Our portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential impairment include the following:
·
|
Change in strategy resulting in an increased or decreased holding period;
|
·
|
Deterioration of the rental market as evidenced by rent decreases over numerous quarters;
|
·
|
Properties adjacent to or located in the same submarket as those with recent impairment issues;
|
·
|
Significant decrease in market price;
|
·
|
Tenant financial problems; and/or
|
·
|
Experience of our competitors in the same submarket.
|
During the three months ended March 31, 2010, we performed quarterly impairment analyses on our properties that showed indications of potential impairment based on the indicators described above. No real estate assets in our portfolio required impairment adjustments as of March 31, 2010 as a result of our analysis.
The assessment as to whether our investments in real estate are impaired is highly subjective. The calculations involve management’s best estimate of the holding period, market comparables, future levels, rental rates, capitalization rates, lease-up periods and capital requirements for each property. A change in any one or more of these factors could materially impact whether a property is impaired as of any given valuation date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
One of the more significant assumptions is probability weighting whereby management may contemplate more than one holding period in its test for impairment. These scenarios can include long-, intermediate- and short-term holding periods which are probability weighted based on management’s best estimate of the likelihood of such a holding period as of the valuation date. A shift in the probability weighting towards a shorter hold scenario can increase the likelihood of impairment. For example, management may weight the holding period for a specific asset based on a 3-, 5- and 10-year hold with probability weighting of 50%, 20% and 30%, respectively. A change in those holding periods and/or a change in the probability weighting for the specific assets could result in a future impairment. As an example of the sensitivity of these estimates, we hold certain assets that if the holding period were changed by as little as a few years, those assets would have been impaired at March 31, 2010. Many factors may influence management’s estimate of holding periods, including market conditions, accessibility of capital and credit markets and recent sales activity of properties in the same submarket, our liquidity and net proceeds generated or expected to be generated by asset dispositions or lack thereof, among others. These conditions may change in a relatively short period of time, especially in light of our limited liquidity and the current economic environment.
Based on continuing input from our board of directors and as our business continues to evolve and we work through various alternatives with respect to certain assets, holding periods may be modified and result in additional impairment charges. Continued declines in the market value of commercial real estate, especially in the Orange County, California market, also increase the risk of future impairment. As a result, key assumptions used in testing the recoverability of our investments in real estate, particularly with respect to holding periods, can change period-over-period.
Note 15—Dispositions and Discontinued Operations
A summary of our property dispositions for the three months ended March 31, 2010 is as follows (amounts in millions, except square footage amounts):
Property
|
|
Location
|
|
Net
Rentable
Square
Feet
|
|
|
Debt
Satisfied
|
|
|
Gain/
(Impairment) Recorded (1)
|
|
|
Loss from
Early
Extinguishment
|
|
2385 Northside Drive (2)
|
|
San Diego, CA
|
|
|
89,000 |
|
|
$ |
17.6 |
|
|
$ |
— |
|
|
$ |
— |
|
Griffin Towers (3)
|
|
Santa Ana, CA
|
|
|
547,000 |
|
|
|
145.0 |
|
|
|
49.1 |
|
|
|
0.4 |
|
__________
(1)
|
Gains on disposition are recorded in the consolidated statement of operations in the period the property is disposed of. Impairment losses are recorded in the consolidated statement of operations when the carrying value exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and/or in the period of disposition.
|
(2)
|
In 2009, we recorded a $9.9 million impairment charge to reduce our investment in 2385 Northside Drive to its estimated fair value as of December 31, 2009. No gain or additional impairment was recorded during the three months ended March 31, 2010 upon disposition of this property.
|
(3)
|
In 2009, we recorded a $90.0 million impairment charge to reduce our investment in Griffin Towers to its estimated fair value as of December 31, 2009. A gain of $49.1 million was recorded during the three months ended March 31, 2010 as a result of debt that was forgiven by the lender upon disposition.
|
Griffin Towers¾
In March 2010, we disposed of Griffin Towers located in Santa Ana, California. We received proceeds of $89.4 million, net of transactions costs, which were combined with $6.5 million of restricted cash reserves released to us by the lender to partially repay the $125.0 million mortgage loan secured by this property. We were relieved of the obligation to pay the remaining $49.1 million due under the mortgage and senior mezzanine loans by the lender.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2385 Northside Drive¾
In March 2010, we disposed of 2385 Northside Drive located in San Diego, California. We received proceeds of $17.7 million, net of transaction costs, which were used to repay the balance outstanding under the construction loan secured by this property.
Discontinued Operations
The results of discontinued operations are as follows (in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Revenue:
|
|
|
|
|
|
|
Rental
|
|
$ |
4,420 |
|
|
$ |
19,194 |
|
Tenant reimbursements
|
|
|
233 |
|
|
|
971 |
|
Parking
|
|
|
252 |
|
|
|
1,665 |
|
Other
|
|
|
17 |
|
|
|
517 |
|
Total revenue
|
|
|
4,922 |
|
|
|
22,347 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Rental property operating and maintenance
|
|
|
1,290 |
|
|
|
6,552 |
|
Real estate taxes
|
|
|
381 |
|
|
|
3,019 |
|
Parking
|
|
|
133 |
|
|
|
911 |
|
Depreciation and amortization
|
|
|
1,362 |
|
|
|
8,630 |
|
Impairment of long-lived assets
|
|
|
— |
|
|
|
23,500 |
|
Interest
|
|
|
3,300 |
|
|
|
9,950 |
|
Loss from early extinguishment of debt
|
|
|
379 |
|
|
|
211 |
|
Total expenses
|
|
|
6,845 |
|
|
|
52,773 |
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before gain on settlement of debt and gain on sale of real estate
|
|
|
(1,923 |
) |
|
|
(30,426 |
) |
Gain on settlement of debt
|
|
|
49,121 |
|
|
|
— |
|
Gain on sale of real estate
|
|
|
— |
|
|
|
2,170 |
|
Income (loss) from discontinued operations
|
|
$ |
47,198 |
|
|
$ |
(28,256 |
) |
The results of operations of 18581 Teller (which was disposed of during first quarter 2009), City Parkway and 3161 Michelson (which were disposed of during second quarter 2009), Park Place I (which was disposed of during third quarter 2009), 130 State College and Lantana Media Campus (which were disposed of during fourth quarter 2009), 2385 Northside Drive and Griffin Towers (which were disposed of during first quarter 2010) and Mission City Corporate Center (which was held for sale as of March 31, 2010) are presented as discontinued operations in our consolidated statements of operations.
Interest expense included in discontinued operations relates to interest on mortgage loans secured by the properties disposed of or held for sale. No interest expense associated with our corporate-level debt has been allocated to properties subsequent to their classification as discontinued operations.
Real Estate Held for Sale
In March 2010, we entered into an agreement with Kilroy Realty, L.P. to dispose of Mission City Corporate Center, located in San Diego, California. The disposition is subject to lender approval and customary closing conditions. We expect this transaction will close in the second quarter of 2010. As a result of this agreement, we have classified Mission City Corporate Center as held for sale as of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
March 31, 2010. The major classes of assets and liabilities of real estate held for sale were as follows (in thousands):
|
|
March 31, 2010
|
|
Investment in real estate, net
|
|
$ |
49,169 |
|
Restricted cash
|
|
|
571 |
|
Other
|
|
|
2,359 |
|
Assets associated with real estate held for sale
|
|
$ |
52,099 |
|
|
|
|
|
|
Mortgage loan
|
|
$ |
52,000 |
|
Accounts payable and other liabilities
|
|
|
656 |
|
Obligations associated with real estate held for sale
|
|
$ |
52,656 |
|
Note 16—Income Taxes
We elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our tax year ended December 31, 2003. We believe that we have always operated so as to continue to qualify as a REIT. Accordingly, we will not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income.
However, qualification and taxation as a REIT depends upon our ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that we will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. We may also be subject to certain state or local income taxes, or franchise taxes on our REIT activities.
We have elected to treat certain of our subsidiaries as a taxable REIT subsidiary (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes. During the three months ended March 31, 2010 and 2009, we recorded tax provisions of approximately $0.2 million and $0.3 million, respectively, which are included in other expense in our consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 17—Fair Value Measurements
Non-Recurring Measurements
As of March 31, 2010 and December 31, 2009, our assets measured at fair value on a non-recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Assets
|
|
Total
Fair
Value
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Total
Losses
|
|
Investments in real estate at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
$ |
856,903 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
856,903 |
|
|
$ |
— |
|
December 31, 2009
|
|
|
962,048 |
|
|
|
— |
|
|
|
105,072 |
|
|
|
856,976 |
|
|
|
(490,985 |
) |
During the three months ended March 31, 2010, we disposed of 2385 Northside Drive and Griffin Towers. These assets had a fair value of $104.6 million at the time they were disposed of. The fair value of these properties was calculated based on the sales price negotiated with the buyers.
Recurring Measurements
As of March 31, 2010 and December 31, 2009, our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):
|
|
|
|
|
Fair Value Measurements Using
|
|
Liabilities
|
|
Total Fair Value
|
|
|
Quoted Prices in Active Markets for Identical Liabilities (Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Interest rate swap at:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
$ |
(41,217 |
) |
|
$ |
— |
|
|
$ |
(41,217 |
) |
|
$ |
—
|
|
December 31, 2009
|
|
|
(41,610 |
) |
|
|
— |
|
|
|
(41,610 |
) |
|
|
— |
|
The value of our interest rate caps is immaterial as of March 31, 2010 and December 31, 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 18—Financial Instruments
Derivative Financial Instruments
Interest rate fluctuations may impact our results of operations and cash flow. Our construction loans as well as some of our mortgage loans and our unsecured term loan bear interest at a variable rate. We seek to minimize the volatility that changes in interest rates have on our variable-rate debt by entering into interest rate swap and cap agreements with major financial institutions based on their credit rating and other factors. We do not trade in financial instruments for speculative purposes. Our derivatives are designated as cash flow hedges. The effective portion of changes in the fair value of cash flow hedges is initially reported in other accumulated comprehensive loss in the consolidated balance sheet and is recognized as part of interest expense in the consolidated statement of operations when the hedged transaction affects earnings. The ineffective portion, if any, of changes in the fair value of cash flow hedges is recognized as part of interest expense in the consolidated statement of operations in the current period.
A summary of the fair value of our derivative instruments as of March 31, 2010 is as follows (in thousands):
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Interest rate swap
|
Accounts payable and other liabilities
|
|
$ |
(41,217 |
) |
A summary of the effect of derivative instruments reported in the consolidated balance sheet as of March 31, 2010 is as follows (in thousands):
|
|
Amount of
Gain Recognized
in AOCL
|
|
|
Amount of Gain
Reclassified from
AOCL to
Statement of
Operations
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swap
|
|
$ |
392 |
|
|
$ |
— |
|
Interest Rate Swap—
As of March 31, 2010 and December 31, 2009, we held an interest rate swap with a notional amount of $425.0 million, which was equal to the exposure hedged. The swap requires net settlement each month and expires on August 9, 2012. We are required to post collateral with our counterparty, primarily in the form of cash, to the extent that the termination value of the swap exceeds a $5.0 million obligation (“Swap Liability”). As of March 31, 2010 and December 31, 2009, we had transferred $38.5 million and $40.1 million in cash, respectively, to our counterparty to satisfy our collateral posting requirement under the swap, which is included in restricted cash in the consolidated balance sheets. This collateral will be returned to us during the remaining term of the swap as we settle our monthly obligations. The amount we would need to pay our counterparty as of March 31, 2010 to terminate the swap totals $44.0 million.
Excluding the impact of movements in future LIBOR rates, our Swap Liability will decrease each month as we settle our monthly obligations, and accordingly we will receive a return of previously-posted cash collateral. During the remainder of 2010, we expect to receive a return of approximately $12 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
to $16 million of previously-posted cash collateral from our counterparty, which is comprised of a combination of return of collateral as a result of the satisfaction of our monthly obligations under the swap agreement, as well as a return of cash collateral due to anticipated increases in future LIBOR rates.
Other Financial Instruments
Our financial instruments include cash, cash equivalents, restricted cash, rents and other receivables, amounts due from affiliates, accounts payable, dividends and distributions payable and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
The estimated fair value of our mortgage and other secured loans (excluding Properties in Default) is $2,705.9 (compared to a carrying amount of $3,204.7 million) as of March 31, 2010. We calculated the fair value of these mortgage and other loans based on currently available market rates assuming the loans are outstanding through maturity and considering the collateral. In determining the current market rate for fixed-rate debt, a market spread is added to the quoted yields on federal government treasury securities with similar maturity dates to our debt.
See Note 13 “Properties in Default—Fair Value of Mortgage Loans” for the estimated fair value as of March 31, 2010 of loans encumbering the Properties in Default.
Note 19—Related Party Transactions
We earn property management and investment advisory fees and leasing commissions from our joint venture with Charter Hall Group. A summary of our transactions and balances with the joint venture is as follows (in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Management, investment advisory and development fees
and leasing commissions
|
|
$ |
961 |
|
|
$ |
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Accounts receivable
|
|
$ |
1,505 |
|
|
$ |
2,359 |
|
Accounts payable
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
$ |
1,500 |
|
|
$ |
2,354 |
|
Fees and commissions earned from the joint venture are included in management, leasing and development services in our consolidated statement of operations. Balances due from the joint venture are included in due from affiliates while balances due to the joint venture are included in accounts payable and other liabilities in the consolidated balance sheets. The joint venture’s balances were current as of March 31, 2010 and December 31, 2009.
Note 20—Subsequent Events
Park Place II Forbearance Agreement
In April 2010, the forbearance agreement between the special purpose property-owning subsidiaries that own Park Place II and the special servicer for the lender was amended. This agreement expires upon the earlier of (i) the disposition of the property, (ii) 30 days after the termination of negotiations to sell the property or the termination of the purchase agreement once signed, or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(iii) June 16, 2010. If Park Place II has not been sold by June 16, 2010, the special servicer has agreed to take one of the following actions within 30 days after the forbearance agreement terminates: (a) commence foreclosure proceedings, (b) take title to the property by way of a deed-in-lieu of foreclosure, (c) apply to the court for the appointment of a receiver, or (d) enter into an alternative arrangement that includes the full release of the Company from all obligations under the loan.
Brea Corporate Place and Brea Financial Commons Mortgage Loan
On May 1, 2010, we extended our $109.0 million mortgage loan secured by Brea Corporate Place and Brea Financial Commons. This loan is now scheduled to mature on May 1, 2011. We have one one-year extension remaining on this loan. No cash paydown was made to extend the loan, and the loan terms remain unchanged.
207 Goode Construction Loan
On May 6, 2010, we made a principal payment of $9.7 million on our 207 Goode construction loan. In exchange for this payment, the lender agreed to substantially eliminate our Operating Partnership’s principal repayment guaranty and extend the maturity date of the loan to August 1, 2010. As a result of this extension, we no longer have loan proceeds available to fund leasing costs. We are currently marketing this property for sale. The maturity date of this loan can be further extended to November 1, 2010 subject to certain conditions.
Corporate Name Change
On May 7, 2010, the board of directors approved an amendment to our charter to change our name from Maguire Properties, Inc. to MPG Office Trust, Inc. Our common and Series A preferred stock will continue to be listed on the New York Stock Exchange (“NYSE”) under their current ticker symbols “MPG” and “MPG-PA.” The board of directors also approved amendments to our certificate of limited partnership and limited partnership agreement to change the name of our Operating Partnership from Maguire Properties, L.P. to MPG Office Trust, L.P.
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
MPG OFFICE TRUST, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q.
Overview and Background
We are a self-administered and self-managed REIT, and we operate as a REIT for federal income tax purposes. We are the largest owner and operator of Class A office properties in the LACBD and are primarily focused on owning and operating high-quality office properties in the high-barrier-to-entry Southern California market.
As of March 31, 2010, our Operating Partnership indirectly owns whole or partial interests in 29 office and retail properties, a 350-room hotel and off-site parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 87.8% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in Maguire Macquarie Office, LLC, an unconsolidated joint venture formed in conjunction with Charter Hall Group (as successor to Macquarie Office Trust), our Operating Partnership’s share of the Total Portfolio is 13.5 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office, hotel and retail properties from which we derive our net income or loss, which we recognize in accordance with GAAP. The aggregate square footage of our Effective Portfolio has not been reduced to reflect our limited partners’ share of our Operating Partnership.
Our property statistics as of March 31, 2010 are as follows:
|
|
Number of
|
|
|
Total Portfolio
|
|
|
Effective Portfolio
|
|
|
|
Properties
|
|
|
Buildings
|
|
|
Square
Feet
|
|
|
Parking
Square
Footage
|
|
|
Parking
Spaces
|
|
|
Square
Feet
|
|
|
Parking
Square
Footage
|
|
|
Parking
Spaces
|
|
Wholly owned properties
|
|
|
17 |
|
|
|
26 |
|
|
|
10,155,902 |
|
|
|
6,205,406 |
|
|
|
19,125 |
|
|
|
10,155,902 |
|
|
|
6,205,406 |
|
|
|
19,125 |
|
Properties in Default
|
|
|
7 |
|
|
|
27 |
|
|
|
2,942,924 |
|
|
|
2,727,880 |
|
|
|
9,973 |
|
|
|
2,611,248 |
|
|
|
2,403,240 |
|
|
|
8,543 |
|
Unconsolidated joint venture
|
|
|
5 |
|
|
|
16 |
|
|
|
3,466,866 |
|
|
|
1,865,448 |
|
|
|
5,561 |
|
|
|
693,373 |
|
|
|
373,090 |
|
|
|
1,112 |
|
|
|
|
29 |
|
|
|
69 |
|
|
|
16,565,692 |
|
|
|
10,798,734 |
|
|
|
34,659 |
|
|
|
13,460,523 |
|
|
|
8,981,736 |
|
|
|
28,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Properties in Default
|
|
|
|
83.8 |
% |
|
|
|
|
|
|
|
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
|
Properties in Default
|
|
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
Including Properties in Default
|
|
|
|
81.0 |
% |
|
|
|
|
|
|
|
|
|
|
81.3 |
% |
|
|
|
|
|
|
|
|
As of March 31, 2010, the majority of our Total Portfolio is located in eight Southern California markets: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the John Wayne Airport, Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa and Mission Valley submarkets of San Diego County. We also have an interest in one property in Denver, Colorado (a joint venture property). We directly manage the properties in our Total Portfolio through our Operating Partnership and/or our Services Companies, except for properties in receivership, Cerritos Corporate Center and the Westin® Pasadena Hotel.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our hotel property and on- and off-site parking garages. We also receive income from providing management, leasing and real estate development services to our joint venture with Charter Hall Group.
Liquidity and Capital Resources
General
Our business requires continued access to adequate cash to fund our liquidity needs. In 2009, we focused on improving our liquidity position through cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, together with reductions in leasing costs, discretionary capital expenditures, property operating expenses and general and administrative expenses. During 2010, our foremost priorities are preserving and generating cash sufficient to fund our liquidity needs. Given the uncertainty in the economy and financial markets, management believes that access to any source of cash will be challenging and is planning accordingly. We are also working proactively to address challenges to our longer-term liquidity position, particularly our debt maturities, recourse obligations and leasing costs.
Sources and Uses of Liquidity
Our expected actual and potential liquidity sources and uses are, among others, as follows:
|
|
Sources
|
|
|
Uses
|
|
·
|
Unrestricted and restricted cash;
|
|
·
|
Property operations and corporate expenses;
|
|
·
|
Cash generated from operations;
|
|
·
|
Capital expenditures (including commissions
|
|
·
|
Asset dispositions;
|
|
|
and tenant improvements);
|
|
·
|
Cash generated from the contribution
|
|
·
|
Development and redevelopment costs;
|
|
|
of existing assets to joint ventures;
|
|
·
|
Payments in connection with loans (including
|
|
·
|
Proceeds from additional secured or
|
|
|
debt service, principal payment obligations
|
|
|
unsecured debt financings; and/or
|
|
|
and payments to extend, refinance, modify or
|
|
·
|
Proceeds from public or private
|
|
|
exit loans);
|
|
|
issuance of debt or equity securities.
|
|
·
|
Swap obligations; and/or
|
|
|
|
|
·
|
Distributions to common and preferred
|
|
|
|
|
|
stockholders and unit holders.
|
Actual and Potential Sources of Liquidity—
Described below are our expected actual and potential sources of liquidity, which we currently believe will be sufficient to meet our near-term liquidity needs. These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate adequate cash from these sources, we will have liquidity-related problems and will be exposed to significant risks. While we believe that we will have adequate cash for our near-term uses, significant issues with access to the liquidity sources identified below could lead to our insolvency. We face additional challenges in connection with our long-term liquidity position. For a further discussion of risks associated with (among other matters) recent and potential future loan defaults, current economic conditions, our liquidity position and our substantial indebtedness, see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Unrestricted and Restricted Cash—
A summary of our cash position is as follows (in millions):
|
|
March 31, 2010
|
|
Restricted cash:
|
|
|
|
Leasing and capital expenditure reserves
|
|
$ |
23.7 |
|
Tax, insurance and other working capital reserves
|
|
|
22.8 |
|
Prepaid rent
|
|
|
24.5 |
|
Debt service reserves
|
|
|
1.5 |
|
Collateral accounts
|
|
|
40.1 |
|
Total restricted cash, excluding Properties in Default
|
|
|
112.6 |
|
Unrestricted cash and cash equivalents
|
|
|
91.2 |
|
Total restricted cash and unrestricted cash and cash
equivalents, excluding Properties in Default
|
|
|
203.8 |
|
Restricted cash of Properties in Default
|
|
|
25.5 |
|
|
|
$ |
229.3 |
|
The leasing and capital expenditure, tax, insurance and other working capital, prepaid rent and debt service reserves are held in restricted accounts by our lenders in accordance with the terms of our mortgage loans. The collateral accounts are held by our counterparties or lenders under our interest rate swap agreement and other obligations. Of the $40.1 million held in cash collateral accounts by our counterparties as of March 31, 2010, we expect to receive a return of swap collateral of between approximately $12 million to $16 million during the remainder of 2010.
In connection with past property acquisitions and loan refinancings, we typically reserved a portion of the loan proceeds at closing in restricted cash accounts to fund (1) anticipated leasing expenditures (primarily commissions and tenant improvement costs) for both existing and prospective tenants, (2) non-recurring discretionary capital expenditures, such as major lobby renovations, and (3) future payments of interest (debt service). As of March 31, 2010, we had a total of $22.0 million of leasing reserves, $1.7 million of capital expenditure reserves and $1.5 million of debt service reserves. For a number of the properties with such reserves, particularly in Orange County, the monthly debt service requirements exceed the monthly cash generated from operations. For assets we do not dispose of, we expect this cash flow deficit to continue unless we are able to stabilize those properties through
lease-up. Stabilization is challenging in the current market, and lease-up may be costly and take a significant period of time.
The following is a summary of our available leasing reserves (excluding Properties in Default) as of March 31, 2010 (in millions):
|
|
Restricted Cash Accounts
|
|
|
Undrawn Debt Proceeds
|
|
|
Total Leasing Reserves
|
|
LACBD
|
|
$ |
9.2 |
|
|
$ |
— |
|
|
$ |
9.2 |
|
Orange County
|
|
|
10.4 |
|
|
|
— |
|
|
|
10.4 |
|
Tri-Cities
|
|
|
2.4 |
|
|
|
— |
|
|
|
2.4 |
|
Completed developments
|
|
|
— |
|
|
|
8.3 |
|
|
|
8.3 |
|
|
|
$ |
22.0 |
|
|
$ |
8.3 |
|
|
$ |
30.3 |
|
Historically, we have relied heavily upon leasing reserves to fund ongoing leasing costs. At our LACBD and Tri-Cities properties, these leasing reserves have been exhausted in large part, and future leasing costs will need to be funded primarily from property-generated cash flow. With respect to our Orange County assets, we continue to have adequate leasing reserves at our Brea Corporate Place,
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Brea Financial Commons, 3800 Chapman and 17885 Von Karman properties to fund leasing costs for the next several years, while the leasing reserves at City Tower have effectively been fully utilized.
Cash Generated from Operations—
Our cash generated from operations is primarily dependent upon (1) the occupancy level of our portfolio, (2) the rental rates achieved on our leases, and (3) the collectability of rent from our tenants. Net cash generated from operations is tied to our level of operating expenses and other general and administrative costs, described below under “—Actual and Potential Uses of Liquidity.”
Occupancy levels. There was negative absorption in 2009 in most of our submarkets, and our overall occupancy levels declined in 2009. We expect our occupancy levels during the remainder of 2010 to be lower than 2009 levels for the following reasons (among others):
·
|
Leasing activity in general continues to be soft in all of our submarkets.
|
·
|
Many of our current and potential tenants rely heavily on the availability of financing to support operating costs (including rent), and there is currently limited availability of credit.
|
·
|
The financial crisis has resulted in many companies shifting to a more cautionary mode with respect to leasing. Rather than expanding, many current and potential tenants are looking to consolidate, cut overhead and preserve operating capital. Many existing and potential tenants are also deferring strategic decisions, including entering into new, long-term leases.
|
·
|
We are facing increased competition from high-quality, recently-completed sublease space that is currently available, particularly in the LACBD.
|
·
|
Increased firm failures and rising unemployment have limited the tenant base.
|
·
|
Our liquidity challenges and recent and potential future asset dispositions and loan defaults may impact potential tenants’ willingness to enter into leases with us.
|
For a discussion of other factors that may affect our ability to sustain or improve our occupancy levels, see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010.
Rental rates. As a result of the economic crisis in 2009, average asking rental rates dropped in all of our submarkets (most dramatically in Orange County). On average, our in-place rents are generally close to current market in the LACBD, above market in the Tri-Cities and significantly above market in Orange County. Our leases with Pacific Enterprises for approximately 217,000 square feet at US Bank Tower and Southern California Gas Company for approximately 576,000 square feet at Gas Company Tower expire in 2010 and 2011, respectively. These leases have in-place rents in excess of $36.00 per square foot, which is approximately 40% above current market rental rates. We do not expect to re-lease the space at either building at those rates. In 2009, many landlords prioritized tenant retention by reducing rental rates and focusing on short-term lease extensions. During 2010, management does not expect significant rental rate increases or decreases from current levels in our submarkets. However, because of economic volatility and uncertainty, there can be no assurance that rental rates will not decline further.
Collectability of rent from our tenants. Our rental revenue depends on collecting rent from tenants, and in particular from our major tenants. As of March 31, 2010, our 20 largest tenants represented 51.3% of our Effective Portfolio’s total annualized rental revenue (excluding Properties in Default). Some of our tenants are in the mortgage, financial, insurance and professional services
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
industries, and these industries have been severely impacted by the current economic climate. Many of our major tenants have experienced or may experience a notable business downturn, weakening their financial condition. This resulted in increased lease defaults and decreased rent collectability in 2009. This trend may continue or worsen through year-end 2010 and beyond. In many cases, we made substantial up-front investments in the applicable leases, through tenant improvement allowances and other concessions, and we incurred typical transaction costs (including professional fees and commissions). In the event of tenant defaults, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. This is particularly true in the case of the bankruptcy or insolvency of a major tenant or where the Federal Deposit Insurance Corporation’s (the “FDIC”) is acting as receiver.
Asset Dispositions—
In 2008, we announced our intent to sell certain assets, which we expect will help us (1) preserve cash, through the potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the potential disposition of strategically-identified non-core properties that we believe have equity value above the debt. In connection with this strategy, in 2009 we disposed of 3.2 million square feet of office space, resulting in the elimination of $0.6 billion of mortgage debt, the elimination of various related recourse obligations to our Operating Partnership (including repayment guaranties, master leases and debt service guaranties) and the generation of $42.7 million in net proceeds (after the repayment of debt) in unrestricted cash to be used for general corporate purposes. During 2010, we closed the following transactions:
·
|
In March 2010, we disposed of Griffin Towers located in Santa Ana, California. We received proceeds of $89.4 million, net of transactions costs, which were combined with $6.5 million of restricted cash reserves released to us by the lender to partially repay the $125.0 million mortgage loan secured by this property. We were relieved of the obligation to pay the remaining $49.1 million due under the mortgage and senior mezzanine loans by the lender.
|
·
|
In March 2010, we disposed of 2385 Northside Drive located in San Diego, California. We received proceeds of $17.7 million, net of transaction costs, which were used to repay the balance outstanding under the construction loan secured by this property. Our Operating Partnership has no further obligation to guarantee the repayment of the construction loan.
|
Also as part of our strategic disposition program, certain of our special purpose property-owning subsidiaries are currently in default under six CMBS mortgages totaling approximately $0.9 billion secured by six separate office properties totaling approximately 2.5 million square feet (Stadium Towers Plaza, Park Place II, 2600 Michelson, Pacific Arts Plaza, 550 South Hope and 500 Orange Tower). As a result of the defaults under these mortgage loans, the special servicers have required that tenant rental payments be deposited in restricted lockbox accounts. As such, we do not have direct access to these rental payments, and the disbursement of cash from these restricted lockbox accounts to us is at the discretion of the special servicers. There are several potential outcomes on each of the Properties in Default, including foreclosure, a deed-in-lieu of foreclosure and a short sale. We are in various stages of negotiations with the special servicers on each of these six assets, with the goal of reaching a cooperative resolution for each asset quickly. We remain the title holder on each of these assets, both as of March 31, 2010 and the date of this report.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
With respect to the remainder of 2010, we are actively marketing several non-core assets, some of which may be disposed of at or below the debt and others which may potentially generate net proceeds. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of current economic conditions and the limited number of recently completed dispositions in our submarkets, we cannot predict:
·
|
Whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
|
·
|
Whether potential buyers will be able to secure financing; and
|
·
|
The length of time needed to find a buyer and to close the sale of a property.
|
With respect to recent and potential dispositions, the marketing process has been lengthier than anticipated and expected pricing has declined (in some cases materially). This trend may continue or worsen. The foregoing means that the number of assets we could potentially sell to generate net proceeds has decreased, and the amount of expected net proceeds in the event of any asset sale has also decreased. We may be unable to complete the disposition of identified properties in the near term or at all, which could significantly impact our liquidity situation.
In addition, certain of our material debt obligations require us to comply with financial and other covenants, including, but not limited to, net worth and liquidity covenants, due on sale clauses, change in control restrictions, listing requirements and other financial requirements. Some or all of these covenants could prevent or delay our ability to dispose of identified properties. For a discussion of other factors that may affect our ability to dispose of certain assets, see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010.
Furthermore, we agreed to indemnify Robert F. Maguire III and related entities and other contributors from all direct and indirect adverse tax consequences in the event that our Operating Partnership directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests in a taxable transaction. These tax indemnification obligations cover five of the office properties in our portfolio, which represented 56.9% of our Effective Portfolio’s aggregate annualized rent as of March 31, 2010 (excluding Properties in Default). These obligations apply for periods of up to 12 years from the date that these properties were contributed to our Operating Partnership at the time of our initial public offering in June 2003. The tax indemnification obligations may serve to prevent the disposition of the following assets that might otherwise provide important liquidity alternatives to us:
·
|
Gas Company Tower (initial expiration in 2012, with final expiration in 2015);
|
·
|
US Bank Tower (initial expiration in 2012, with final expiration in 2015);
|
·
|
KPMG Tower (initial expiration in 2012, with final expiration in 2015);
|
·
|
Wells Fargo Tower (initial expiration in 2010, with final expiration in 2013); and
|
·
|
Plaza Las Fuentes (excluding the Westin® Pasadena Hotel) (initial expiration in 2010, with final expiration in 2013).
|
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Contribution of Existing Assets to Joint Ventures—
We are currently partners with Charter Hall Group in a joint venture. In the near term or longer term, we may seek to raise capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved. Our ability to successfully identify, negotiate and close joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.
Proceeds from Additional Secured or Unsecured Debt Financings—
We have historically financed our asset acquisitions and operations largely from secured debt financings. We currently do not have any arrangements for future financings. Substantially all of our developed assets are currently encumbered, and most of our existing debt arrangements contain rates and other terms that are unlikely to be obtained in the market at this time or in the near term. Given the current severely limited access to credit and our financial condition, it will also be challenging to obtain any significant unsecured financings in the near term.
Proceeds from Public or Private Issuance of Debt or Equity Securities—
While we currently have no plans for the public or private issuance of debt or equity securities, we may explore this liquidity source in the future. Due to market conditions, our high leverage level and our liquidity position, it may be extremely difficult to raise cash through the issuance of securities on favorable terms or at all.
Actual and Potential Uses of Liquidity—
The following are the projected uses, and some of the potential uses, of our cash in the near term. Because of the current uncertainty in the real estate market and the economy as a whole, there may be other uses of our cash that are unexpected (and that are not identified below).
Property Operations and Corporate Expenses—
Management is focused on a careful and efficient use of cash to fund property operating and corporate expenses. All of our business units underwent a thorough budgeting process in the fourth quarter of 2009 to allow for support of the Company’s 2010 business plan, while preserving capital. In particular, management continues to take steps to reduce general and administrative expenses and to reduce discretionary property operating expenses during 2010. Our completed and any future property dispositions will further reduce these expenses. Regardless of these efforts, operating our properties and our business requires a significant amount of capital.
Capital Expenditures (Including Commissions and Tenant Improvements)—
Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain our properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions. Our costs for capital expenditures and leasing fall into two categories: (1) amounts that we are contractually obligated to spend and (2) discretionary amounts.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
As of March 31, 2010, we have executed leases (excluding those related to Properties in Default) that contractually commit us to pay $19.2 million in unpaid leasing costs, of which $3.1 million is contractually due in 2011, $1.5 million in 2012, $0.1 million in 2013 and $3.5 million in 2014 and beyond. The remaining $11.0 million is contractually available for payment to tenants upon request during 2010, but actual payment is largely determined by the timing of requests from those tenants.
As part of our effort to preserve cash, we intend to limit the amount of discretionary funds allocated to capital expenditures and leasing costs in the near term. Given the current economic environment, this is likely to result in a decrease in the number of leases we execute and average rental rates. In addition, for leases that we do execute, we expect that typical tenant concessions will increase.
As included in the summary table of available leasing reserves shown above, we have $30.3 million in available leasing reserves as of March 31, 2010. We incurred approximately $10 per square foot, $21 per square foot, $40 per square foot and $24 per square foot in leasing costs on new and renewal leases executed during the three months ended March 31, 2010 and the years ended December 31, 2009, 2008 and 2007, respectively. Actual leasing costs incurred will fluctuate as described above. Future leasing costs anticipated to be incurred at 17885 Von Karman will also be higher than our historical averages on a per square foot basis, as this project requires the build out of raw space. However, we expect to fund the majority of these costs through construction loan proceeds. As a result of the extension of our 207 Goode construction loan, we no longer have loan proceeds available to fund leasing costs. We are currently marketing this property for sale.
Development and Redevelopment Costs—
We continually evaluate the size, timing, costs and scope of our development and redevelopment programs and, as necessary, scale activity to reflect our financial position, overall economic conditions and the real estate fundamentals that exist in our submarkets. We intend to limit the amount of cash allocated to discretionary development and redevelopment projects in 2010. We have $8.3 million available under our 17885 Von Karman construction loan available for anticipated leasing costs. The timing of our construction expenditures may fluctuate given the actual progress and status of leasing activity. We believe that the undrawn construction loan available as of March 31, 2010 will be sufficient to substantially cover remaining tenanting costs.
Payments in Connection with Loans—
Debt Service. As of March 31, 2010, we had $4.1 billion of total consolidated debt, including $0.9 billion of debt associated with Properties in Default. Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. During 2009, we made a total of $263.0 million in debt service payments (including payments funded from reserves), of which $42.8 million related to Properties in Default. During the three months ended March 31, 2010, we made debt service payments totaling $47.3 million (including payments funded from reserves), none of which related to Properties in Default.
Principal Payment Obligations. As our debt matures, our principal payment obligations also present significant future cash requirements. We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic conditions. For a further discussion of our debt’s effect on our financial condition and operating flexibility, see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
A summary of our debt maturing in 2010, 2011 and 2012 is as follows (in millions):
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Maturity Date if Fully Extended
|
|
Unsecured term loan
|
|
$ |
7.3 |
|
|
$ |
15.0 |
|
|
$ |
— |
|
|
|
|
Construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207 Goode (1)
|
|
|
47.8 |
|
|
|
— |
|
|
|
— |
|
|
|
|
17885 Von Karman
|
|
|
25.3 |
|
|
|
— |
|
|
|
— |
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brea Corporate Place/Brea Financial Commons (2)
|
|
|
— |
|
|
|
109.0 |
|
|
|
— |
|
|
|
2012 |
|
Plaza Las Fuentes
|
|
|
91.2 |
|
|
|
— |
|
|
|
— |
|
|
|
2013 |
|
Mission City Corporate Center (3)
|
|
|
— |
|
|
|
— |
|
|
|
52.0 |
|
|
|
|
|
KPMG Tower
|
|
|
— |
|
|
|
— |
|
|
|
400.0 |
|
|
|
|
|
Total debt, excluding Properties in Default
|
|
|
171.6 |
|
|
|
124.0 |
|
|
|
452.0 |
|
|
|
|
|
Properties in Default (4)
|
|
|
1.7 |
|
|
|
1.3 |
|
|
|
365.5 |
|
|
|
|
|
|
|
$ |
173.3 |
|
|
$ |
125.3 |
|
|
$ |
817.5 |
|
|
|
|
|
__________
(1)
|
We extended the maturity date of this loan to August 1, 2010. See “Subsequent Events.”
|
(2)
|
We extended the maturity date of this loan to May 1, 2011. See “Subsequent Events.”
|
(3)
|
As of March 31, 2010, our Mission City Corporate Center property is held for sale.
|
(4)
|
Amounts shown related to Properties in Default reflect the contractual maturity dates per the loan agreements. The actual settlement dates for these loans will depend upon when the properties are disposed of either by the Company or the special servicer, as applicable. Principal amounts that were contractually due and unpaid as of March 31, 2010 are included in the 2010 column. Management does not intend to settle principal amounts related to Properties in Default with unrestricted cash. We expect that these amounts will be settled in a non-cash manner at the time of disposition.
|
The maturity date of our 207 Goode construction loan was extended to August 2010. We are currently marketing this asset for sale. The maturity date of this loan can be further extended to November 2010 subject to certain conditions. See “Subsequent Events.”
Our 17885 Von Karman construction loan matures in June 2010 with no further extension options. The loan has a $6.7 million partial repayment guarantee made by our Operating Partnership. We have entered into extension negotiations with the lender. If unsuccessful, we could be obligated to fund the difference between the current loan balance of $25.3 million and the ultimate value achieved in a disposition of the asset, with a cap of $6.7 million. We are focused on leasing the asset to stabilization and pursuing a disposition of the property.
Our Brea Corporate Place/Brea Financial Commons mortgage was extended to May 2011. See “Subsequent Events.” We have one one-year extension option remaining as of March 31, 2010. The extension requires that we meet a debt service coverage ratio test and deliver an interest rate cap. If we are unable to fulfill the extension conditions, we could elect to make a paydown on this loan in order to obtain the extension.
Our Plaza Las Fuentes mortgage loan matures in September 2010. This loan has three one-year extension options remaining at March 31, 2010. The extension requirements include, among other things, meeting a debt service coverage ratio test and a loan-to-value test. If we are unable to fulfill the extension conditions, we will likely need to make a paydown on this loan in order to obtain the extension.
Our KPMG Tower mortgage matures in October 2012. Based on current underwriting standards, management expects that this loan will require a substantial paydown upon refinancing (depending on market conditions). We have not yet identified the capital source or sources required to enable us to make this paydown.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Payments to Extend, Refinance, Modify or Exit Loans. In the ordinary course of business and as part of our current strategic initiatives, we frequently endeavor to extend, refinance, modify or exit loans. If we are unable to do so on reasonable terms or at all, the resulting costs will deplete our capital resources and we could become insolvent.
Because of our limited unrestricted cash and the reduced market value of our assets when compared with the debt balances on those assets, upcoming debt maturities present cash obligations that the relevant special purpose property-owning subsidiary obligor may not be able to satisfy. For assets that we do not or cannot dispose of and for which the relevant property-owning subsidiary is unable or unwilling to fund the resulting obligations, we will seek to extend or refinance the applicable loans or may default upon such loans. Historically, extending or refinancing loans has required principal paydowns and the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancings will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions will affect our ability to fund our other liquidity uses. In addition, the terms of the extensions or refinancings may include operational and financial covenants significantly more restrictive than our current debt covenants.
We also have significant covenants in other loan agreements, including: (1) required levels of interest coverage, fixed charge coverage and liquidity, (2) that we will not engage in certain types of transactions without lender consent unless our stock is listed on the NYSE and/or another nationally recognized stock exchange, and (3) receipt of an unqualified audit opinion on our annual financial statements. Although we were in compliance with these covenants as of March 31, 2010, some of the actions we may take in connection with our liquidity situation or other circumstances outside of our control could result in non-compliance under one or more of these covenants at future measurement dates. We are taking active steps to address any potential non-compliance issues. However, any covenant modifications would likely require a payment by us to secure lender approval. No assurance can be given that we will be able to secure modifications to the covenants on terms acceptable to us or at all. The impact of non-compliance varies based on the terms of the applicable loan, but in some cases could result in the acceleration of a significant financial obligation.
In addition, recourse obligations impact our ability to dispose of certain assets on favorable terms or at all and present significant challenges to our liquidity position. As described elsewhere in this report, we recently disposed of several assets and are working to dispose of several additional assets. For many of these assets (particularly in Orange County), the market value of the asset is insufficient to satisfy the applicable loan balance. Although most of our property-level indebtedness is non-recourse, our Operating Partnership has several potential contingent obligations described in “—Indebtedness—Operating Partnership Contingent Obligations.” If project-level debt is accelerated where a project’s assets are not sufficient to repay such debt in full, any recourse obligation would require a cash payment by our Operating Partnership. The recourse obligations also impact our ability to dispose of the underlying assets on favorable terms or at all. In some cases we may be required to continue to own properties that currently operate at a loss and utilize a significant portion of our unrestricted cash because we do not have the means to fund the recourse obligations in the case of a foreclosure of the property. Even if we are able to dispose of these properties, the lender(s) will likely require substantial cash payments to release us from the recourse obligations, impacting our liquidity position.
Swap Obligations—
We hold an interest rate swap agreement with a notional amount of $425.0 million under which we are the fixed-rate payer at a rate of 5.564% per annum and we receive one-month LIBOR from our
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
counterparty, an A+ rated financial institution. The swap requires net settlement each month and expires on August 9, 2012. We are required to post collateral with our counterparty, primarily in the form of cash, to the extent that the termination value of the swap exceeds a $5.0 million obligation (“Swap Liability”). As of March 31, 2010, the Swap Liability was $41.2 million. As of March 31, 2010, we had transferred $38.5 million in cash to our counterparty to satisfy our collateral posting requirement under the swap. This collateral will be returned to us during the remaining term of the swap agreement as we settle our monthly obligations.
Future changes in both actual and expected LIBOR rates will continue to have a significant impact on both our Swap Liability and our requirement to either post additional cash collateral or receive a return of previously-posted cash collateral. As of March 31, 2010, one-month LIBOR was 0.25%. As of March 31, 2010, each 0.25% weighted average decrease in future LIBOR rates during the remaining swap term would result in the requirement to post approximately $2 million in additional cash collateral, while each 0.25% weighted average increase in future LIBOR rates during the remaining swap term would result in the return to us of approximately $2 million in cash collateral from our counterparty. Accordingly, movements in future LIBOR rates will require us to either post additional cash collateral or receive a refund of previously-posted cash collateral during 2010.
Excluding the impact of movements in future LIBOR rates, our Swap Liability will also decrease each month as we settle our monthly obligations, and accordingly we will receive a return of previously-posted cash collateral. During the remainder of 2010, we expect to receive a return of approximately $12 million to $16 million of previously-posted cash collateral from our counterparty, which is comprised of a combination of return of collateral as a result of the satisfaction of our monthly obligations under the swap agreement, as well as a return of cash collateral due to anticipated increases in future LIBOR rates.
Distributions to Common and Preferred Stockholders and Unit Holders—
We are required to distribute 90% of our REIT taxable income (excluding net capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. We have historically funded a portion of our distributions from borrowings, and have distributed amounts in excess of our REIT taxable income. We may be required to use future borrowings, if necessary, to meet REIT distribution requirements and maintain our REIT status. We consider market factors and our performance in addition to REIT requirements in determining distribution levels. As of December 31, 2009, MPG Office Trust, Inc. had a net operating loss carryforward of approximately $608 million. Unless we generate significant net operating income through asset dispositions, we do not expect the need to pay distributions to our stockholders during 2010 to maintain our REIT status. Our board of directors did not declare dividends on our common stock during 2009 or the first quarter of 2010.
On December 19, 2008, our board of directors suspended the payment of dividends on our Series A Preferred Stock. Dividends on our Series A Preferred Stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.9064 per share. As of April 30, 2010, we have missed six quarterly dividend payments totaling $28.6 million. If we miss six or more quarterly dividend payments (whether consecutive or non-consecutive), the holders of our Series A Preferred Stock are entitled to elect two additional members to our board of directors (the “Preferred Directors”). The Preferred Directors will serve on our board until all dividends in arrears and the then current period’s dividend have been fully paid or until such dividends have been declared, and an amount sufficient for the payment thereof has been set aside for payment.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
All distributions to common stockholders, preferred stockholders and Operating Partnership unit holders are at the discretion of the board of directors, and no assurance can be given as to the amounts or timing of future distributions.
Indebtedness
Mortgage and Other Loans
As of March 31, 2010, our consolidated debt was comprised of mortgages secured by 22 properties, two construction loans and one unsecured term loan. A summary of our consolidated debt as of March 31, 2010 is as follows (in millions, except percentage and year amounts):
|
|
Principal
Amount
|
|
|
Percent of
Total Debt
|
|
Effective
Interest
Rate
|
|
Term to
Maturity
|
Fixed-rate
|
|
$ |
2,509.1 |
|
|
|
61.29 |
% |
|
|
5.46 |
% |
|
6 years
|
Variable-rate swapped to fixed-rate
|
|
|
425.0 |
|
|
|
10.38 |
% |
|
|
7.18 |
% |
|
2 years
|
Variable-rate
|
|
|
270.6 |
|
|
|
6.61 |
% |
|
|
2.95 |
% |
|
Less than 1 year
|
Total debt, excluding Properties in Default
|
|
|
3,204.7 |
|
|
|
78.28 |
% |
|
|
5.48 |
% |
|
5 years
|
Properties in Default
|
|
|
888.5 |
|
|
|
21.72 |
% |
|
|
10.22 |
% |
|
|
|
|
$ |
4,093.2 |
|
|
|
100.00 |
% |
|
|
6.51 |
% |
|
|
As of March 31, 2010, excluding mortgages encumbering the Properties in Default, approximately 72% of our outstanding debt was fixed (or swapped to a fixed-rate) at a weighted average interest rate of approximately 5.7% on an interest-only basis with a weighted average remaining term of approximately five years. Our variable-rate debt bears interest at a rate based on one-month LIBOR, which was 0.25% as of March 31, 2010, except for our 17885 Von Karman construction loan, which bears interest at prime, which was 3.25% as of March 31, 2010, subject to a floor interest rate of 5.00% per the loan agreement.
As of March 31, 2010, our ratio of total consolidated debt to total consolidated market capitalization was 90.6% of our total market capitalization of $4.5 billion (based on the closing price of our common stock of $3.08 per share on the NYSE on March 31, 2010). Our ratio of total consolidated debt plus liquidation preference of preferred stock to total consolidated market capitalization was 96.2% as of March 31, 2010. Our total consolidated market capitalization includes the book value of our consolidated debt, the $25.00 liquidation preference of 10.0 million shares of Series A Preferred Stock and the market value of our outstanding common stock and common units of our Operating Partnership as of March 31, 2010.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Certain information with respect to our indebtedness as of March 31, 2010 is as follows (in thousands, except percentage amounts):
|
Interest
Rate
|
|
Maturity Date
|
|
Principal
Amount (1)
|
|
|
Annual
Debt
Service (2)
|
|
Floating-Rate Debt
|
|
|
|
|
|
|
|
|
|
Unsecured term loan (3)
|
3.00%
|
|
5/1/2011
|
|
$ |
22,250 |
|
|
$ |
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans:
|
|
|
|
|
|
|
|
|
|
|
|
17885 Von Karman
|
5.00%
|
|
6/30/2010
|
|
|
25,310 |
|
|
|
1,283 |
|
207 Goode (4)
|
2.05%
|
|
8/1/2010
|
|
|
22,792 |
|
|
|
473 |
|
Total construction loans
|
|
|
|
|
|
48,102 |
|
|
|
1,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Plaza Las Fuentes (5)
|
3.50%
|
|
9/29/2010
|
|
|
91,200 |
|
|
|
3,235 |
|
Brea Corporate Place (6)
|
2.20%
|
|
5/1/2011
|
|
|
70,468 |
|
|
|
1,571 |
|
Brea Financial Commons (6)
|
2.20%
|
|
5/1/2011
|
|
|
38,532 |
|
|
|
859 |
|
Total variable-rate mortgage loans
|
|
|
|
|
|
200,200 |
|
|
|
5,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Swapped to Fixed-Rate Loans:
|
|
|
|
|
|
|
|
|
|
|
|
KPMG Tower (7)
|
7.16%
|
|
10/9/2012
|
|
|
400,000 |
|
|
|
29,054 |
|
207 Goode (4)
|
7.36%
|
|
8/1/2010
|
|
|
25,000 |
|
|
|
1,867 |
|
Total variable-rate swapped to fixed-rate loans
|
|
|
|
|
|
425,000 |
|
|
|
30,921 |
|
Total floating-rate debt
|
|
|
|
|
|
695,552 |
|
|
|
39,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Tower
|
5.68%
|
|
4/6/2017
|
|
|
550,000 |
|
|
|
31,649 |
|
Two California Plaza
|
5.50%
|
|
5/6/2017
|
|
|
470,000 |
|
|
|
26,208 |
|
Gas Company Tower
|
5.10%
|
|
8/11/2016
|
|
|
458,000 |
|
|
|
23,692 |
|
777 Tower
|
5.84%
|
|
11/1/2013
|
|
|
273,000 |
|
|
|
16,176 |
|
US Bank Tower
|
4.66%
|
|
7/1/2013
|
|
|
260,000 |
|
|
|
12,284 |
|
City Tower
|
5.85%
|
|
5/10/2017
|
|
|
140,000 |
|
|
|
8,301 |
|
Glendale Center
|
5.82%
|
|
8/11/2016
|
|
|
125,000 |
|
|
|
7,373 |
|
801 North Brand
|
5.73%
|
|
4/6/2015
|
|
|
75,540 |
|
|
|
4,386 |
|
Mission City Corporate Center (8)
|
5.09%
|
|
4/1/2012
|
|
|
52,000 |
|
|
|
2,685 |
|
The City - 3800 Chapman
|
5.93%
|
|
5/6/2017
|
|
|
44,370 |
|
|
|
2,666 |
|
701 North Brand
|
5.87%
|
|
10/1/2016
|
|
|
33,750 |
|
|
|
2,009 |
|
700 North Central
|
5.73%
|
|
4/6/2015
|
|
|
27,460 |
|
|
|
1,594 |
|
Total fixed-rate rate debt
|
|
|
|
|
|
2,509,120 |
|
|
|
139,023 |
|
Total debt, excluding Properties in Default
|
|
|
|
|
|
3,204,672 |
|
|
|
178,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties in Default
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Arts Plaza (9)
|
9.15%
|
|
4/1/2012
|
|
|
270,000 |
|
|
|
25,055 |
|
550 South Hope Street (10)
|
10.67%
|
|
5/6/2017
|
|
|
200,000 |
|
|
|
21,638 |
|
500 Orange Tower (11)
|
10.88%
|
|
5/6/2017
|
|
|
110,000 |
|
|
|
12,136 |
|
2600 Michelson (12)
|
10.69%
|
|
5/10/2017
|
|
|
110,000 |
|
|
|
11,927 |
|
Stadium Towers Plaza (13)
|
10.78%
|
|
5/11/2017
|
|
|
100,000 |
|
|
|
10,934 |
|
Park Place II (14)
|
10.39%
|
|
3/11/2012
|
|
|
98,482 |
|
|
|
10,248 |
|
Total Properties in Default
|
|
|
|
|
|
888,482 |
|
|
|
91,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
|
|
|
|
4,093,154 |
|
|
$ |
269,979 |
|
Debt discount
|
|
|
|
|
|
(5,703 |
) |
|
|
|
|
Mortgage loan associated with real estate held for sale (8)
|
|
|
|
|
|
(52,000 |
) |
|
|
|
|
Total consolidated debt, net
|
|
|
|
|
$ |
4,035,451 |
|
|
|
|
|
__________
(1)
|
Assuming no payment has been made in advance of its due date.
|
(2)
|
The March 31, 2010 one-month LIBOR rate of 0.25% was used to calculate interest on the variable-rate loans, except for the 17885 Von Karman construction loan which was calculated using the floor interest rate under the loan agreement of 5.00%.
|
(3)
|
In connection with the disposition of Griffin Towers in March 2010, the repurchase facility was converted into an unsecured term loan. This loan bears interest at a variable rate of LIBOR plus 2.75%, increasing to LIBOR plus 3.75% in June 2010.
|
(4)
|
This loan bears interest at LIBOR plus 1.80%. We have entered into an interest rate swap agreement to hedge this loan up to $25.0 million, which effectively fixes the LIBOR rate at 5.564%. This loan was extended to August 1, 2010. See “Subsequent Events.”
|
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(5)
|
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75% during the loan term, excluding extension periods. Three one-year extensions are available at our option, subject to certain conditions, some of which we may be unable to fulfill.
|
(6)
|
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 6.50% during the loan term, excluding extension periods. This loan was extended to May 1, 2011. See “Subsequent Events.” One one-year extension is available at our option, subject to certain conditions, some of which we may be unable to fulfill.
|
(7)
|
This loan bears interest at a rate of LIBOR plus 1.60%. We have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR rate at 5.564%.
|
(8)
|
As of March 31, 2010, Mission City Corporate Center is classified as held for sale.
|
(9)
|
Our special purpose property-owning subsidiary that owns the Pacific Arts Plaza property failed to make the debt service payments under this loan that were due beginning on September 1, 2009 and continuing through and including May 1, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement.
|
(10)
|
Our special purpose property-owning subsidiary that owns the 550 South Hope property failed to make the debt service payments under this loan that were due beginning on August 6, 2009 and continuing through and including May 6, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement.
|
(11)
|
Our special purpose property-owning subsidiary that owns the 500 Orange Tower property failed to make the debt service payments under this loan that were due beginning on January 6, 2010 and continuing through and including May 6, 2010.
|
(12)
|
Our special purpose property-owning subsidiary that owns the 2600 Michelson property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement.
|
(13)
|
Our special purpose property-owning subsidiary that owns the Stadium Towers Plaza property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement.
|
(14)
|
Our special purpose property-owning subsidiary that owns the Park Place II property failed to make the debt service payments under this loan that were due beginning on August 11, 2009 and continuing through and including May 11, 2010. The interest rate shown for this loan is the default rate as defined in the loan agreement.
|
Mortgage Loans
The interest expense recorded in our consolidated statement of operations the three months ended March 31, 2010 related to mortgage loans in default is as follows (in thousands):
Property
|
|
Initial Default Date
|
|
No. of
Missed
Payments
|
|
|
Contractual Interest
|
|
|
Default
Interest
|
|
550 South Hope
|
|
August 6, 2009
|
|
8 |
|
|
$ |
2,835 |
|
|
$ |
2,500 |
|
2600 Michelson
|
|
August 11, 2009
|
|
8 |
|
|
|
1,566 |
|
|
|
1,375 |
|
Park Place II
|
|
August 11, 2009
|
|
8 |
|
|
|
1,318 |
|
|
|
1,240 |
|
Stadium Towers Plaza
|
|
August 11, 2009
|
|
8 |
|
|
|
1,446 |
|
|
|
1,250 |
|
Pacific Arts Plaza
|
|
September 1, 2009
|
|
7 |
|
|
|
3,478 |
|
|
|
2,700 |
|
500 Orange Tower
|
|
January 6, 2010
|
|
3 |
|
|
|
1,618 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
$ |
12,261 |
|
|
$ |
10,363 |
|
Amounts shown in the table above include contractual and default interest calculated per the terms of the loan agreements. Management does not intend to settle these amounts with unrestricted cash. We expect that these amounts will be settled in a non-cash manner at the time of disposition.
The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. We are in discussions with the special servicers regarding a cooperative resolution on each of these assets, including through foreclosure, deed-in-lieu of foreclosure or short sale. There can be no assurance, however, that we will be able to resolve these matters in a short period of time. In addition to the loans in default as of March 31, 2010, other special purpose property-owning subsidiaries may default under additional loans in the future, including non-recourse loans where the relevant project is suffering from cash shortfalls on operating expenses and debt service obligations.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Amounts Available for Future Funding under Construction Loans
A summary of our construction loans as of March 31, 2010 is as follows (in thousands):
Project
|
|
Maximum Loan
Amount
|
|
|
Balance as of
March 31, 2010
|
|
|
Available for Future Funding
|
|
|
Operating
Partnership
Repayment
Guarantee
|
|
207 Goode
|
|
$ |
47,826 |
|
|
$ |
47,792 |
|
|
$ |
34 |
|
|
$ |
9,675 |
|
17885 Von Karman
|
|
|
33,600 |
|
|
|
25,310 |
|
|
|
8,290 |
|
|
|
6,720 |
|
|
|
$ |
81,426 |
|
|
$ |
73,102 |
|
|
$ |
8,324 |
|
|
|
|
|
Amounts shown as available for future funding as of March 31, 2010 represent funds that can be drawn to pay for remaining project development costs, including tenant improvement and leasing costs.
Each of our construction loans is subject to a partial guarantee by our Operating Partnership. The amounts guaranteed at any point in time are based on the stage of the development cycle that the project is in and are subject to reduction when certain financial ratios have been met. These repayment guarantees expire if and when the underlying loans have been fully repaid.
On May 6, 2010, we made a principal payment of $9.7 million on our 207 Goode construction loan. In exchange for this payment, the lender agreed to substantially eliminate our Operating Partnership’s principal repayment guarantee. See “Subsequent Events.”
Dispositions
Griffin Towers¾
In March 2010, we disposed of Griffin Towers located in Santa Ana, California. We received proceeds of $89.4 million, net of transactions costs, which were combined with $6.5 million of restricted cash reserves released to us by the lender to partially repay the $125.0 million mortgage loan secured by this property. We were relieved of the obligation to pay the remaining $49.1 million due under the mortgage and senior mezzanine loans by the lender.
In connection with the disposition of Griffin Towers, the repurchase facility was converted into an unsecured term loan. The term loan has the same terms as the repurchase facility, including the interest rate spreads and repayment dates. The term loan continues to be an obligation of our Operating Partnership.
2385 Northside Drive¾
In March 2010, we disposed of 2385 Northside Drive located in San Diego, California. We received proceeds of $17.7 million, net of transaction costs, which were used to repay the balance outstanding under the construction loan secured by this property. Our Operating Partnership has no further obligation to guarantee the repayment of the construction loan.
Operating Partnership Contingent Obligations
In connection with the issuance of otherwise non-recourse loans obtained by certain special purpose property-owning subsidiaries of our Operating Partnership, our Operating Partnership provided various forms of partial guaranties to the lenders originating those loans. These guaranties are contingent
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
obligations that could give rise to defined amounts of recourse against our Operating Partnership, should the special purpose property-owning subsidiaries be unable to satisfy certain obligations under otherwise non-recourse loans. These guaranties are in the form of (1) master leases whereby our Operating Partnership agreed to guarantee the payment of rents and/or re-tenanting costs for certain tenant leases existing at the time of loan origination should the tenants not satisfy their obligations through their lease term, (2) the guaranty of debt service payments (as defined) for a period of time (but not the guaranty of repayment of principal), (3) master leases of a defined amount of space over a defined period of time, with offsetting credit received for actual rents collected through third-party leases entered into with respect to the master leased space, and (4) customary repayment guaranties under construction loans. These partial guaranties of certain otherwise non-recourse debt of special purpose property-owning subsidiaries of our Operating Partnership, for which the interest expense and debt is included in our consolidated financial statements, are more fully described below.
Master Lease Agreements with Lenders—
As a condition to closing the mortgage loans on City Tower and 2600 Michelson in 2007, our Operating Partnership entered into a number of master lease agreements to guarantee rents on space leased by Ameriquest Corporation (“Ameriquest”). On July 1, 2007, Ameriquest terminated leases at each of these properties, which triggered our master lease obligations at City Tower and 2600 Michelson. We can mitigate future obligations under these master leases by re-leasing the space covered by our various guaranties to new tenants.
City Tower—
In connection with the entry into a $140.0 million mortgage loan on City Tower in 2007 by a special purpose property-owning subsidiary of our Operating Partnership, our Operating Partnership entered into a guaranty with the lender for all rents derived from 71,657 rentable square feet leased to Ameriquest through February 28, 2010 (the “City Tower Master Lease”). The City Tower Master Lease was triggered on July 1, 2007 upon the termination of Ameriquest’s leases at City Tower. This master lease expired on February 28, 2010.
2600 Michelson—
In connection with the entry into a $110.0 million mortgage loan on 2600 Michelson in 2007 by a special purpose property-owning subsidiary of our Operating Partnership, our Operating Partnership entered into a guaranty for all rents derived from 97,798 rentable square feet leased to Ameriquest through January 31, 2011 (the “2600 Michelson Master Lease”). The 2600 Michelson Master Lease would have been triggered upon the July 1, 2007 termination of Ameriquest’s leases at 2600 Michelson; however, we simultaneously entered into direct leases with subtenants of Ameriquest that were in occupancy and paying rent on all 97,798 rentable square feet of space covered by the 2600 Michelson Master Lease. The lender agreed to transfer our 2600 Michelson Master Lease obligations to these new tenants.
During the fourth quarter of 2007, one of these new tenants terminated their lease on 20,025 rentable square feet. As a result, our obligations to fund the remaining $0.9 million in future rent payable under their 20,025 rentable square foot lease from October 1, 2007 to January 31, 2011, as well as our obligation to pay for the first $34.00 per square foot, or approximately $0.7 million, in costs associated with re-leasing this space, were triggered under the 2600 Michelson Master Lease. We received a termination fee from this tenant in the amount of $0.3 million, which we deposited in lender-controlled debt service reserves as a prepayment of a portion of our 2600 Michelson Master Lease
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
obligations. Unless we re-lease this space to a new tenant, we will be required to fund the remaining $0.4 million in rental obligations on a monthly basis and then deposit $0.7 million into a lender-controlled leasing reserve on January 31, 2011.
As of March 31, 2010, the tenants occupying the remaining 77,773 rentable square feet covered under the 2600 Michelson Master Lease are current under their lease agreements. Our remaining exposure related to these tenants is approximately $1.6 million as of March 31, 2010. As long as these tenants are not in default under their lease agreements, our contingent obligations under the 2600 Michelson Master Lease will decrease to zero by January 31, 2011, at a rate of approximately $0.5 million per quarter. Should these tenants default under their lease agreements prior to that date, in addition to our responsibility to guarantee their remaining future rental payments, our Operating Partnership will also be liable for the first $34.00 per square foot, or $2.6 million, of leasing costs incurred to re-lease this space. 2600 Michelson is a 308,592 rentable square foot building that is 67.5% leased as of March 31, 2010.
Debt Service Guaranties—
As a condition to closing the fixed-rate mortgage loans on 3800 Chapman and the $109.0 million variable-rate mortgage secured by both Brea Corporate Place and Brea Financial Commons (the “Brea Campus”) in 2007, our Operating Partnership entered into various debt service guaranty agreements. Under each of the debt service guaranties, our Operating Partnership agreed to guarantee the prompt payment of the monthly debt service amount (but not the repayment of any principal amount) and all amounts to be deposited into (i) the tax and insurance reserve, (ii) the capital reserve, (iii) the rollover reserve, and (iv) the ground lease reserve (Brea Corporate Place only). Each guaranty commenced on January 1, 2009. The 3800 Chapman guaranty expires on May 6, 2017. For the loan secured by our Brea Campus, our guaranty expires on May 1, 2011, unless we exercise our extension option, through which the guaranty can be extended until May 1, 2012. Each of the guaranties can expire before its respective term upon determination by the lender that the relevant property has achieved a debt service coverage ratio (as defined in the loan agreements) of at least 1.10 to 1.00 for two consecutive calculation dates.
The following table provides information regarding each debt service guaranty as of March 31, 2010:
Property
|
|
Rentable
Square Feet
|
|
|
Leased
Percentage
|
|
Guaranty Commencement Date
|
|
|
Guaranty Expiration Date
|
|
|
Annual Debt Service (1)
|
|
|
In-Place Annual Cash NOI (2)
|
|
3800 Chapman
|
|
|
158,767 |
|
|
|
75.9 |
% |
|
|
1-1-09 |
|
|
|
5-06-17 |
|
|
$ |
2.7M |
|
|
$ |
2.2M |
|
Brea Campus
|
|
|
495,489 |
|
|
|
78.0 |
% |
|
|
1-1-09 |
|
|
|
5-01-11 |
|
|
|
2.4M |
|
|
|
4.4M |
|
_____________
(1)
|
Annual debt service represents annual interest expense only.
|
(2)
|
Tax and insurance reserve payment obligations and ground lease payment obligations (Brea Corporate Place only) are reflected as deductions to derive in-place annual cash NOI. In-place annual cash NOI represents actual first quarter 2010 cash NOI multiplied by four.
|
During the term of the respective guaranties shown in the table above, we also fund a capital reserve on a monthly basis at an annualized rate of $0.20 per square foot and are obligated to fund a rollover reserve on a monthly basis at an annualized rate of $0.75 per square foot.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Plaza Las Fuentes Mortgage Guarantee Obligations—
In connection with our special purpose property-owning subsidiary’s entry into a $100.0 million mortgage loan secured by Plaza Las Fuentes and the Westin® Pasadena Hotel, our Operating Partnership entered into two guarantees on September 29, 2008 related to space leased to East West Bank (90,773 rentable square feet) and Fannie Mae (61,655 rentable square feet). If either tenant defaults on its lease payments, as defined in the loan agreement, our Operating Partnership is required to either post a standby letter of credit or deposit cash with the lender’s agent equal to (1) $50.00 per square foot of space leased by the defaulting tenant (“PLF Leasing Reserve”) and (2) one year of rent based on the defaulting tenant’s contractual rate (“PLF Interest Reserve”). The PLF Leasing Reserve would be available to us for reimbursement of leasing expenditures incurred to re-lease the defaulted space, and the PLF Interest Reserve would be available for payment of loan interest. We are required to replenish the PLF Interest Reserve if the remaining balance falls below six months worth of rent, provided that, in no event shall the amount deposited (initial and subsequent deposits) exceed 24 months of rent for the defaulting tenant. As of March 31, 2010, our total contingent obligation related to our guaranty of the PLF Leasing Reserve is approximately $7.6 million, while our total contingent obligation related to our guaranty of the PLF Interest Reserve is approximately $10 million. As of March 31, 2010 and through the date of this report, both tenants are current on their lease payments.
Non-Recourse Carve Out Guarantees—
Most of our properties are encumbered by non-recourse debt obligations. In connection with most of these loans, however, our Operating Partnership entered into certain “non-recourse carve out” guarantees which provide for the loans to be partially or fully recourse against our Operating Partnership if certain triggering events occur. Although these events are different for each guarantee, some of the common events include:
·
|
The special purpose property-owning subsidiary’s or Operating Partnership’s filing a voluntary petition for bankruptcy;
|
·
|
The special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity;
|
·
|
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and
|
·
|
Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of our Operating Partnership or the Company.
|
In the event that any of these triggering events occur and the loans become partially or fully recourse against our Operating Partnership, our business, financial condition, results of operation and common stock price would be materially adversely affected and our insolvency could result.
In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, liens which are senior to the mortgage loan and outstanding security deposits.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
Comparison of the Three Months Ended March 31, 2010 to March 31, 2009
Our results of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 were affected by dispositions made during 2009 and 2010. Therefore, our results are not comparable from period to period. To eliminate the effect of changes in our Total Portfolio due to dispositions, we have separately presented the results of our “Same Properties Portfolio.”
Properties included in our Same Properties Portfolio are our hotel and the properties in our office portfolio, with the exception of the Properties in Default, our joint venture properties and Mission City Corporate Center, which was held for sale as of March 31, 2010.
Consolidated Statements of Operations Information
(In millions, except percentage amounts)
|
|
Same Properties Portfolio
|
|
Total Portfolio
|
|
|
For the Three
Months Ended
|
|
|
Increase/
|
|
|
%
|
|
For the Three
Months Ended
|
|
|
Increase/
|
|
|
%
|
|
|
3/31/10
|
|
|
3/31/09
|
|
|
(Decrease)
|
|
|
Change
|
|
3/31/10
|
|
|
3/31/09
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
55.0 |
|
|
$ |
54.4 |
|
|
$ |
0.6 |
|
|
|
1 |
% |
|
$ |
68.2 |
|
|
$ |
67.4 |
|
|
$ |
0.8 |
|
|
|
1 |
% |
Tenant reimbursements
|
|
|
21.9 |
|
|
|
23.2 |
|
|
|
(1.3 |
) |
|
|
-6 |
% |
|
|
25.1 |
|
|
|
26.9 |
|
|
|
(1.8 |
) |
|
|
-7 |
% |
Hotel operations
|
|
|
5.2 |
|
|
|
5.0 |
|
|
|
0.2 |
|
|
|
4 |
% |
|
|
5.2 |
|
|
|
5.0 |
|
|
|
0.2 |
|
|
|
4 |
% |
Parking
|
|
|
10.3 |
|
|
|
10.4 |
|
|
|
(0.1 |
) |
|
|
-1 |
% |
|
|
11.7 |
|
|
|
11.6 |
|
|
|
0.1 |
|
|
|
1 |
% |
Management, leasing and development services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.0 |
|
|
|
2.0 |
|
|
|
(1.0 |
) |
|
|
-50 |
% |
Interest and other
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
-50 |
% |
|
|
0.3 |
|
|
|
0.8 |
|
|
|
(0.5 |
) |
|
|
-63 |
% |
Total revenue
|
|
|
92.5 |
|
|
|
93.2 |
|
|
|
(0.7 |
) |
|
|
-1 |
% |
|
|
111.5 |
|
|
|
113.7 |
|
|
|
(2.2 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property operating and maintenance
|
|
|
19.5 |
|
|
|
19.6 |
|
|
|
(0.1 |
) |
|
|
-1 |
% |
|
|
24.2 |
|
|
|
24.9 |
|
|
|
(0.7 |
) |
|
|
-3 |
% |
Hotel operating and maintenance
|
|
|
3.7 |
|
|
|
3.4 |
|
|
|
0.3 |
|
|
|
9 |
% |
|
|
3.7 |
|
|
|
3.4 |
|
|
|
0.3 |
|
|
|
9 |
% |
Real estate taxes
|
|
|
7.6 |
|
|
|
8.6 |
|
|
|
(1.0 |
) |
|
|
-12 |
% |
|
|
9.1 |
|
|
|
10.4 |
|
|
|
(1.3 |
) |
|
|
-13 |
% |
Parking
|
|
|
2.7 |
|
|
|
3.0 |
|
|
|
(0.3 |
) |
|
|
-10 |
% |
|
|
3.1 |
|
|
|
3.6 |
|
|
|
(0.5 |
) |
|
|
-14 |
% |
General and administrative
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7.6 |
|
|
|
8.3 |
|
|
|
(0.7 |
) |
|
|
-8 |
% |
Other expense
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization
|
|
|
25.0 |
|
|
|
27.6 |
|
|
|
(2.6 |
) |
|
|
-9 |
% |
|
|
33.7 |
|
|
|
37.0 |
|
|
|
(3.3 |
) |
|
|
-9 |
% |
Interest
|
|
|
44.0 |
|
|
|
44.3 |
|
|
|
(0.3 |
) |
|
|
-1 |
% |
|
|
66.7 |
|
|
|
71.6 |
|
|
|
(4.9 |
) |
|
|
-7 |
% |
Total expenses
|
|
|
103.8 |
|
|
|
107.8 |
|
|
|
(4.0 |
) |
|
|
-4 |
% |
|
|
149.6 |
|
|
|
160.7 |
|
|
|
(11.1 |
) |
|
|
-7 |
% |
Loss from continuing operations before equity
in net loss of unconsolidated joint venture
and gain on sale of real estate
|
|
|
(11.3 |
) |
|
|
(14.6 |
) |
|
|
3.3 |
|
|
|
|
|
|
|
(38.1 |
) |
|
|
(47.0 |
) |
|
|
8.9 |
|
|
|
|
|
Equity in net loss of unconsolidated joint venture
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
0.2 |
|
|
|
(1.7 |
) |
|
|
1.9 |
|
|
|
|
|
Gain on sale of real estate
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
16.6 |
|
|
|
20.3 |
|
|
|
(3.7 |
) |
|
|
|
|
Loss from continuing operations
|
|
$ |
(11.3 |
) |
|
$ |
(14.6 |
) |
|
$ |
3.3 |
|
|
|
|
|
|
$ |
(21.3 |
) |
|
$ |
(28.4 |
) |
|
$ |
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47.2 |
|
|
$ |
(28.3 |
) |
|
$ |
75.5 |
|
|
|
|
|
Tenant Reimbursements Revenue
Same Properties Portfolio tenant reimbursements revenue decreased $1.3 million, or 6%, while Total Portfolio tenant reimbursements revenue decreased $1.8 million, or 7%, for the three months ended March 31, 2010 as compared to March 31, 2009, primarily due to a decrease in escalatable costs.
Hotel Operations Revenue
Hotel operations revenue increased $0.2 million, or 4%, for the three months ended March 31, 2010 as compared to March 31, 2009 as a result of a 7.1% increase in occupancy and a 2.9% increase in REVPAR.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Management, Leasing and Development Services
Total Portfolio management, leasing and development services decreased $1.0 million, or 50%, for the three months ended March 31, 2010 as compared to March 31, 2009, mainly due to lower management and leasing fees earned from our joint venture.
Real Estate Taxes Expense
Same Properties Portfolio real estate taxes decreased $1.0 million, or 12%, while Total Portfolio real estate taxes decreased $1.3 million, or 13%, for the three months ended March 31, 2010 as compared to March 31, 2009, primarily due to base year reductions in property values during 2010.
General and Administrative Expense
Total Portfolio general and administrative expense decreased $0.7 million, or 8%, for the three months ended March 31, 2010 as compared to March 31, 2009, largely as a result of lower compensation expense (including stock-based compensation expense) due to the departure of certain members of senior management during 2009, which was partially offset by higher legal and professional fees incurred during 2010.
Depreciation and Amortization Expense
Same Properties Portfolio depreciation and amortization decreased $2.6 million, or 9%, while Total Portfolio depreciation and amortization decreased $3.3 million, or 9%, during the three months ended March 31, 2010 as compared to March 31, 2009, mainly due to a reduction in the carrying amount of various properties, including the Properties in Default, as a result of impairment charges recorded in 2009.
Interest Expense
Total Portfolio interest expense decreased $4.9 million, or 7%, for the three months ended March 31, 2010 as compared to March 31, 2009, primarily due to property dispositions during 2009, which was partially offset by the accrual of $10.4 million of default interest on Properties in Default.
Gain on Sale of Real Estate
We recorded a $16.6 million gain on sale of real estate in the Total Portfolio for the three months ended March 31, 2010 as the result of the recognition of a gain that was deferred in 2006 related to the disposition of the 808 South Olive parking garage. During the same period in 2009, we recorded a $20.3 million gain on sale of real estate in the Total Portfolio as the result of the expiration of a loan guarantee made by our Operating Partnership on the Cerritos Corporate Center mortgage which was deferred at the time we contributed that property to our joint venture with the Charter Hall Group.
Discontinued Operations
Our income from discontinued operations of $47.2 million for the three months ended March 31, 2010 was comprised primarily of a $49.1 million gain on settlement of debt related to the disposition of Griffin Towers. Our loss from discontinued operations of $28.3 million for the three
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
months ended March 31, 2009 was comprised primarily of an impairment charge of $23.5 million recorded in connection with the writedown of 3161 Michelson to fair value as of March 31, 2009.
Cash Flow
The following summary discussion of our cash flow is based on the consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below.
|
|
For the Three Months Ended
|
|
|
Increase/ |
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
(Decrease)
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$ |
436 |
|
|
$ |
(8,254 |
) |
|
$ |
8,690 |
|
Net cash provided by (used in) investing activities
|
|
|
113,608 |
|
|
|
(11,344 |
) |
|
|
124,952 |
|
Net cash (used in) provided by financing activities
|
|
|
(113,791 |
) |
|
|
6,095 |
|
|
|
(119,886 |
) |
As discussed above, our business requires continued access to adequate cash to fund our liquidity needs. During 2010, our foremost priorities are preserving and generating cash sufficient to fund our liquidity needs. See “Liquidity and Capital Resources” above for a detailed discussion of our expected and potential sources and uses of liquidity.
Operating Activities
Our cash flow from operating activities is primarily dependent upon (1) the occupancy level of our portfolio, (2) the rental rates achieved on our leases, and (3) the collectability of rent and other amounts billed to our tenants and is also tied to our level of operating expenses and other general and administrative costs. Net cash provided by operating activities during the three months ended March 31, 2010 totaled $0.4 million, compared to net cash used in operating activities during the three months ended March 31, 2009 of $8.3 million. An increase in property operating income combined with a reduction in general and administrative expense and interest accrued related to the Properties in Default that was unpaid as of March 31, 2010 were the drivers of the increase in cash provided by operating activities. In 2010, we expect our operating cash flow to continue to improve as we continue to manage our property operating and general and administrative expenses and continue to work to dispose of properties with current and projected negative cash flow.
Investing Activities
Our cash flow from investing activities is generally impacted by the amount of construction and lease-up activity at our development properties and capital expenditures for our operating properties. In the past, we also funded restricted cash reserves at loan inception which we then use to pay for activities at our operating properties. Net cash provided by investing activities was $113.6 million during the three months ended March 31, 2010, compared to net cash used in investing activities of $11.3 million during the three months ended March 31, 2009, mainly due to proceeds received from the dispositions of Griffin Towers and 2385 Northside Drive. Additionally, we significantly reduced the amount of discretionary funds spent on tenant improvements and leasing commissions and development activity in 2010 as compared to 2009, and our expenditures in 2010 are also lower due to property dispositions completed in 2009. In 2010, we expect to continue the reduction in development and discretionary capital expenditure activity we began in 2009 as well as continue to use our restricted cash to pay for improvements at our operating properties. We also expect to continue to receive the return of restricted cash held in collateral account by our swap counterparty as we settle our obligations.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Financing Activities
Our cash flow from financing activities is generally impacted by our loan activity, less any dividends and distributions paid to our stockholders and common units of our Operating Partnership, if any. Net cash used in financing activities was $113.8 million during the three months ended March 31, 2010, compared to net cash provided by financing activities of $6.1 million during the three months ended March 31, 2009, primarily due to repayment of the 2385 Northside Drive construction loan and the partial repayment of the Griffin Towers mortgage upon disposition, with minimal borrowing activity during the three months ended March 31, 2010. In 2010, we expect to continue to use funds received upon disposition of properties to repay the mortgage loans encumbering those properties. Due to our current liquidity position and the availability of substantial net operating loss carryforwards, we do not expect to pay dividends and distributions on our common and preferred stock for the foreseeable future.
Development Properties
We have a proactive planning process by which we continually evaluate the size, timing and scope of our development programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets. Based on current conditions, we expect to engage in limited new development activities and otherwise reduce or defer discretionary development costs in the near term. We may be unable to lease committed development projects at expected rentals rates or within projected time frames or complete projects on schedule or within budgeted amounts, which could adversely affect our financial condition, results of operations and cash flow.
We are currently engaging in efforts to lease 17885 Von Karman, a 151,370 square foot office building located in Irvine, California to stabilization. As we lease this property to stabilization (which will be challenging in the current market), we will continue to incur leasing costs, which will be funded through our existing construction loan.
We also own undeveloped land that we believe can support up to approximately 5 million square feet of office and mixed-use development and approximately 5 million square feet of structured parking, excluding development sites that are encumbered by the mortgage loans on our 2600 Michelson and Pacific Arts Plaza properties, which are in default.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Contractual Obligations
The following table provides information with respect to our commitments at March 31, 2010, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Principal payments on mortgage and other loans–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
171,552 |
|
|
$ |
124,000 |
|
|
$ |
400,000 |
|
|
$ |
533,000 |
|
|
$ |
— |
|
|
$ |
1,924,120 |
|
|
$ |
3,152,672 |
|
Properties in Default (1)
|
|
|
1,746 |
|
|
|
1,266 |
|
|
|
365,470 |
|
|
|
— |
|
|
|
— |
|
|
|
520,000 |
|
|
|
888,482 |
|
Mortgage loan associated with real estate held for sale
|
|
|
— |
|
|
|
— |
|
|
|
52,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52,000 |
|
Our share of unconsolidated joint venture (2)
|
|
|
27,882 |
|
|
|
21,411 |
|
|
|
266 |
|
|
|
281 |
|
|
|
297 |
|
|
|
110,145 |
|
|
|
160,282 |
|
Interest payments–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated - fixed-rate (3)
|
|
|
102,254 |
|
|
|
136,338 |
|
|
|
136,338 |
|
|
|
127,493 |
|
|
|
107,878 |
|
|
|
214,143 |
|
|
|
824,444 |
|
Consolidated - variable-rate (4)
|
|
|
27,005 |
|
|
|
30,162 |
|
|
|
22,527 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
79,694 |
|
Properties in Default (1)
|
|
|
121,043 |
|
|
|
91,785 |
|
|
|
65,400 |
|
|
|
56,635 |
|
|
|
56,635 |
|
|
|
133,219 |
|
|
|
524,717 |
|
Mortgage loan associated with real estate held for sale
|
|
|
2,014 |
|
|
|
2,685 |
|
|
|
669 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,368 |
|
Our share of unconsolidated joint venture (2)
|
|
|
7,445 |
|
|
|
7,219 |
|
|
|
6,124 |
|
|
|
6,095 |
|
|
|
6,079 |
|
|
|
3,332 |
|
|
|
36,294 |
|
Capital leases (5)–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
893 |
|
|
|
596 |
|
|
|
348 |
|
|
|
266 |
|
|
|
135 |
|
|
|
354 |
|
|
|
2,592 |
|
Our share of unconsolidated joint venture (2)
|
|
|
17 |
|
|
|
23 |
|
|
|
24 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
Operating lease (6)
|
|
|
617 |
|
|
|
832 |
|
|
|
858 |
|
|
|
885 |
|
|
|
313 |
|
|
|
— |
|
|
|
3,505 |
|
Lease termination agreement (7)
|
|
|
675 |
|
|
|
870 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,545 |
|
Property disposition obligations (8)
|
|
|
314 |
|
|
|
418 |
|
|
|
308 |
|
|
|
383 |
|
|
|
105 |
|
|
|
— |
|
|
|
1,528 |
|
Tenant-related commitments (9)–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
11,053 |
|
|
|
3,080 |
|
|
|
1,483 |
|
|
|
125 |
|
|
|
726 |
|
|
|
2,771 |
|
|
|
19,238 |
|
Properties in Default
|
|
|
4,233 |
|
|
|
1,581 |
|
|
|
270 |
|
|
|
93 |
|
|
|
2 |
|
|
|
1,064 |
|
|
|
7,243 |
|
Real estate held for sale
|
|
|
98 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
98 |
|
Our share of unconsolidated joint venture (2)
|
|
|
3,205 |
|
|
|
32 |
|
|
|
26 |
|
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
3,283 |
|
Parking easement obligations (10)
|
|
|
1,038 |
|
|
|
1,233 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,271 |
|
Air space and ground leases (11)–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
2,498 |
|
|
|
3,330 |
|
|
|
3,330 |
|
|
|
3,330 |
|
|
|
3,720 |
|
|
|
345,493 |
|
|
|
361,701 |
|
Our share of unconsolidated joint venture (2), (12)
|
|
|
196 |
|
|
|
261 |
|
|
|
261 |
|
|
|
261 |
|
|
|
293 |
|
|
|
25,320 |
|
|
|
26,592 |
|
|
|
$ |
485,778 |
|
|
$ |
427,122 |
|
|
$ |
1,055,702 |
|
|
$ |
728,871 |
|
|
$ |
176,183 |
|
|
$ |
3,279,961 |
|
|
$ |
6,153,617 |
|
__________
(1)
|
Amounts shown for principal payments related to Properties in Default reflect the contractual maturity dates per the loan agreements. The actual settlement dates for these loans will depend upon when the properties are disposed of either by the Company or the special servicer, as applicable. Amounts shown for interest related to Properties in Default are based on contractual and default interest rates per the loan agreements. Interest and principal amounts that were contractually due and unpaid as of March 31, 2010 are included in the 2010 column. Management does not intend to settle principal and interest amounts related to Properties in Default with unrestricted cash. We expect that these amounts will be settled in a non-cash manner at the time of disposition.
|
(2)
|
Our share of the Maguire Macquarie joint venture is 20%.
|
(3)
|
The interest payments on our fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
|
(4)
|
The interest payments on our variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate of 0.25% as of March 31, 2010 plus the contractual spread per the loan agreement, except for the 17885 Von Karman construction loan which is calculated using the floor interest rate of 5.00% per the loan agreement.
|
(5)
|
Includes principal and interest payments.
|
(6)
|
Includes operating lease obligations for sub-leased office space at 1733 Ocean.
|
(7)
|
Includes payments to be made pursuant to a lease termination agreement for fourth floor office space at 1733 Ocean.
|
(8)
|
Includes master lease obligations related to our Maguire Macquarie joint venture.
|
(9)
|
Tenant-related commitments are based on executed leases as of March 31, 2010. Excludes a $0.2 million lease takeover obligation that we have mitigated through a sub-lease of that space to a third-party tenant. We are not currently funding tenant-related commitments for Properties in Default. Amounts are being funded by the special servicers using restricted cash held at the property-level.
|
(10)
|
Includes payments required under the amended parking easement for the 808 South Olive garage.
|
(11)
|
Includes an air space lease for Plaza Las Fuentes and ground leases for Two California Plaza and Brea Corporate Place. The air space rent for Plaza Las Fuentes and ground rent for Two California Plaza are calculated through their lease expiration
|
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
|
dates in years 2017 and 2082, respectively. The ground rent for Brea Corporate Place is calculated through the year of first reappraisal.
|
(12)
|
Includes ground leases for One California Plaza and Cerritos Corporate Center which are calculated through their lease expiration dates in years 2082 and 2098, respectively.
|
Related Party Transactions
We earn property management and investment advisory fees and leasing commissions from our joint venture with Charter Hall Group. A summary of our transactions and balances with the joint venture is as follows (in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Management, investment advisory and development fees
and leasing commissions
|
|
$ |
961 |
|
|
$ |
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Accounts receivable
|
|
$ |
1,505 |
|
|
$ |
2,359 |
|
Accounts payable
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
$ |
1,500 |
|
|
$ |
2,354 |
|
Litigation
See Part II, Item 1. “Legal Proceedings.”
Critical Accounting Policies
Please refer to our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010 for a discussion of our critical accounting policies for “Impairment Evaluation” and “Revenue Recognition.” There have been no changes to these policies during the three months ended March 31, 2010.
New Accounting Pronouncements
There are no recently issued accounting pronouncements that are expected to have a material effect on our financial condition and results of operations in future periods.
Subsequent Events
Park Place II Forbearance Agreement
In April 2010, the forbearance agreement between the special purpose property-owning subsidiaries that own Park Place II and the special servicer for the lender was amended. This agreement expires upon the earlier of (i) the disposition of the property, (ii) 30 days after the termination of negotiations to sell the property or the termination of the purchase agreement once signed, or (iii) June 16, 2010. If Park Place II has not sold by June 16, 2010, the special servicer has agreed to take one of the following actions within 30 days after the forbearance agreement terminates: (a) commence foreclosure proceedings, (b) take title to the property by way of a deed-in-lieu of foreclosure, (c) apply to the court for the appointment of a receiver, or (d) enter into an alternative arrangement that includes the full release of the Company from all obligations under the loan.
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Brea Corporate Place and Brea Financial Commons Mortgage Loan
On May 1, 2010, we extended our $109.0 million mortgage loan secured by Brea Corporate Place and Brea Financial Commons. This loan is now scheduled to mature on May 1, 2011. We have one one-year extension remaining on this loan. No cash paydown was made to extend the loan, and the loan terms remain unchanged.
207 Goode Construction Loan
On May 6, 2010, we made a principal payment of $9.7 million on our 207 Goode construction loan. In exchange for this payment, the lender agreed to substantially eliminate our Operating Partnership’s principal repayment guaranty and extend the maturity date of the loan to August 1, 2010. As a result of this extension, we no longer have loan proceeds available to fund leasing costs. We are currently marketing this property for sale. The maturity date of this loan can be further extended to November 1, 2010 subject to certain conditions.
Corporate Name Change
On May 7, 2010, the board of directors approved an amendment to our charter to change our name from Maguire Properties, Inc. to MPG Office Trust, Inc. Our common and Series A preferred stock will continue to be listed on the NYSE under their current ticker symbols “MPG” and “MPG-PA.” The board of directors also approved amendments to our certificate of limited partnership and limited partnership agreement to change the name of our Operating Partnership from Maguire Properties, L.P. to MPG Office Trust, L.P.
Non-GAAP Supplemental Measure
Funds from operations (“FFO”) is a widely recognized measure of REIT performance. We calculate FFO as defined by the National Association of Real Estate Investment Trusts, or NAREIT. FFO represents net income (loss) (as computed in accordance with GAAP), excluding gains from disposition of property (but including impairments and provisions for losses on property held for sale), plus real estate-related depreciation and amortization (including capitalized leasing costs and tenant allowances or improvements). Adjustments for our unconsolidated joint venture are calculated to reflect FFO on the same basis.
Management uses FFO as a supplemental performance measure because, in excluding real estate-related depreciation and amortization and gains from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results of operations, the utility of FFO as a measure of our performance is limited. Other Equity REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to such other Equity REITs’ FFO. As a result, FFO should be considered only as a supplement to net income (loss) as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to meet our cash needs, including our ability to pay dividends or make distributions. FFO also should not be used as a supplement to or substitute for cash flows from operating activities (as computed in accordance with GAAP).
MPG OFFICE TRUST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
A reconciliation of net income (loss) available to common stockholders to FFO is as follows (in thousands, except per share amounts):
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Net income (loss) available to common stockholders
|
|
$ |
18,580 |
|
|
$ |
(53,890 |
) |
|
|
|
|
|
|
|
|
|
Add: Depreciation and amortization of real estate assets
|
|
|
34,988 |
|
|
|
45,526 |
|
Depreciation and amortization of real estate assets-
|
|
|
|
|
|
|
|
|
unconsolidated joint venture (1)
|
|
|
1,898 |
|
|
|
3,312 |
|
Net income (loss) attributable to common units of our
Operating Partnership
|
|
|
2,584 |
|
|
|
(7,496 |
) |
Unallocated losses - unconsolidated joint venture (1)
|
|
|
(962 |
) |
|
|
— |
|
Deduct: Gains on sale of real estate
|
|
|
16,591 |
|
|
|
22,520 |
|
|
|
|
|
|
|
|
|
|
Funds from operations available to common stockholders
|
|
|
|
|
|
|
|
|
and unit holders (FFO)
|
|
$ |
40,497 |
|
|
$ |
(35,068 |
) |
|
|
|
|
|
|
|
|
|
Company share of FFO (2)
|
|
$ |
35,552 |
|
|
$ |
(30,786 |
) |
|
|
|
|
|
|
|
|
|
FFO per share–basic
|
|
$ |
0.73 |
|
|
$ |
(0.64 |
) |
FFO per share–diluted
|
|
$ |
0.72 |
|
|
$ |
(0.64 |
) |
___________
(1)
|
Amount represents our 20% ownership interest in our joint venture with Charter Hall Group.
|
(2)
|
Based on a weighted average interest in our Operating Partnership of 87.8% for both the three months ended March 31, 2010 and 2009.
|
|
|
Quantitative and Qualitative Disclosures About Market Risk.
|
See Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2009.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Nelson C. Rising, our principal executive officer, and Shant Koumriqian, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2010.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We may make changes in our internal control processes from time to time in the future.
PART II—OTHER INFORMATION
We are involved in various litigation and other legal matters, including personal injury claims and administrative proceedings, which we are addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations. As described in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness,” mortgage loans encumbering several of our properties are currently in default. The resolution of some or all of these defaults may involve various legal actions, including court-appointed receiverships, damages claims and foreclosures.
Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)
Certain written and oral statements made or incorporated by reference from time to time by us or our representatives in this Quarterly Report on Form 10-Q, other filings or reports filed with the SEC, press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act). In particular, statements relating to our liquidity and capital resources, prospective asset dispositions, portfolio performance and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including anticipated FFO, market conditions and demographics) are forward-looking statements. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements. We caution investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or that management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
·
|
Difficulties resulting from any defaults by our special purpose property-owning subsidiaries under loans that are recourse or non-recourse to our Operating Partnership;
|
·
|
The continued or increased negative impact of the current credit crisis and global economic slowdown;
|
·
|
Adverse economic or real estate developments in Southern California, particularly in the LACBD or Orange County region;
|
·
|
Difficulties in disposing of the several non-core assets as discussed throughout this report;
|
·
|
Our failure to obtain additional capital or extend or refinance debt maturities;
|
·
|
Our dependence on significant tenants, many of which are in industries that have been severely impacted by the current credit crisis and global economic slowdown;
|
·
|
Defaults on or non-renewal of leases by tenants;
|
·
|
Decreased rental rates, increased lease concessions or failure to achieve occupancy targets;
|
·
|
Our failure to reduce our significant level of indebtedness;
|
·
|
Further decreases in the market value of our properties;
|
·
|
Future terrorist attacks in the U.S.;
|
·
|
Increased interest rates and operating costs;
|
·
|
Potential loss of key personnel;
|
·
|
Our failure to maintain our status as a REIT;
|
·
|
Our failure to successfully operate acquired properties and operations;
|
·
|
Difficulty in operating the properties owned through our joint venture;
|
·
|
Our failure to successfully develop or redevelop properties;
|
·
|
Environmental uncertainties and risks related to natural disasters; and
|
·
|
Changes in real estate and zoning laws and increases in real property tax rates.
|
Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K/A filed with the SEC on April 30, 2010. Those risks are also relevant to our performance and financial condition. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all of such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
(a) Recent Sales of Unregistered Securities: None.
(b) Use of Proceeds from Registered Securities: None.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: None
|
|
Defaults Upon Senior Securities.
|
Six of our special purpose property-owning subsidiaries are currently in default under non-recourse mortgage loans. Amounts due under these loans that are unpaid as of the date of this report are as follows (in thousands):
Property
|
|
Initial Default Date
|
|
Interest
|
|
|
Principal
Amortization
Payment
|
|
|
Impound
Amounts
|
|
|
Total
|
|
550 South Hope
|
|
August 6, 2009
|
|
$ |
17,638 |
|
|
$ |
— |
|
|
$ |
2,403 |
|
|
$ |
20,041 |
|
2600 Michelson
|
|
August 11, 2009
|
|
|
8,884 |
|
|
|
— |
|
|
|
1,023 |
|
|
|
9,907 |
|
Park Place II
|
|
August 11, 2009
|
|
|
7,582 |
|
|
|
941 |
|
|
|
921 |
|
|
|
9,444 |
|
Stadium Towers Plaza
|
|
August 11, 2009
|
|
|
8,901 |
|
|
|
— |
|
|
|
110 |
|
|
|
9,011 |
|
Pacific Arts Plaza
|
|
September 1, 2009
|
|
|
14,255 |
|
|
|
— |
|
|
|
1,648 |
|
|
|
15,903 |
|
500 Orange Tower
|
|
January 6, 2010
|
|
|
4,699 |
|
|
|
— |
|
|
|
1,102 |
|
|
|
5,801 |
|
|
|
|
|
$ |
61,959 |
|
|
$ |
941 |
|
|
$ |
7,207 |
|
|
$ |
70,107 |
|
The interest shown in the table above includes contractual and default interest calculated per the terms of the loan agreements and late fees assessed by the special servicers.
The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. We are in discussions with the special servicers regarding a cooperative resolution on each of these assets, including through foreclosure, deed-in-lieu of foreclosure or short sale. There can be no assurance, however, that we will be able to resolve these matters in a short period of time. In addition to the loans in default as of the date of this report, other special purpose property-owning subsidiaries may default under additional loans in the future, including non-recourse loans where the relevant project is suffering from cash shortfalls on operating expenses and debt service obligations.
Series A Preferred Stock
On December 19, 2008, our board of directors suspended the payment of dividends on our Series A Preferred Stock. Dividends on our Series A Preferred Stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.9064 per share. As of April 30, 2010, we have missed six quarterly dividend payments totaling $28.6 million.
None.
Exhibit No.
|
|
Exhibit Description
|
|
|
|
|
|
4.1*
|
|
Form of Certificate of Common Stock of
MPG Office Trust, Inc.
|
|
4.2*
|
|
Form of Certificate of Series A Preferred Stock of
MPG Office Trust, Inc.
|
|
31.1*
|
|
Certification of Principal Executive Officer dated May 17, 2010 pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2*
|
|
Certification of Principal Financial Officer dated May 17, 2010 pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1**
|
|
Certification of Principal Executive Officer and Principal Financial Officer dated May 17, 2010 pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
|
|
__________
(1)
|
This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
MPG OFFICE TRUST, INC.
|
|
Registrant
|
|
|
|
|
By:
|
/s/ NELSON C. RISING
|
|
|
Nelson C. Rising
|
|
|
President and Chief Executive Officer
|
|
|
(Principal executive officer)
|
|
|
|
|
By:
|
/s/ SHANT KOUMRIQIAN
|
|
|
Shant Koumriqian
|
|
|
Executive Vice President,
|
|
|
Chief Financial Officer
|
|
|
(Principal financial officer)
|
60