10-Q 1 mpg201163010q.htm FORM 10-Q MPG 2011.6.30 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
 
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________

Commission File Number: 001-31717
________________________
MPG OFFICE TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
04-3692625
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
355 South Grand Avenue Suite 3300
Los Angeles, CA
(Address of principal executive offices)
 
90071
(Zip Code)
(213) 626-3300
(Registrant’s telephone number, including area code)
None
(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 x 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 x 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.
 
Large accelerated filer £
Accelerated filer x
Non-accelerated filer £
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of August 5, 2011
Common Stock, $0.01 par value per share
 
50,955,772 shares



MPG OFFICE TRUST, INC.

FORM 10-Q
FOR THE QUARTER ENDED June 30, 2011

TABLE OF CONTENTS


 
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements.
 
 
 
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
 
 
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)
 
 
Notes to Consolidated Financial Statements (unaudited)
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
Item 4.
Controls and Procedures.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings.
 
Item 1A.
Risk Factors.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
Item 3.
Defaults Upon Senior Securities.
 
Item 4.
(Removed and Reserved).
 
Item 5.
Other Information.
 
Item 6.
Exhibits.
 
Signatures
 
Exhibits
 
 
 
Exhibit 31.1
 
 
 
Exhibit 31.2
 
 
 
Exhibit 32.1
 
 
 
Exhibit 101 Instance Document
 
 
 
Exhibit 101 Schema Document
 
 
 
Exhibit 101 Calculation Linkbase Document
 
 
 
Exhibit 101 Definition Linkbase Document
 
 
 
Exhibit 101 Label Linkbase Document
 
 
 
Exhibit 101 Presentation Linkbase Document
 



PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.
MPG OFFICE TRUST, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
June 30, 2011
 
December 31, 2010
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land
$
263,312

 
$
313,942

Acquired ground leases
55,801

 
55,801

Buildings and improvements
1,996,196

 
2,280,878

Land held for development
87,276

 
92,001

Tenant improvements
287,797

 
300,052

Furniture, fixtures and equipment
2,088

 
20,512

 
2,692,470

 
3,063,186

Less: accumulated depreciation
(636,119
)
 
(668,328
)
Investments in real estate, net
2,056,351

 
2,394,858

 
 
 
 
Cash and cash equivalents
65,985

 
46,864

Restricted cash
97,953

 
142,795

Rents and other receivables, net
3,666

 
5,809

Deferred rents
55,992

 
60,609

Deferred leasing costs and value of in-place leases, net
79,467

 
91,311

Deferred loan costs, net
10,261

 
13,972

Other assets
13,104

 
14,794

Total assets
$
2,382,779

 
$
2,771,012

 
 
 
 
LIABILITIES AND DEFICIT
 
 
   
Liabilities:
 
 
   
Mortgage and other loans
$
3,140,841

 
$
3,576,493

Accounts payable and other liabilities
150,437

 
196,015

Acquired below-market leases, net
30,835

 
44,026

Total liabilities
3,322,113

 
3,816,534

 
 
 
 
Deficit:
 
 
   
Stockholders’ Deficit:
 
 
   
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
100

 
100

Common stock, $0.01 par value, 100,000,000 shares authorized;
     49,558,961 and 48,925,499 shares issued and outstanding at
     June 30, 2011 and December 31, 2010, respectively
496

 
489

Additional paid-in capital
705,006

 
702,556

Accumulated deficit and dividends
(1,507,104
)
 
(1,594,407
)
Accumulated other comprehensive loss
(24,616
)
 
(29,079
)
Total stockholders’ deficit
(826,118
)
 
(920,341
)
Noncontrolling Interests:
 
 
   
Common units of our Operating Partnership
(113,216
)
 
(125,181
)
Total deficit
(939,334
)
 
(1,045,522
)
Total liabilities and deficit
$
2,382,779

 
$
2,771,012





See accompanying notes to consolidated financial statements.

1


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Revenue:
 
 
 
 
 
 
 
Rental
$
53,639

 
$
55,930

 
$
107,327

 
$
112,756

Tenant reimbursements
20,662

 
21,090

 
41,316

 
43,036

Parking
9,193

 
9,730

 
18,227

 
19,912

Management, leasing and development services
1,126

 
1,062

 
2,125

 
2,023

Interest and other
1,800

 
234

 
1,995

 
451

Total revenue
86,420

 
88,046

 
170,990

 
178,178

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
21,578

 
20,629

 
41,858

 
41,158

Real estate taxes
7,495

 
7,355

 
14,990

 
14,691

Parking
2,290

 
2,500

 
4,818

 
5,105

General and administrative
5,308

 
6,517

 
11,999

 
14,124

Other expense
1,917

 
1,603

 
3,679

 
3,052

Depreciation and amortization
25,890

 
26,204

 
51,273

 
54,449

Interest
56,380

 
48,420

 
109,688

 
96,557

Loss from early extinguishment of debt
164

 

 
164

 

Total expenses
121,022

 
113,228

 
238,469

 
229,136

 
 
 
 
 
 
 
 
Loss from continuing operations before equity in
     net loss of unconsolidated joint venture and
     gain on sale of real estate
(34,602
)
 
(25,182
)
 
(67,479
)
 
(50,958
)
Equity in net loss of unconsolidated joint venture
(21
)
 
196

 
(333
)
 
397

Gain on sale of real estate

 

 

 
16,591

Loss from continuing operations
(34,623
)
 
(24,986
)
 
(67,812
)
 
(33,970
)
 
 
 
 
 
 
 
 
Discontinued Operations:
 
 
 
 
 
 
 
Loss from discontinued operations before gains on
     settlement of debt and sale of real estate
(18,182
)
 
(31,190
)
 
(24,980
)
 
(45,397
)
Gains on settlement of debt
127,849

 

 
127,849

 
49,121

Gains on sale of real estate
63,629

 

 
63,629

 

Income (loss) from discontinued operations
173,296

 
(31,190
)
 
166,498

 
3,724

 
 
 
 
 
 
 
 
Net income (loss)
138,673

 
(56,176
)
 
98,686

 
(30,246
)
Net (income) loss attributable to common units of our
     Operating Partnership
(15,483
)
 
7,421

 
(10,278
)
 
4,837

Net income (loss) attributable to MPG Office Trust, Inc.
123,190

 
(48,755
)
 
88,408

 
(25,409
)
Preferred stock dividends
(4,766
)
 
(4,766
)
 
(9,532
)
 
(9,532
)
Net income (loss) available to common stockholders
$
118,424

 
$
(53,521
)
 
$
78,876

 
$
(34,941
)
 
 
 
 
 
 
 
 
Basic income (loss) per common share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.71
)
 
$
(0.54
)
 
$
(1.39
)
 
$
(0.79
)
Income (loss) from discontinued operations
3.13

 
(0.56
)
 
3.00

 
0.07

Net income (loss) available to common stockholders per share
$
2.42

 
$
(1.10
)
 
$
1.61

 
$
(0.72
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
49,040,268

 
48,692,588

 
49,028,693

 
48,613,815

 
 
 
 
 
 
 
 
Amounts attributable to MPG Office Trust, Inc.:
 
 
 
 
 
 
 
Loss from continuing operations
$
(30,069
)
 
$
(21,363
)
 
$
(58,844
)
 
$
(28,668
)
Income (loss) from discontinued operations
153,259

 
(27,392
)
 
147,252

 
3,259

 
$
123,190

 
$
(48,755
)
 
$
88,408

 
$
(25,409
)




See accompanying notes to consolidated financial statements.

2


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
For the Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
 
Cash flows from operating activities:
 
 
 
Net income (loss):
$
98,686

 
$
(30,246
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
     operating activities (including discontinued operations):
 
 
   
Equity in net loss of unconsolidated joint venture
333

 
(397
)
Depreciation and amortization
55,150

 
66,709

Impairment of long-lived assets
13,888

 
17,447

Gains on settlement of debt
(127,849
)
 
(49,121
)
Gains on sale of real estate
(63,629
)
 
(16,591
)
Loss from early extinguishment of debt
399

 
485

Deferred rent expense
1,026

 
1,023

Provision for doubtful accounts
745

 
1,383

Revenue recognized related to below-market
     leases, net of acquired above-market leases
(6,492
)
 
(8,399
)
Deferred rental revenue
(910
)
 
(3,790
)
Compensation cost for share-based awards, net
2,495

 
1,872

Amortization of deferred loan costs
3,576

 
3,253

Unrealized (gain) loss due to hedge ineffectiveness, net
(552
)
 
173

Changes in assets and liabilities:
 
 
   
Rents and other receivables
71

 
(2,590
)
Deferred leasing costs
(5,020
)
 
(4,517
)
Other assets
(1,458
)
 
1,166

Accounts payable and other liabilities
9,576

 
33,542

Net cash (used in) provided by operating activities
(19,965
)
 
11,402

Cash flows from investing activities:
 
 
   
Proceeds from dispositions of real estate, net
136,641

 
106,637

Expenditures for improvements to real estate
(4,466
)
 
(11,344
)
Investment in unconsolidated joint venture
(620
)
 

Decrease in restricted cash
42,689

 
5,633

Net cash provided by investing activities
174,244

 
100,926

Cash flows from financing activities:
 
 
   
Proceeds from construction loans

 
2,781

Principal payments on:
 
 
   
Mortgage loans
(119,896
)
 
(98,087
)
Construction loans

 
(29,234
)
Unsecured term loan
(15,000
)
 
(7,420
)
Capital leases
(262
)
 
(618
)
Net cash used in financing activities
(135,158
)
 
(132,578
)
Net change in cash and cash equivalents
19,121

 
(20,250
)
Cash and cash equivalents at beginning of period
46,864

 
90,982

Cash and cash equivalents at end of period
$
65,985

 
$
70,732


3


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)
 
For the Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
105,962

 
$
92,196

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Buyer assumption of mortgages loans secured by properties disposed of
$
184,665

 
$
52,000

Debt and related interest forgiven by lender
123,929

 
49,121

Mortgage loan and related interest satisfied in connection with transfer of deed
33,920

 
24,500

Increase in fair value of interest rate swaps and caps, net
8,795

 
895

Accrual for real estate improvements and purchases of
     furniture, fixtures, and equipment
621

 
916

Common units of our Operating Partnership converted to common stock

 
180

 
 
 
 







See accompanying notes to consolidated financial statements.

4


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Organization and Description of Business

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. Additionally, the term “Properties in Default” refers to our Stadium Towers Plaza, 500 Orange Tower, City Tower, 700 North Central and 801 North Brand properties, whose mortgage loans were in default as of June 30, 2011 and where our ultimate goal is to exit the assets. In addition to the mortgage loans secured by the Properties in Default, the mortgage loan secured by Two California Plaza is also in default as of June 30, 2011. We have excluded Two California Plaza from the Properties in Default because our goal is to modify the loan with the special servicer rather than to dispose of the asset.

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 Southern California market.

Through our controlling interest in MPG Office, L.P. (the “Operating Partnership”), of which we are the sole general partner and hold an approximate 88.5% interest, and the subsidiaries of our Operating Partnership, including MPG TRS Holdings, Inc., MPG TRS Holdings II, Inc., and MPG Office Trust Services, Inc. and its subsidiaries (collectively known as the “Services Companies”), we own, manage and lease 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 and land parcels.

As of June 30, 2011, our Operating Partnership indirectly owns whole or partial interests in 21 office properties, off-site parking garages, and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 88.5% 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, our Operating Partnership’s share of the Total Portfolio is 11.0 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office 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’ 11.5% share of our Operating Partnership.

Our property statistics as of June 30, 2011 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
11

 
18

 
8,915,012

 
4,612,484

 
13,928

 
8,915,012

 
4,612,484

 
13,928

Properties in Default
5

 
7

 
1,424,268

 
1,535,775

 
4,886

 
1,424,268

 
1,535,775

 
4,886

Unconsolidated joint venture
5

 
16

 
3,489,256

 
1,865,448

 
5,561

 
697,851

 
373,090

 
1,113

 
21

 
41

 
13,828,536

 
8,013,707

 
24,375

 
11,037,131

 
6,521,349

 
19,927

Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Properties in Default
 
 
 
 
83.9
%
 
 
 
 
 
83.8
%
 
 
 
 
Properties in Default
 
 
 
 
67.9
%
 
 
 
 
 
67.9
%
 
 
 
 
Including Properties in Default
 
 
 
 
82.2
%
 
 
 
 
 
81.8
%
 
 
 
 


5


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of June 30, 2011, the majority of our Total Portfolio is located in six Southern California markets: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa submarket 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 Stadium Towers Plaza, 500 Orange Tower and City Tower (each of which is in receivership) and Cerritos Corporate Center.

Note 2Basis 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. None of our properties, including the Properties in Default, met the criteria to be held for sale as of June 30, 2011. 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 June 30, 2011 and December 31, 2010, 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. See Note 13 “Properties in Default—Overview” for the assets and obligations associated with Properties in Default included in our consolidated balance sheets as of June 30, 2011 and December 31, 2010.

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, 2010 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 filed with the Securities and Exchange Commission (“SEC”) on March 16, 2011.

6


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 3Liquidity

Our business requires continued access to adequate cash to fund our liquidity needs. Over the last several years, we have improved our liquidity position through secured debt financings, cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, as well as reductions in our leasing costs, discretionary capital expenditures, property operating expenses, and general and administrative expenses. We are working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, leasing costs, capital expenditures and recourse obligations. We do not currently have committed sources of cash adequate to fund our projected longer-term needs. Management believes that access to future sources of cash will be challenging.

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;

Asset dispositions;

Cash generated from the contribution of existing assets to joint ventures;

Proceeds from public or private issuance of debt or equity securities; and/or

Proceeds from additional secured or unsecured debt financings.
 
These sources are essential to our liquidity and financial position, and if we are unable to generate adequate cash from these sources we will have liquidity-related problems and will be exposed to material risks. We face greater challenges in connection with our long-term liquidity position, particularly debt maturities, leasing costs, capital expenditures and recourse obligations. We have not currently identified sources sufficient to fund our projected long-term liquidity needs. Our inability to secure adequate sources of liquidity could lead to our eventual insolvency.

Asset Dispositions—

During the past several years, we have systematically disposed of assets in order to (1) preserve cash, through the 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 disposition of strategically-identified non-core properties with equity value.

In 2010, we disposed of 2385 Northside Drive, Griffin Towers, 17885 Von Karman, Mission City Corporate Center, Park Place II, 207 Goode and Pacific Arts Plaza, comprising a combined 2.1 million square feet of office space and 0.1 million square feet of retail space. While these transactions generated no net proceeds for us, they resulted in the elimination of $647.5 million of debt maturing in the next several years and the elimination of $20.4 million in principal repayment and/or debt service guaranties on our 2385 Northside Drive, 17885 Von Karman and 207 Goode construction loans.


7


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

During the six months ended June 30, 2011, we disposed of the 500 Orange Center development site, 701 North Brand, 550 South Hope, the Westin® Pasadena Hotel and 2600 Michelson. We received proceeds from these transactions totaling $136.6 million, net of transaction costs, of which $78.6 million was used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building and $39.8 million was applied by the special servicers to the mortgages loans secured by 550 South Hope and 2600 Michelson. The remaining $18.2 million of net proceeds, combined with $2.1 million of loan reserves released to us after repayment of the mortgage, will be used for general corporate purposes.

We intend to exit several additional non-core assets in 2011 or 2012, if possible, including but not limited to Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand (all of which are currently in default under their respective mortgage loans, as described below). However, we may not be able to exit these assets in a timely manner or on a cooperative basis. We do not anticipate any additional cash-generating dispositions in the near term, and have a very limited number of assets remaining that could potentially be sold in the near term to generate net cash proceeds.

Proceeds from Additional Secured or Unsecured Debt Financings

In August 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building. See Note 19 “Subsequent Events.” The loan agreement permits us to obtain up to $11.3 million of mezzanine financing on the property, but our ability to secure such mezzanine financing on favorable terms or at all is uncertain. We do not currently have arrangements for any other future secured financings and do not expect to obtain any other secured debt financings in the near term that will generate net cash proceeds. We currently do not believe that we will be able to address challenges to our longer-term liquidity position (particularly debt maturities, leasing costs, capital expenditures and recourse obligations) through future secured debt financings. Given the current limited access to credit and our financial condition, it will also be highly challenging to obtain any significant unsecured financings in the near term.

Payments in Connection with Loans
    
Debt Service—

As of June 30, 2011, we had $3.1 billion of total consolidated debt, including $0.9 billion of debt associated with mortgages in default (as described below). 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. The lockbox and cash management arrangements contained in most of our loan agreements provide that substantially all of the income generated by our special purpose property-owning subsidiaries is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders.  With the exception of the mortgages in default, cash is distributed to us only after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses.


8


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

During 2010, we made debt service payments totaling $187.3 million (including payments funded from reserves), and the respective special servicers of the mortgages in default applied $12.4 million of restricted cash held at the property level to pay contractual principal and interest on the mortgage loans secured by 2600 Michelson, 550 South Hope, Park Place II and Pacific Arts Plaza. During the six months ended June 30, 2011, we made debt service payments totaling $74.6 million, and the respective special servicers of the mortgages in default applied $33.0 million of restricted cash held at the property level to pay contractual interest on the mortgage loans secured by 550 South Hope, Stadium Towers Plaza, Two California Plaza, 500 Orange Tower, City Tower and 700 North Central. We made no debt service payments with unrestricted cash during the six months ended June 30, 2011 related to mortgages in default subsequent to the default date.

Certain of our special purpose property-owning subsidiaries were in default as of June 30, 2011 under commercial mortgage-backed securities (“CMBS”) mortgages totaling approximately $0.9 billion secured by six separate office properties totaling approximately 2.8 million square feet (Stadium Towers Plaza, 500 Orange Tower, City Tower, Two California Plaza, 700 North Central and 801 North Brand). As a result of the defaults under these mortgage loans, pursuant to contractual rights the respective 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. We remained the title holder on each of these assets as of June 30, 2011. On July 22, 2011, we disposed of City Tower. See Note 19 “Subsequent Events.”

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. We have reached agreements with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit both Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. There also can be no assurance that we will achieve a favorable outcome with respect to the disposition of 700 North Central and 801 North Brand. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

Following notices from us, in March 2011 the non-recourse mortgage loans encumbering Wells Fargo Tower and US Bank Tower were transferred into special servicing. We took this proactive step to commence discussions regarding the non-recourse mortgage loans encumbering these properties at an early stage with the respective special servicers. In June 2011, the special servicer for Wells Fargo Tower transferred the mortgage loan back to the master servicer, and the loan has not been modified. The mortgage loan encumbering US Bank Tower remains in special servicing as of June 30, 2011. We also delivered a notice of imminent default in March 2011 to the master servicer for the non-recourse mortgage loan on Gas Company Tower requesting that the loan be transferred into special servicing. As of June 30, 2011, the master servicer has not transferred the Gas Company Tower mortgage loan into special servicing, and we do not expect a transfer into special servicing to occur in the near term. As of June 30, 2011, the mortgage loans secured by Wells Fargo Tower, US Bank Tower and Gas Company Tower are not in default, and we do not intend to dispose of these assets.

In July 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center. See Note 19 “Subsequent Events.”
    

9


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 current economic conditions. We do not have any committed financing sources available to refinance our debt as it matures. The non-recourse loans secured by Brea Corporate Place and Brea Financial Commons mature on May 1, 2012. The total indebtedness encumbering these properties is $109.0 million as of June 30, 2011. The non-recourse mortgage loan secured by KPMG Tower matures on October 9, 2012. The total indebtedness encumbering KPMG Tower is $400.0 million as of June 30, 2011.

Payments to Extend, Refinance, Modify or Exit Loans—

Because of our limited unrestricted cash and the reduced market value of our assets when compared with the significant 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 may 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 significantly restrictive operational and financial covenants. The default by the relevant special purpose property-owning subsidiary obligor upon any such loans could result in foreclosure of the property.

Note 4Land Held for Development

A summary of the costs capitalized in connection with our real estate projects is as follows (in millions):

 
For the Three
Months Ended
 
For the Six
Months Ended
 
June 30, 2010
 
June 30, 2010
Interest expense
$
1.0

 
$
2.1

Indirect project costs
0.1

 
0.3

 
$
1.1

 
$
2.4

There were no costs capitalized in connection with our real estate projects for the six months ended June 30, 2011.

Note 5Rents and Other Receivables, Net

Rents and other receivables are presented net of allowances for doubtful accounts of $2.0 million and $2.9 million as of June 30, 2011 and December 31, 2010, respectively. For the six months ended June 30, 2011 and 2010, we recorded a provision for doubtful accounts of $0.7 million and $1.4 million, respectively. The decrease in the allowance for doubtful accounts as of June 30, 2011 as compared to December 31, 2010 is a result of the writeoff of allowances related to properties disposed of during the second quarter of 2011.

10


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 6Intangible Assets and Liabilities

Our identifiable intangible assets and liabilities are summarized as follows (in thousands):

 
June 30, 2011
 
December 31, 2010
Acquired above-market leases
 
 
 
Gross amount
$
37,893

 
$
38,317

Accumulated amortization
(34,492
)
 
(33,819
)
 
$
3,401

 
$
4,498

 
 
 
 
Acquired in-place leases
 
 
 
Gross amount
$
114,730

 
$
127,442

Accumulated amortization
(99,973
)
 
(105,534
)
 
$
14,757

 
$
21,908

 
 
 
 
Acquired below-market leases
 
 
 
Gross amount
$
(145,894
)
 
$
(164,940
)
Accumulated amortization
115,059

 
120,914

 
$
(30,835
)
 
$
(44,026
)

Amortization of acquired below-market leases, net of acquired above-market leases, increased our rental income in continuing operations by $5.9 million and $6.2 million for the six months ended June 30, 2011 and 2010, respectively. Rental income in discontinued operations benefited from amortization of acquired below-market leases, net of acquired above-market leases, by $0.6 million and $2.2 million during the six months ended June 30, 2011 and 2010, respectively.

Amortization of acquired in-place leases, included as part of depreciation and amortization, in continuing operations for the six months ended June 30, 2011 and 2010 was $2.8 million and $3.8 million, respectively. Amortization related to discontinued operations for the six months ended June 30, 2011 and 2010 was $0.4 million and $1.9 million, 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 
2011
$
908

 
$
2,496

 
$
(6,168
)
2012
1,689

 
4,154

 
(11,150
)
2013
776

 
2,993

 
(6,445
)
2014
11

 
2,054

 
(3,492
)
2015
5

 
1,258

 
(1,661
)
Thereafter
12

 
1,802

 
(1,919
)
 
$
3,401

 
$
14,757

 
$
(30,835
)

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.


11


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 7Investment in Unconsolidated Joint Venture

We own a 20% interest in our Maguire Macquarie Office, LLC joint venture with Charter Hall Group that owns the following office properties: Wells Fargo Center (Denver), One California Plaza, San Diego Tech Center, 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. In August 2011, Charter Hall announced it had entered into contracts to sell 100% of its interests in its U.S. portfolio, including the joint venture properties. See Note 19 “Subsequent Events.”

A summary of our transactions and balances with the joint venture is as follows (in thousands):
   
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Management, investment advisory and
     development fees and leasing commissions
 
$
1,089

 
$
985

 
$
2,028

 
$
1,946


 
 
June 30, 2011
 
December 31, 2010
Accounts receivable
 
$
2,148

 
$
1,819



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 in the consolidated balance sheet. The joint venture’s balances were current as of June 30, 2011 and December 31, 2010.

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 six months ended June 30, 2011 and 2010, we did not record losses totaling $0.4 million and $2.2 million, respectively, 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 had been reduced to zero. As of June 30, 2011 and 2010, the cumulative unallocated losses totaled $0.4 million and $6.2 million, respectively. 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.


12


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 8Mortgage and Other Loans

Consolidated Debt

Our consolidated debt is as follows (in thousands, except percentages):

 
 
 
 
 
Principal Amount as of
 
Maturity Date
 
Interest Rate
 
June 30, 2011
 
December 31, 2010
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
   
Brea Corporate Place (1)
5/1/2012
 
LIBOR + 1.95%

 
$
70,468

 
$
70,468

Brea Financial Commons (1)
5/1/2012
 
LIBOR + 1.95%

 
38,532

 
38,532

Total variable-rate loans
 
 
 
 
109,000

 
109,000

 
 
 
 
 
 
 
   
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
   
KPMG Tower (2)
10/9/2012
 
7.16
%
 
400,000

 
400,000

Total floating-rate debt
 
 
 
 
509,000

 
509,000

 
 
 
 
 
 
 
   
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

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

Glendale Center
8/11/2016
 
5.82
%
 
125,000

 
125,000

801 North Brand
4/6/2015
 
5.73
%
 

 
75,540

The City–3800 Chapman
5/6/2017
 
5.93
%
 
44,370

 
44,370

700 North Central
4/6/2015
 
5.73
%
 

 
27,460

Total fixed-rate debt
 
 
 
 
1,710,370

 
2,283,370

Total debt, excluding mortgages in default
 
 
 
 
2,219,370

 
2,792,370

 
 
 
 
 
 
 
   
Mortgages in Default
 
 
 
 
 
 
   
Two California Plaza (3)
5/6/2017
 
10.50
%
 
470,000

 

City Tower (4) (5)
5/10/2017
 
10.85
%
 
140,000

 
140,000

500 Orange Tower (4)
5/6/2017
 
10.88
%
 
110,000

 
110,000

Stadium Towers Plaza (4)
5/11/2017
 
10.78
%
 
100,000

 
100,000

801 North Brand (4)
4/6/2015
 
10.73
%
 
75,540

 

700 North Central (4)
4/6/2015
 
10.73
%
 
27,460

 

Total mortgages in default
 
 
 
 
923,000

 
350,000

 
 
 
 
 
 
 
 
Debt Repaid/Properties Disposed of During 2011:
 
 
 
 
 
 
 
550 South Hope
 
 
 
 

 
200,000

2600 Michelson
 
 
 
 

 
110,000

Plaza Las Fuentes
 
 
 
 

 
80,100

701 North Brand
 
 
 
 

 
33,750

Unsecured term loan
 
 
 
 

 
15,000

Total debt repaid/properties disposed of during 2011
 
 
 

 
438,850

Total consolidated debt
 
 
 
 
3,142,370

 
3,581,220

Debt discount
 
 
 
 
(1,529
)
 
(4,727
)
Total consolidated debt, net
 
 
 
 
$
3,140,841

 
$
3,576,493

__________
(1)
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.
(2)
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%.
(3)
Our special purpose property-owning subsidiary that owns Two California Plaza is in default on the mortgage loan secured by the

13


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

property. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. If we are successful in modifying the mortgage loan, the settlement date and treatment of principal will be as set forth in the modified loan agreement.
(4)
Our special purpose property-owning subsidiary that owns this property is in default for failing to make debt service payments due under this loan. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. The actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition.
(5)
We disposed of this property on July 22, 2011. See Note 19 “Subsequent Events.”

As of June 30, 2011 and December 31, 2010, one-month LIBOR was 0.19% and 0.26%, respectively. The weighted average interest rate of our consolidated debt was 7.06% (or 5.57% excluding mortgages in default) as of June 30, 2011 and 6.32% (or 5.52% excluding mortgages in default) as of December 31, 2010.

Excluding mortgages in default, as of June 30, 2011 $0.5 billion of our consolidated debt may be prepaid without penalty, $1.1 billion may be defeased after various lock-out periods (as defined in the underlying loan agreements) and $0.6 billion may be prepaid with prepayment penalties or defeased after various lock-out periods (as defined in the underlying loan agreements) at our option.

Brea Corporate Place and Brea Financial Commons Mortgage Loan Extension

On May 1, 2011, we extended our $109.0 million mortgage loan secured by Brea Corporate Place and Brea Financial Commons. The final maturity date of this loan is May 1, 2012, and there are no remaining extension options. No cash paydown was made to extend the loan, and the loan terms remain unchanged.
    
Repayment of Unsecured Term Loan

On May 1, 2011, we repaid our $15.0 million unsecured term loan upon maturity using unrestricted cash.

Mortgage Loans Settled Upon Disposition

701 North Brand—

On April 1, 2011, we disposed of 701 North Brand located in Glendale, California to the property’s lender. We recorded a $3.9 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of the difference between the fair value assigned to the property in the transaction and the $33.8 million loan and accrued contractual interest that were forgiven by the lender. The impact of this gain on settlement of debt was $0.07 per share for the three months ended June 30, 2011.

550 South Hope—

On April 26, 2011, we disposed of 550 South Hope located in Los Angeles, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $118.0 million of the $200.0 million mortgage loan as part of this transaction. Additionally, we received proceeds of $37.8 million, net of transaction costs, which were applied by the special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $65.4 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition. The impact of this gain on settlement of debt was $1.18 per share for the three months ended June 30, 2011.


14


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Plaza Las Fuentes—

On May 27, 2011, we disposed of the Westin® Pasadena Hotel located in Pasadena, California. As a result of the disposition, we received proceeds of $92.1 million, net of transaction costs, of which $78.6 million were used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building. The remaining $13.5 million of net proceeds, along with reserves totaling $2.1 million returned to us by the lender upon repayment of the mortgage loan, is available to us as unrestricted cash, which will be used for general corporate purposes. We recorded a $0.4 million loss from extinguishment of debt related to the writeoff of unamortized loan costs related to this loan during the three months ended June 30, 2011.

In August 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building. See Note 19 “Subsequent Events.”

2600 Michelson—

On June 30, 2011, we disposed of 2600 Michelson located in Irvine, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $66.6 million of the $110.0 mortgage loan as part of this transaction. Additionally, we received proceeds of $2.0 million, net of transaction costs, which were applied by the special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $58.6 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition. The impact of this gain on settlement of debt was $1.06 per share for the three months ended June 30, 2011.

Mortgages in Default

On June 6, 2011, the special purpose property-owning subsidiaries that own 700 North Central and 801 North Brand defaulted on the mortgage loans secured by the respective properties.

As of June 30, 2011, we are in default on $0.9 billion of non-recourse mortgage loans that have contractual maturity dates in 2015 and 2017 per the terms of the loan agreements. The special servicers with respect to those loans have the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. For properties that are disposed of, the actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition. For any properties that we are successful in modifying the mortgage loan, the settlement date and treatment of principal and interest (including default interest) will be as set forth in the modified loan agreement.


15


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The interest expense recorded as part of continuing operations in our consolidated statements of operations related to mortgages in default is as follows (in thousands):

 
 
 
 
For the Six Months Ended
 
 
 
 
June 30, 2011
 
June 30, 2010
Property
 
Initial Default Date
 
Contractual Interest
 
Default Interest
 
Contractual Interest
 
Default Interest
Stadium Towers Plaza
 
August 11, 2009
 
$
2,908

 
$
2,514

 
$
2,908

 
$
2,514

500 Orange Tower
 
January 6, 2010
 
3,253

 
2,765

 
3,253

 
2,689

City Tower (1)
 
September 11, 2010
 
4,116

 
3,520

 

 

Two California Plaza
 
March 7, 2011
 
8,329

 
7,768

 

 

801 North Brand
 
June 6, 2011
 
361

 
262

 

 

700 North Central
 
June 6, 2011
 
131

 
95

 

 

 
 
 
 
$
19,098

 
$
16,924

 
$
6,161

 
$
5,203

__________
(1)
We disposed of this property on July 22, 2011. See Note 19 “Subsequent Events.”

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. We have reached agreements with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit both Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. There also can be no assurance that we will achieve a favorable outcome with respect to the disposition of 700 North Central and 801 North Brand. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

Notices of Imminent Default

Following notices from us, in March 2011 the non-recourse mortgage loans encumbering Wells Fargo Tower and US Bank Tower were transferred into special servicing. We took this proactive step to commence discussions regarding the non-recourse mortgage loans encumbering these properties at an early stage with the respective special servicers. In June 2011, the special servicer for Wells Fargo Tower transferred the mortgage loan back to the master servicer, and the loan has not been modified. The mortgage loan encumbering US Bank Tower remains in special servicing as of June 30, 2011. We also delivered a notice of imminent default in March 2011 to the master servicer for the non-recourse mortgage loan on Gas Company Tower requesting that the loan be transferred into special servicing. As of June 30, 2011, the master servicer has not transferred the Gas Company Tower mortgage loan into special servicing, and we do not expect a transfer into special servicing to occur in the near term. As of June 30, 2011, the mortgage loans secured by Wells Fargo Tower, US Bank Tower and Gas Company Tower are not in default, and we do not intend to dispose of these assets.

In July 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center. See Note 19 “Subsequent Events.”


16


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Operating Partnership Contingent Obligations

As a condition to closing the fixed-rate mortgage loan on 3800 Chapman, our Operating Partnership entered into a debt service guaranty. Under this debt service guaranty, 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, and (iii) the rollover reserve. The total amount our Operating Partnership would owe the lender under the debt service guaranty if the property were generating no in-place cash net operating income through the May 2017 loan maturity is $16.5 million.
 
In addition to the guaranty described above, all of the Company’s $3.1 billion of consolidated debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non-recourse loans can become partially or fully recourse against our Operating Partnership if certain triggering events occur. Although these events differ from loan to loan, 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 the 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 the 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 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, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

As of June 30, 2011, to our knowledge the Company has not triggered any of the “non-recourse carve out” guarantees on its otherwise non-recourse loans. The maximum amount our Operating Partnership would be required to pay under a “non-recourse carve out” guarantee is the principal amount of the loan (or a total of $3.1 billion as of June 30, 2011). The maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to our Operating Partnership pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due the lender from our Operating Partnership in the event a “non-recourse carve out” guarantee is triggered would be reduced by the net proceeds received from the disposition of the office building, which management believes may not be sufficient to cover the maximum potential amount due if the “non-recourse carve out” guarantee was triggered, depending on the particular asset.

17


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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.

Note 9Noncontrolling 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 June 30, 2011 and December 31, 2010, our limited partners’ ownership interest in MPG Office, L.P. was 11.5% and 11.6%, respectively. 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 value of an equivalent number of shares of our common stock at the time of redemption, or exchange them for unregistered 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. We maintain an effective registration statement to register the resale of shares of our common stock we issue in exchange for noncontrolling common units of our Operating Partnership.

As of June 30, 2011 and December 31, 2010, noncontrolling common units of our Operating Partnership totaling 6,446,777 were outstanding. These common units are presented as noncontrolling interests in the deficit section of our consolidated balance sheet. As of June 30, 2011 and December 31, 2010, the aggregate redemption value of outstanding noncontrolling common units of our Operating Partnership was $18.4 million and $17.7 million, respectively, based on the closing price of our common stock on each respective date. 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 or 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 stockholders’ deficit and the noncontrolling common units of our Operating Partnership in the consolidated balance sheet and statement of deficit to account for any change in ownership percentage during the period. During the three and six months ended June 30, 2011, our limited partners’ weighted average share of our net income was 11.6%. During the three and six months ended June 30, 2010, our limited partners’ weighted average share of our net loss was 12.2%.


18


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 10Deficit and Comprehensive Income (Loss)

Deficit

Our deficit is allocated between controlling and noncontrolling interests as follows (in thousands):

 
MPG Office
Trust, Inc.
 
Noncontrolling
Interests
 
Total
Balance, December 31, 2010
$
(920,341
)
 
$
(125,181
)
 
$
(1,045,522
)
Net income
88,408

 
10,278

 
98,686

Adjustment for preferred dividends not declared
(1,105
)
 
1,105

 

Compensation cost for share-based awards, net
2,457

 

 
2,457

Other comprehensive income
4,463

 
582

 
5,045

Balance, June 30, 2011
$
(826,118
)
 
$
(113,216
)
 
$
(939,334
)
 
 
 
 
 
 
Balance, December 31, 2009
$
(754,020
)
 
$
(102,957
)
 
$
(856,977
)
Net loss
(25,409
)
 
(4,837
)
 
(30,246
)
Redemption of common units of our Operating Partnership
(119
)
 
119

 

Adjustment for preferred dividends not declared
(1,162
)
 
1,162

 

Compensation cost for share-based awards, net
1,891

 

 
1,891

Other comprehensive loss
(137
)
 
(19
)
 
(156
)
Balance, June 30, 2010
$
(778,956
)
 
$
(106,532
)
 
$
(885,488
)


19


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Comprehensive Income (Loss)

The changes in the components of other comprehensive income (loss) are as follows (in thousands):

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Net income (loss)
$
138,673

 
$
(56,176
)
 
$
98,686

 
$
(30,246
)
Interest rate swaps assigned to lenders:
 
 
   
 
 
 
   
Reclassification adjustment for realized gains included in
    net income (loss)
(164
)
 
(282
)
 
(3,198
)
 
(1,330
)
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
   
 
 
 
   
Unrealized holding gains
4,108

 
531

 
8,808

 
923

Reclassification adjustment for unrealized gain included in
    net income (loss)
(257
)
 

 
(565
)
 

 
3,851

 
531

 
8,243

 
923

 
 
 
   
 
 
 
   
Interest rate caps:
 
 
   
 
 
 
   
Realized holding losses
(13
)
 
(28
)
 
(13
)
 
(28
)
Reclassification adjustment for realized losses included in
    net income (loss)
13

 
121

 
13

 
279

 

 
93

 

 
251

 
 
 
   
 
 
 
   
Comprehensive income (loss)
$
142,360

 
$
(55,834
)
 
$
103,731

 
$
(30,402
)
 
 
 
   
 
 
 
   
Comprehensive income (loss) attributable to:
 
 
   
 
 
 
   
MPG Office Trust, Inc.
$
125,902

 
$
(49,034
)
 
$
91,766

 
$
(26,708
)
Common units of our Operating Partnership
16,458

 
(6,800
)
 
11,965

 
(3,694
)
 
$
142,360

 
$
(55,834
)
 
$
103,731

 
$
(30,402
)
The components of accumulated other comprehensive loss are as follows (in thousands):

 
June 30, 2011
 
December 31, 2010
Deferred gain on assignment of interest rate swap agreements, net
$
1,529

 
$
4,727

Interest rate swap
(21,336
)
 
(29,579
)
 
$
(19,807
)
 
$
(24,852
)
Accumulated other comprehensive loss attributable to:
 
 
   
MPG Office Trust, Inc.
$
(24,616
)
 
$
(29,079
)
Common units of our Operating Partnership
4,809

 
4,227

 
$
(19,807
)
 
$
(24,852
)

Note 11Share-Based Payments

We have various stock compensation plans that are more fully described in Note 8 to the consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on March 16, 2011.

Stock-based compensation cost recorded as part of general and administrative expense in the consolidated statements of operations was $2.5 million and $1.9 million for the six months ended June 30, 2011 and 2010, respectively.


20


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of June 30, 2011, the total unrecognized compensation cost related to unvested share-based payments totaled $3.9 million and is expected to be recognized in the consolidated statement of operations over a weighted average period of approximately 2.0 years.

Note 12Earnings (Loss) per Share

Basic net income or loss available to common stockholders is computed by dividing reported net income or loss available to common stockholders by the weighted average number of common and contingently issuable shares outstanding during each period. As discussed in Note 8 to the consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on March 16, 2011, we do not issue common stock in settlement of vested restricted stock unit awards until the earliest to occur of (1) the third or fifth anniversary of the grant date, depending upon the vesting period per the grant agreement, (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 income or loss 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.

A reconciliation of our income (loss) per share is as follows (in thousands, except share and per share amounts):

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Numerator:
 
 
 
   
 
 
 
 
Net income (loss) attributable to
     MPG Office Trust, Inc.
 
$
123,190

 
$
(48,755
)
 
$
88,408

 
$
(25,409
)
Preferred stock dividends
 
(4,766
)
 
(4,766
)
 
(9,532
)
 
(9,532
)
Net income (loss) available to 
      common stockholders
 
$
118,424

 
$
(53,521
)
 
$
78,876

 
$
(34,941
)
 
 
   
 
   
 
   
 
   
Denominator:
 
   
 
   
 
   
 
   
Weighted average number of
     common shares outstanding
 
49,040,268

 
48,692,588

 
49,028,693

 
48,613,815

Net income (loss) available to common
     stockholders per share – basic
 
$
2.42

 
$
(1.10
)
 
$
1.61

 
$
(0.72
)

For the three months ended June 30, 2011, approximately 1,308,000 nonqualified stock options, 614,000 restricted stock units and 605,000 shares of nonvested restricted common stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our loss from continuing operations. For the three months ended June 30, 2010, approximately 1,145,000 nonqualified stock options, 1,082,000 restricted stock units and 72,000 shares of nonvested restricted common stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position. For the six months ended June 30, 2011, approximately 1,308,000 nonqualified stock options, 618,000 restricted units and 605,000 shares of nonvested restricted common stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our loss from continuing operations. For the six months ended June 30, 2010 approximately 1,082,000 restricted stock units, 876,000 nonqualified stock options and 72,000 shares of nonvested restricted common stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position.


21


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 13Properties in Default

Overview

For purposes of this footnote, Stadium Towers Plaza, 500 Orange Tower, City Tower, 700 North Central and 801 North Brand are reported as Properties in Default because their respective mortgage loans were in default as of June 30, 2011 and our ultimate goal is to exit the assets. Although the mortgage loan on Two California Plaza was also in default as of June 30, 2011, we have excluded it from the Properties in Default because our goal is to modify the loan with the special servicer rather than to dispose of the asset. As a result of the defaults under these mortgage loans, pursuant to contractual rights the respective 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.

On June 20, 2011, City Tower was placed in receivership pursuant to our written agreement with the special servicer. On July 22, 2011, we disposed of City Tower. See Note 19 “Subsequent Events.”

As of June 30, 2011, Stadium Towers Plaza and 500 Orange Tower were also in receivership pursuant to written agreements with the special servicer for these two properties. Pursuant to the agreements with the special servicer, the receiver is managing the operations of the properties, and we will cooperate in any sale of the properties. If the properties are not sold within the period specified in the agreements, the special servicer is obligated to acquire the properties by either foreclosure or a deed-in-lieu of foreclosure and deliver a general release to us. Pursuant to the agreements with the special servicer, we have no liability in connection with the disposition of the properties other than our legal fees. Upon closing of a sale, we will be released from substantially all liability (except for limited environmental and very remote claims). The receivership order insulates us against potential recourse events that could occur during the receivership period.

A summary of the assets and obligations associated with Properties in Default is as follows (in thousands):

 
June 30, 2011
 
December 31, 2010
Investments in real estate, net
$
274,016

 
$
420,725

Restricted cash
8,104

 
30,023

Deferred leasing costs and value of in-place leases, net
3,929

 
8,862

Other
4,962

 
8,248

Assets associated with Properties in Default
$
291,011

 
$
467,858

 
 
 
   
Mortgage loans
$
453,000

 
$
660,000

Accounts payable and other liabilities
40,755

 
77,744

Acquired below-market leases, net
3,272

 
9,996

Obligations associated with Properties in Default
$
497,027

 
$
747,740


The assets and obligations as of December 31, 2010 shown in the table above include 550 South Hope and 2600 Michelson, which were disposed of in 2011.

Intangible Assets and Liabilities

As of June 30, 2011, 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 $0.5 million, $0.9 million,

22


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

$0.7 million, $0.4 million, $0.3 million and $0.5 million for 2011, 2012, 2013, 2014, 2015 and thereafter, respectively.

Note 14Impairment 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 impairment evaluation process is more fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on March 16, 2011.

During the three months ended June 30, 2011, we performed an impairment analysis on our properties that showed indications of potential impairment. As a result of this analysis, we recorded an impairment charge totaling $13.9 million, which is included in discontinued operations. Other than the property discussed below, no other real estate assets in our portfolio were determined to be impaired as of June 30, 2011 as a result of our analysis.

The $13.9 million charged recorded in discontinued operations represents the writedown to fair value of 2600 Michelson as a result of its disposition. The fair value of this property was calculated based on the value assigned to it in the purchase and sale agreement with the buyer.

Note 15Dispositions and Discontinued Operations

Dispositions

A summary of our property dispositions for the six months ended June 30, 2011 is as follows (in millions, except square footage amounts):
Property
 
Location
 
Net
Rentable
Square
Feet
 
Quarter
 
Debt
Satisfied
 
Gain/
(Impairment)
Recorded(1)
 
Loss from
Early
Extinguishment
500 Orange Center development site
 
Orange, CA
 

 
Q1
 
$

 
$

 
$

701 North Brand (2)
 
Glendale, CA
 
131,129

 
Q2
 
33.8

 
5.1

 

550 South Hope (3)
 
Los Angeles, CA
 
565,738

 
Q2
 
200.0

 
72.5

 

Westin® Pasadena Hotel
 
Pasadena, CA
 
266,000

 
Q2
 

 
55.3

 
0.2

2600 Michelson (4)
 
Irvine, CA
 
309,742

 
Q2
 
110.0

 
44.7

 

__________
(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 2010, we recorded a $9.1 million impairment charge to reduce our investment in 701 North Brand to its estimated fair value as of December 31, 2010. We recorded a $1.2 million gain on sale of real estate and a $3.9 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.
(3)
In 2009, we recorded a $48.1 million impairment charge to reduce our investment in 550 South Hope to its estimated fair value as of June 30, 2009. We recorded a $7.1 million gain on sale of real estate and a $65.4 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.
(4)
In 2009, we recorded a $9.5 million impairment charge to reduce our investment in 2600 Michelson to its estimated fair value as of June 30, 2009. We recorded a $13.9 million impairment charge and a $58.6 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.


23


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

500 Orange Center Development Site—

On January 31, 2011, we disposed of the 500 Orange Center development site located in Orange, California. We received proceeds from this transaction of $4.7 million, net of transaction costs, which will be used for general corporate purposes. No gain on sale of real estate or impairment was recorded during the six months ended June 30, 2011 related to the disposition of this property.

701 North Brand—

On April 1, 2011, we disposed of 701 North Brand located in Glendale, California to the property’s lender. We recorded a $3.9 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of the difference between the fair value assigned to the property in the transaction and the $33.8 million loan and accrued contractual interest that were forgiven by the lender. Additionally, we recorded a $1.2 million gain on sale of real estate as part of discontinued operations during the three months ended June 30, 2011 upon disposition of this property.

550 South Hope—

On April 26, 2011, we disposed of 550 South Hope located in Los Angeles, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $118.0 million of the $200.0 million mortgage loan as part of this transaction. Additionally, we received proceeds of $37.8 million, net of transaction costs, which were applied by the special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $65.4 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition. Additionally, we recorded a $7.1 million gain on sale of real estate as part of discontinued operations during the three months ended June 30, 2011 upon disposition of this property.

Westin® Pasadena Hotel—

On May 27, 2011, we disposed of the Westin® Pasadena Hotel located in Pasadena, California. As a result of the disposition, we received proceeds of $92.1 million, net of transaction costs, of which $78.6 million were used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building. The remaining $13.5 million of net proceeds, along with reserves totaling $2.1 million returned to us by the lender upon repayment of the mortgage loan, is available to us as unrestricted cash, which will be used for general corporate purposes. We recorded a $55.3 million gain on sale of real estate as part of discontinued operations during the three months ended June 30, 2011 upon disposition of this property.

2600 Michelson—

On June 30, 2011, we disposed of 2600 Michelson located in Irvine, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $66.6 million of the $110.0 mortgage loan as part of this transaction. Additionally, we received proceeds of $2.0 million, net of transaction costs, which were applied by the special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $58.6 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition. Additionally, we recorded a $13.9 million impairment charge as part of discontinued operations during the three months ended June 30, 2011 upon disposition of this property.


24


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Discontinued Operations

The results of discontinued operations are as follows (in thousands):

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Revenue:
 
 
 
 
 
 
 
 
Rental
 
$
1,715

 
$
11,783

 
$
6,059

 
$
27,604

Tenant reimbursements
 
494

 
3,272

 
1,702

 
6,666

Hotel operations
 
3,380

 
4,956

 
8,368

 
10,193

Parking
 
212

 
1,152

 
814

 
2,919

Other
 

 
80

 
142

 
172

Total revenue
 
5,801

 
21,243

 
17,085

 
47,554

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
   
 
 
 
 
Rental property operating and maintenance
 
873

 
4,179

 
2,692

 
9,125

Hotel operating and maintenance
 
2,466

 
3,543

 
6,039

 
7,290

Real estate taxes
 
252

 
1,936

 
903

 
4,095

Parking
 
86

 
456

 
326

 
1,051

Depreciation and amortization
 
1,398

 
5,441

 
3,877

 
12,260

Impairment of long-lived assets
 
13,888

 
17,447

 
13,888

 
17,447

Interest
 
4,785

 
19,325

 
14,105

 
41,198

Loss from early extinguishment of debt
 
235

 
106

 
235

 
485

Total expenses
 
23,983

 
52,433

 
42,065

 
92,951

 
 
 
 
   
 
 
 
 
Loss from discontinued operations before gains on
     settlement of debt and sale of real estate
 
(18,182
)
 
(31,190
)
 
(24,980
)
 
(45,397
)
Gains on settlement of debt
 
127,849

 

 
127,849

 
49,121

Gains on sale of real estate
 
63,629

 

 
63,629

 

Income (loss) from discontinued operations
 
$
173,296

 
$
(31,190
)
 
$
166,498

 
$
3,724


The results of operations of 2385 Northside Drive, Griffin Towers, 17885 Von Karman, Mission City Corporate Center, Park Place II, 207 Goode, Pacific Arts Plaza, 701 North Brand, 550 South Hope, the Westin® Pasadena Hotel and 2600 Michelson are reflected in the consolidated statements of operations as discontinued operations.

Interest expense included in discontinued operations relates to interest on mortgage loans secured by the properties disposed of.

Note 16Income 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.

    

25


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 six months ended June 30, 2011 and 2010, we recorded tax provisions of $0.8 million and $0.5 million, respectively, which are included in other expense in our consolidated statements of operations.

MPG Office Trust, Inc. has a net operating loss (“NOL”) carryforward of approximately $814 million as of December 31, 2010. This amount can be used to offset future taxable income (and/or taxable income for prior years if the audit of any prior year’s return determines that amounts are owed), if any. We may utilize NOL carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid to our stockholders. In the absence of distributions to stockholders, our NOL carryforwards may fully offset REIT taxable income for federal income tax purposes. Certain other factors (such as a future change in ownership of our stock) may significantly reduce the amount of our existing NOL carryforwards and other tax attributes that we can utilize in the future.

Note 17Fair Value Measurements

Recurring Measurements

The valuation of our derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flow of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We have incorporated credit valuation adjustments to appropriately reflect both our own and the respective counterparty’s non-performance risk in the fair value measurements.

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:
 
 
 
 
 
 
 
 
June 30, 2011
 
$
(24,973
)
 
$

 
$
(24,973
)
 
$

December 31, 2010
 
(33,781
)
 

 
(33,781
)
 


The value of our interest rate caps is immaterial as of June 30, 2011 and December 31, 2010.


26


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 18Financial Instruments

Derivative Financial Instruments

Interest rate fluctuations may impact our results of operations and cash flow. 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 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 financial instruments is as follows (in thousands):

 
Liability Derivatives
 
 
 
Fair Value
 
Balance Sheet Location
 
June 30, 2011
 
December 31, 2010
Derivatives designated as cash flow
     hedging instruments:
   
 
   
 
 
Interest rate swap
Accounts payable
  and other liabilities
 
$
(24,973
)
 
$
(33,781
)

A summary of the effect of derivative financial instruments reported in the consolidated financial statements are as follows (in thousands):

 
For the Three Months Ended
 
For the Six Months Ended
 
 
 
June 30, 2011
 
June 30, 2011
 
 
 
Amount of Gain
Recognized in AOCL
 
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
 
Amount of Gain
Recognized in AOCL
 
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
 
Location of Gain
Recognized in
Statement of
Operations
Derivatives designated as cash flow
     hedging instruments:
 
 
   
 
 
 
   
 
 
Interest rate swap
$
4,108

 
$
257

 
$
8,808

 
$
565

 
Interest expense

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2010
 
June 30, 2010
 
Amount of Gain
Recognized in AOCL
 
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
 
Amount of Gain
Recognized in AOCL
 
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
Derivatives designated as cash flow
     hedging instruments:
 
 
   
 
 
 
   
Interest rate swap
$
531

 
$

 
$
923

 
$



27


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Interest Rate Swap—

As June 30, 2011 and December 31, 2010, we held an interest rate swap with a notional amount of $425.0 million. As of June 30, 2011, $400.0 million of this swap was assigned to the KPMG Tower mortgage loan. Previously, $25.0 million of this swap was assigned to the 207 Goode construction loan, which was settled upon disposition of the property in 2010. As a result, we recorded an unrealized gain due to hedge ineffectiveness of $0.6 million during the six months ended June 30, 2011 as part of interest expense in continuing operations related to this swap. 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, based on the net present value of future anticipated payments under the swap agreement to the extent that the termination value of the swap exceeds a $5.0 million obligation. As of June 30, 2011 and December 31, 2010, we had transferred $21.0 million and $30.7 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. The cost to terminate the swap as of June 30, 2011 totals $26.3 million, less the $21.0 million in cash held by our counterparty.
 
During the remainder of 2011, we expect that the return of swap collateral to us will be in the range of $11 million to $12 million. Our estimate of the return of swap collateral we expect to receive is as a result of the monthly payments we make under the swap agreement. These payments are calculated based on a forward LIBOR yield curve (which is a standard method used by the capital markets), less the contractual swap rate of 5.564%.

Interest Rate Caps—

As of June 30, 2011 and December 31, 2010, we held interest rate caps with notional amounts totaling $109.0 million and $189.8 million, respectively. The value of our interest rate caps was immaterial as of June 30, 2011 and December 31, 2010.
 
Other Financial Instruments

Our financial instruments include cash, cash equivalents, restricted cash, rents and other receivables, amounts due from affiliates, accounts 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 loans (excluding mortgages in default) is $1,793.8 million (compared to a carrying amount of $2,219.4 million) as of June 30, 2011. 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 our debt, a market spread is added to the quoted yields on federal government treasury securities with similar maturity dates to our debt.

The carrying amount of mortgages in default totals $0.9 billion as of June 30, 2011, and they bear contractual interest at rates ranging from 10.50% to 10.88%. As of June 30, 2011, we did not calculate the fair value of these loans, as it was not practicable to do so since there is substantial uncertainty as to their market value and when and how they will be settled.


28


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 19Subsequent Events

Glendale Center Mortgage Loan

On July 12, 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center requesting that it be transferred into special servicing (which has not yet occurred).

City Tower Disposition

On July 22, 2011, we disposed of City Tower located in Orange, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $140.0 million mortgage loan secured by the property as well as accrued contractual and default interest.

Exchanges of Series A Preferred Stock

On July 25, 2011, the Company entered into an exchange agreement providing for the exchange of 218,635 shares of its Series A preferred stock for 1,127,597 shares of its common stock. For purposes of this exchange, the exchange ratio is 5.157 shares of common stock for each share of Series A preferred stock, with the Series A preferred stock valued at $19.00 per share and the common stock valued at $3.684 per share, the trailing five-day average closing price. The parties to the exchange have transferred their respective shares and the exchange is complete.

On July 27, 2011, the Company entered into an exchange agreement providing for the exchange of 50,995 shares of its Series A preferred stock for 262,981 shares of its common stock. For purposes of this exchange, the exchange ratio was 5.157 shares of common stock for each share of Series A preferred stock, with the Series A preferred stock valued at $16.50 per share and the common stock valued at $3.20 per share, the closing price on July 27, 2011. The parties to the exchange have transferred their respective shares and the exchange is complete.

Plaza Las Fuentes Financing

On August 1, 2011, the Company completed a $33.8 million financing secured by the Plaza Las Fuentes office building located in Pasadena, California. Net proceeds totaled approximately $33 million, which will be used for general corporate purposes.

The loan bears interest at a rate equal to the greater of (1) LIBOR plus 3.50% or (2) 4.50%, and matures on August 9, 2016. The loan can be repaid at any time prior to maturity in whole or in part without payment of any prepayment penalty or premium. If the property’s debt service coverage ratio (as defined in the loan agreement) is less than a specified amount as of any applicable measurement date, the cash flows from the property will be swept into a cash collateral account controlled by the lender to fund, among other things, monthly debt service, taxes and insurance, property operating costs and expenses, capital expenditures and leasing costs. The loan agreement also permits the Company to obtain up to $11.3 million of mezzanine financing.

Joint Venture with Charter Hall Group

On August 3, 2011, Charter Hall announced it had entered into contracts to sell 100% of its interests in its U.S. portfolio, including the joint venture properties. The closing of this sale is subject to customary closing conditions, including obtaining lender and other third party consents.    

29


Item 2.    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 Southern California market.

As of June 30, 2011, our Operating Partnership indirectly owns whole or partial interests in 21 office properties, off-site parking garages, and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 88.5% 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, our Operating Partnership’s share of the Total Portfolio is 11.0 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office 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’ 11.5% share of our Operating Partnership.

Our property statistics as of June 30, 2011 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
11

 
18

 
8,915,012

 
4,612,484

 
13,928

 
8,915,012

 
4,612,484

 
13,928

Properties in Default
5

 
7

 
1,424,268

 
1,535,775

 
4,886

 
1,424,268

 
1,535,775

 
4,886

Unconsolidated joint venture
5

 
16

 
3,489,256

 
1,865,448

 
5,561

 
697,851

 
373,090

 
1,113

 
21

 
41

 
13,828,536

 
8,013,707

 
24,375

 
11,037,131

 
6,521,349

 
19,927

Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Properties in Default
 
 
 
 
83.9
%
 
 
 
 
 
83.8
%
 
 
 
 
Properties in Default
 
 
 
 
67.9
%
 
 
 
 
 
67.9
%
 
 
 
 
Including Properties in Default
 
 
 
 
82.2
%
 
 
 
 
 
81.8
%
 
 
 
 

As of June 30, 2011, the majority of our Total Portfolio is located in six Southern California markets: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa submarket 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 Stadium Towers Plaza, 500 Orange Tower and City Tower (each of which is in receivership) and Cerritos Corporate Center.

We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our on- and off-site parking garages. We also receive income from providing management, leasing and real estate development services with respect to our joint venture with Charter Hall Group. In August 2011, Charter Hall announced it had entered into contracts to sell 100% of its interests in its U.S. portfolio, including the joint venture properties. See “Subsequent Events.”

30


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)


Liquidity and Capital Resources

General

Our business requires continued access to adequate cash to fund our liquidity needs. Over the last several years, we have improved our liquidity position through secured debt financings, cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, as well as reductions in our leasing costs, discretionary capital expenditures, property operating expenses, and general and administrative expenses. We are working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, leasing costs, capital expenditures and recourse obligations. We do not currently have committed sources of cash adequate to fund our projected longer-term needs. Management believes that access to future sources of cash will be challenging.

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 and tenant improvements);
 
Asset dispositions;
 
Payments in connection with loans (including debt service, principal payment obligations and payments to extend, refinance or exit loans);
 
Cash generated from the contribution of existing assets to joint ventures;
 
Swap obligation;
 
Proceeds from public or private issuance of debt or equity securities; and/or
 
Development costs; and/or
 
Proceeds from additional secured or unsecured debt financings.
 
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 if we are unable to generate adequate cash from these sources we will have liquidity-related problems and will be exposed to material risks. We face greater challenges in connection with our long-term liquidity position, particularly debt maturities, leasing costs, capital expenditures and recourse obligations. We have not currently identified sources sufficient to fund our projected long-term liquidity needs. Our inability to secure adequate sources of liquidity could lead to our eventual insolvency. 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 filed with the SEC on March 16, 2011.


31


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 as of June 30, 2011 is as follows (in millions):

Restricted cash:
   
Leasing and capital expenditure reserves
$
20.6

Tax, insurance and other working capital reserves
16.8

Prepaid rent
18.9

Collateral accounts
22.4

Total restricted cash, excluding mortgages in default
78.7

Unrestricted cash and cash equivalents
66.0

Total restricted cash and unrestricted cash and cash equivalents,
     excluding mortgages in default
144.7

Restricted cash of mortgages in default
19.2

 
$
163.9


The leasing and capital expenditure, tax, insurance and other working capital and prepaid rent reserves are held in restricted accounts by our lenders in accordance with the terms of our mortgage loan agreements. The collateral accounts are held by our counterparties or lenders under our interest rate swap agreement and other obligations. Of the $22.4 million held in cash collateral accounts by our counterparties as of June 30, 2011, we expect that the return of swap collateral to us will be in the range of $11 million to $12 million during the remainder of 2011.

The following is a summary of our available leasing reserves (excluding mortgages in default) as of June 30, 2011 (in millions):

 
Restricted
Cash Accounts
LACBD
$
13.5

Orange County
5.6

Tri-Cities
0.8

 
$
19.9


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, Brea Financial Commons and 3800 Chapman properties to fund leasing costs for the next several years.

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.”


32


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Occupancy levels.  There was negative absorption in 2010 in most of our submarkets, and our overall occupancy levels declined in 2010. We expect our occupancy levels in 2011 to be lower than 2010 levels for the following reasons (among others):

Leasing activity in general continues to be soft in all of our submarkets.

Our perceived liquidity challenges and recent and potential future asset dispositions and loan defaults may impact potential tenants’ willingness to enter into leases with us.

The high unemployment rate has limited our tenant base.

The current economic conditions and stock market volatility have resulted in some companies shifting to a more cautionary mode with respect to leasing.

Many of our current and potential tenants rely heavily on the availability of financing to support operating costs (including rent), and obtaining credit is currently challenging.

We are facing competition from high-quality, recently-completed sublease space that is currently available, particularly in the LACBD (though the amount of available high-quality sublease space is less than 2008 and 2009 levels).

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 filed with the SEC on March 16, 2011.

Rental rates.  As a result of the economic crisis, average asking rental rates dropped in all of our submarkets during 2010. 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. For the remainder of 2011, 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 June 30, 2011, our 20 largest tenants represented 52.6% 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 industries and these industries have been impacted by the current economic climate. Many of our major tenants have experienced or may experience a business downturn, weakening their financial condition. This resulted in increased lease defaults and decreased rent collectability over the last several years. This trend may continue or worsen. In many cases, we made substantial up-front investments in the applicable leases, through tenant improvement allowances and other concessions, and we incurred standard 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 is acting as receiver.

Asset Dispositions
During the past several years, we have systematically disposed of assets in order to (1) preserve cash, through the 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 disposition of strategically-identified non-core properties with equity value.


33


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash-Preserving Dispositions—

In 2010, we disposed of 2385 Northside Drive, Griffin Towers, 17885 Von Karman, Mission City Corporate Center, Park Place II, 207 Goode and Pacific Arts Plaza, comprising a combined 2.1 million square feet of office space and 0.1 million square feet of retail space. While these transactions generated no net proceeds for us, they resulted in the elimination of $647.5 million of debt maturing in the next several years and the elimination of $20.4 million in principal repayment and/or debt service guaranties on our 2385 Northside Drive, 17885 Von Karman and 207 Goode construction loans. To date in 2011, we have closed the following cash-preserving transactions:

In April 2011, we disposed of 701 North Brand located in Glendale, California to the property’s lender. As a result of the disposition, we were relieved of the obligation to repay the $33.8 million mortgage loan secured by the property as well as accrued contractual interest.

In April 2011, we disposed of 550 South Hope located in Los Angeles, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $200.0 million mortgage loan secured by the property as well as accrued contractual and default interest.

In June 2011, we disposed of 2600 Michelson located in Irvine, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $110.0 million mortgage loan secured by the property as well as accrued contractual and default interest.    

In July 2011, we disposed of City Tower located in Orange, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $140.0 million mortgage loan secured by the property as well as accrued contractual and default interest.    

We intend to exit several additional non-core assets in 2011 or 2012, if possible, including but not limited to Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand (all of which are currently in default under their respective mortgage loans, as described below). However, we may not be able to exit these assets in a timely manner or on a cooperative basis.


34


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash-Generating Dispositions—

To date in 2011, we have closed the following cash-generating transactions:

In March 2011, we disposed of the Orange Center development site located in Orange, California. We received proceeds from this transaction of $4.7 million, net of transaction costs, which will be used for general corporate purposes.

In May 2011, we disposed of the Westin® Pasadena Hotel located in Pasadena, California. As a result of the disposition, we received proceeds of $92.1 million, net of transaction costs, of which $78.6 million was used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building. The remaining $13.5 million of net proceeds, along with reserves totaling $2.1 million returned to us by the lender upon repayment of the mortgage loan, is available to us as unrestricted cash, which will be used for general corporate purposes. In August 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building. See “Subsequent Events.”

We do not anticipate any additional cash-generating dispositions in the near term, and have a very limited number of assets remaining that could potentially be sold in the near term to generate net cash proceeds. This is due in part to the tax indemnification obligations on certain of our assets. 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 certain properties in a taxable transaction. Certain types of transactions, including but not limited to joint ventures and refinancings, can be structured to avoid triggering the tax indemnification obligations. These tax indemnification obligations cover five of the office properties in our portfolio, which represented 61.5% of our Effective Portfolio’s aggregate annualized rent as of June 30, 2011 (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 June 2012, with final expiration in June 2015);

US Bank Tower (initial expiration in June 2012, with final expiration in June 2015);

KPMG Tower (initial expiration in June 2012, with final expiration in June 2015);

Wells Fargo Tower (extended expiration in June 2012, with final expiration in June 2013); and

Plaza Las Fuentes (extended expiration in June 2012, with final expiration in June 2013).

Prior to the expiration of the respective tax indemnification obligations, we will likely be required to continue to own each of these properties, even if a property is operating at a loss, in the event that we do not have the means to fund the tax indemnification obligations triggered by a foreclosure of the property. This could potentially utilize a significant portion of our unrestricted cash.


35


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash Generation from the Contribution of Existing Assets to Joint Ventures

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 are typically complicated and 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 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. In the event of a successful issuance, existing equity holders would likely face substantial dilution.

Proceeds from Additional Secured or Unsecured Debt Financings

We have historically financed our asset acquisitions and operations largely from secured debt financings. As of June 30, 2011, with the exception of Plaza Las Fuentes, all of our office properties were encumbered, and most of our existing debt arrangements contain rates, loan-to-value ratios and other terms that are unlikely to be obtained in the market at this time or in the near term.

In August 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building. See “Subsequent Events.” The loan agreement permits us to obtain up to $11.3 million of mezzanine financing on the property, but our ability to secure such mezzanine financing on favorable terms or at all is uncertain. We do not currently have arrangements for any other future secured financings and do not expect to obtain any other secured debt financings in the near term that will generate net cash proceeds. We currently do not believe that we will be able to address challenges to our longer-term liquidity position (particularly debt maturities, leasing costs, capital expenditures and recourse obligations) through future secured debt financings.

Given the current limited access to credit and our financial condition, it will also be highly challenging to obtain any significant unsecured financings in the near term.

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 2010 to allow for support of the Company’s 2011 business plan, while preserving capital. Management continues to take steps to reduce general and administrative expenses. 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.

36


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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.

As of June 30, 2011, we have executed leases (excluding those related to mortgages in default) that contractually commit us to pay $32.4 million in unpaid leasing costs, of which $2.9 million is contractually due in 2012, $0.4 million in 2013, $1.0 million in 2014 and $12.5 million in 2015 and beyond. The remaining $15.6 million is contractually available for payment to tenants upon request during 2011, but actual payment is largely determined by the timing of requests from those tenants.

Although our liquidity position has improved, we continue to take steps to preserve cash. We may limit the amount of discretionary funds allocated to capital expenditures and leasing costs in the near or longer term. If this occurs, it may result in a decrease in the number of leases we execute (particularly new leases, which are generally more costly to us than renewals) and average rental rates. In addition, for leases that we do execute, we expect to pay standard tenant concessions.

As included in the summary table of available leasing reserves shown above, we have $19.9 million in available leasing reserves as of June 30, 2011. We incurred approximately $22 per square foot, $26 per square foot and $21 per square foot in leasing costs on new and renewal leases executed during the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, respectively. Actual leasing costs incurred will fluctuate as described above.

Payments in Connection with Loans

Debt Service. As of June 30, 2011, we had $3.1 billion of total consolidated debt, including $0.9 billion of debt associated with mortgages in default (as described below). 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. The lockbox and cash management arrangements contained in most of our loan agreements provide that substantially all of the income generated by our special purpose property-owning subsidiaries is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders.  With the exception of the mortgages in default, cash is distributed to us only after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses.

During 2010, we made debt service payments totaling $187.3 million (including payments funded from reserves), and the respective special servicers of the mortgages in default applied $12.4 million of restricted cash held at the property level to pay contractual principal and interest on the mortgage loans secured by 2600 Michelson, 550 South Hope, Park Place II and Pacific Arts Plaza. During the six months ended June 30, 2011, we made debt service payments totaling $74.6 million, and the respective special servicers of the mortgages in default applied $33.0 million of restricted cash held at the property level to pay contractual interest on the mortgage loans secured by 550 South Hope, Stadium Towers Plaza, Two California Plaza, 500 Orange Tower, City Tower and 700 North Central. We made no debt service payments with unrestricted cash during the six months ended June 30, 2011 related to mortgages in default subsequent to the default date.


37


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain of our special purpose property-owning subsidiaries were in default as of June 30, 2011 under CMBS mortgages totaling approximately $0.9 billion secured by six separate office properties totaling approximately 2.8 million square feet (Stadium Towers Plaza, 500 Orange Tower, City Tower, Two California Plaza, 700 North Central and 801 North Brand). As a result of the defaults under these mortgage loans, pursuant to contractual rights the respective 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. We remained the title holder on each of these assets as of June 30, 2011. On July 22, 2011, we disposed of City Tower. See “Subsequent Events.”

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. We have reached agreements with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit both Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. There also can be no assurance that we will achieve a favorable outcome with respect to the disposition of 700 North Central and 801 North Brand. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

Following notices from us, in March 2011 the non-recourse mortgage loans encumbering Wells Fargo Tower and US Bank Tower were transferred into special servicing. We took this proactive step to commence discussions regarding the non-recourse mortgage loans encumbering these properties at an early stage with the respective special servicers. In June 2011, the special servicer for Wells Fargo Tower transferred the mortgage loan back to the master servicer, and the loan has not been modified. The mortgage loan encumbering US Bank Tower remains in special servicing as of June 30, 2011. We also delivered a notice of imminent default in March 2011 to the master servicer for the non-recourse mortgage loan on Gas Company Tower requesting that the loan be transferred into special servicing. As of June 30, 2011, the master servicer has not transferred the Gas Company Tower mortgage loan into special servicing, and we do not expect a transfer into special servicing to occur in the near term. As of June 30, 2011, the mortgage loans secured by Wells Fargo Tower, US Bank Tower and Gas Company Tower are not in default, and we do not intend to dispose of these assets.

In July 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center. See “Subsequent Events.”

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 current economic conditions. We do not have any committed financing sources available to refinance our debt as it matures. For a further discussion of our debt’s effect on our financial condition and operating flexibility, see Part I, Item 1A. in our Annual Report on Form 10-K filed with the SEC on March 16, 2011.


38


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

We have no debt maturing in 2011. A summary of our debt maturing in 2012 and 2013 is as follows (in millions):

 
 
2012
 
2013
Mortgage loans:
 
   

 
 
Brea Corporate Place/Brea Financial Commons
 
$
109.0

 
$

KPMG Tower
 
400.0

 

777 Tower
 

 
273.0

US Bank Tower
 

 
260.0

 
 
$
509.0

 
$
533.0


Our Brea Corporate Place/Brea Financial Commons mortgage was extended to May 2012. We have no extension options remaining on this loan.

Our KPMG Tower mortgage matures in October 2012. We have had discussions with the administrative agent for this loan, and the lenders will not commit to an extension of the maturity date at this time. We expect that this loan will require a substantial paydown upon extension or refinancing (depending on market conditions). We have not yet identified the capital source or sources required to enable us to make this significant paydown. If we are unable or unwilling to make the paydown using unrestricted cash, we will attempt to obtain the necessary capital through other means, such as the disposition of other assets with equity value and/or the issuance of debt or equity securities. We are subject to tax indemnification obligations to Mr. Maguire with respect to KPMG Tower, and these obligations could be triggered by the disposition of KPMG Tower in a taxable transaction, including through a foreclosure.

Our US Bank Tower and 777 Tower mortgage loans mature in July 2013 and November 2013, respectively. We do not have a commitment from the respective servicers to extend the maturity dates of these loans. These loans may require a paydown upon refinancing (depending on market conditions). We have not yet identified the capital source or sources required to enable us to make any such paydowns.

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 significant 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 may 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 significantly restrictive operational and financial covenants.

In addition, recourse obligations impact our ability to dispose of certain assets on favorable terms or at all and present challenges to our liquidity. For many of our assets, 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 potential contingent obligations described in “IndebtednessOperating Partnership

39


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 continue to own properties that operate at a loss because we do not believe it to be in our best interests to fund the recourse obligations in the case of a foreclosure of the property.

Swap Obligation

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 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, based on the net present value of future anticipated payments under the swap agreement to the extent that the termination value of the swap exceeds a $5.0 million obligation. As of June 30, 2011, we had transferred $21.0 million in cash to our counterparty to satisfy our collateral posting requirement under the swap. The cost to terminate the swap as of June 30, 2011 totals $26.3 million, less the $21.0 million in cash held by our counterparty.

Future changes in both actual and expected LIBOR rates will continue to have a significant impact on both the termination value of the swap and our requirement to either post additional cash collateral or receive a return of previously-posted cash collateral. As of June 30, 2011, one-month LIBOR was 0.19%. As of June 30, 2011, each 0.25% weighted average decrease in expected future LIBOR rates during the remaining swap term would result in the requirement to post approximately $1 million in additional cash collateral, while each 0.25% weighted average increase in expected future LIBOR rates during the remaining swap term would result in the return to us of approximately $1 million in cash collateral from our counterparty. Accordingly, movements in expected future LIBOR rates will require us to either post additional cash collateral or receive a refund of previously-posted cash collateral during the remainder of 2011.

During the remainder of 2011, we expect that the return of swap collateral to us will be in the range of $11 million to $12 million. Our estimate of the return of swap collateral we expect to receive is as a result of the monthly payments we make under the swap agreement. These payments are calculated based on a forward LIBOR yield curve (which is a standard method used by the capital markets), less the contractual swap rate of 5.564%.

Development Costs

We continually evaluate the size, timing, costs and scope of our development 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 expect to allocate a limited amount of cash to discretionary development projects for 2011, mainly for pursuing and preserving entitlements.

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.


40


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

As of December 31, 2010, MPG Office Trust, Inc. had a net operating loss (“NOL”) carryforward of approximately $814 million. Due to our current liquidity position and the availability of substantial NOL carryforwards, we do not expect to pay distributions on our common and preferred stock for the foreseeable future. We do not expect the need to pay distributions to our stockholders during 2011 to maintain our REIT status due to the use of NOL carryforwards, as necessary. In determining REIT taxable income for purposes of applying the 90% distribution requirement, NOL carryforwards can be taken into account.

On December 19, 2008, our board of directors suspended the payment of dividends on our 7.625% Series A Cumulative Redeemable Preferred Stock (the “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 July 31, 2011, we have missed 11 quarterly dividend payments. The amount of dividends in arrears totals $52.3 million, which reflects the cancellation of 269,630 shares of Series A preferred stock received by the Company prior to July 31, 2011 as a result of the exchange agreements containing waivers of accrued dividends described in “—Subsequent Events—Exchanges of Series A Preferred Stock.”
 
All distributions to common stockholders, preferred stockholders and Operating Partnership common 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 Loans

As of June 30, 2011, our consolidated debt was comprised of mortgage loans secured by 15 properties. Our variable-rate debt bears interest at a rate based on one-month LIBOR, which was 0.19% as of June 30, 2011. A summary of our consolidated debt as of June 30, 2011 is as follows (in millions, except percentage and year amounts):

 
Principal
Amount
 
Percent of
Total Debt
 
Effective
Interest
Rate
 
Term to
Maturity
Fixed-rate
$
1,710.4

 
54.43
%
 
5.41
%
 
4 years
Variable-rate swapped to fixed-rate
400.0

 
12.73
%
 
7.16
%
 
1 year
Variable-rate
109.0

 
3.47
%
 
2.14
%
 
1 year
Total debt, excluding mortgages in default
2,219.4

 
70.63
%
 
5.57
%
 
4 years
Mortgages in default
923.0

 
29.37
%
 
10.65
%
 
 
 
$
3,142.4

 
100.00
%
 
7.06
%
 
 

As of June 30, 2011, our ratio of total consolidated debt to total consolidated market capitalization was 88.4% of our total market capitalization of $3.6 billion (based on the closing price of our common stock of $2.86 per share on the NYSE on June 30, 2011). Our ratio of total consolidated debt plus liquidation preference of preferred stock to total consolidated market capitalization was 95.5% as of June 30, 2011. 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 June 30, 2011.


41


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 June 30, 2011 is as follows (in thousands, except percentage amounts):

 
Interest
Rate
 
Maturity Date
 
Principal
Amount (1)
 
Annual
Debt
Service
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans: (2)
 
 
 
 
 
 
 
Brea Corporate Place (3)
2.14
%
 
5/1/2012
 
$
70,468

 
$
1,526

Brea Financial Commons (3)
2.14
%
 
5/1/2012
 
38,532

 
834

Total variable-rate loans
 
 
 
 
109,000

 
2,360

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
KPMG Tower (4)
7.16
%
 
10/9/2012
 
400,000

 
29,054

Total floating-rate debt
 
 
 
 
509,000

 
31,414

 
 
 
 
 
 
 
 
Fixed-Rate Debt
 
 
 
 
 
 
 
Wells Fargo Tower
5.68
%
 
4/6/2017
 
550,000

 
31,649

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

Glendale Center
5.82
%
 
8/11/2016
 
125,000

 
7,373

The City – 3800 Chapman
5.93
%
 
5/6/2017
 
44,370

 
2,666

Total fixed-rate rate debt
 
 
 
 
1,710,370

 
93,840

Total debt, excluding mortgages in default
 
 
 
 
2,219,370

 
125,254

 
 
 
 
 
 
 
 
Mortgages in Default
 
 
 
 
 
 
 
Two California Plaza (5)
10.50
%
 
5/6/2017
 
470,000

 
50,035

City Tower (6) (7)
10.85
%
 
5/10/2017
 
140,000

 
15,398

500 Orange Tower (6)
10.88
%
 
5/6/2017
 
110,000

 
12,136

Stadium Towers Plaza (6)
10.78
%
 
5/11/2017
 
100,000

 
10,934

801 North Brand (6)
10.73
%
 
4/6/2015
 
75,540

 
8,216

700 North Central (6)
10.73
%
 
4/6/2015
 
27,460

 
2,987

Total mortgages in default
 
 
 
 
923,000

 
99,706

Total consolidated debt
 
 
 
 
3,142,370

 
$
224,960

Debt discount
 
 
 
 
(1,529
)
 
   
Total consolidated debt, net
 
 
 
 
$
3,140,841

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
The June 30, 2011 one-month LIBOR rate of 0.19% was used to calculate interest on the variable-rate loans.
(3)
This loan bears interest at a variable rate of LIBOR plus 1.95%. 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.
(4)
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%.
(5)
Our special purpose property-owning subsidiary that owns Two California Plaza is in default on the mortgage loan secured by the property. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. If we are successful in modifying the mortgage loan, the settlement date and treatment of principal will be as set forth in the modified loan agreement.
(6)
Our special purpose property-owning subsidiary that owns this property is in default for failing to make debt service payments due under this loan. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. The actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition.
(7)
We disposed of this property on July 22, 2011. See “Subsequent Events.”

42


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 Extension

On May 1, 2011, we extended our $109.0 million mortgage loan secured by Brea Corporate Place and Brea Financial Commons. The final maturity date of this loan is May 1, 2012, and there are no remaining extension options. No cash paydown was made to extend the loan, and the loan terms remain unchanged.
    
Repayment of Unsecured Term Loan

On May 1, 2011, we repaid our $15.0 million unsecured term loan upon maturity using unrestricted cash.

Mortgage Loans Settled Upon Disposition

701 North Brand—

On April 1, 2011, we disposed of 701 North Brand located in Glendale, California to the property’s lender. We recorded a $3.9 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of the difference between the fair value assigned to the property in the transaction and the $33.8 million loan and accrued contractual interest that were forgiven by the lender.

550 South Hope—

On April 26, 2011, we disposed of 550 South Hope located in Los Angeles, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $118.0 million of the $200.0 million mortgage loan as part of this transaction. Additionally, we received proceeds of $37.8 million, net of transaction costs, which were applied by the special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $65.4 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition.

Plaza Las Fuentes—

On May 27, 2011, we disposed of the Westin® Pasadena Hotel located in Pasadena, California. As a result of the disposition, we received proceeds of $92.1 million, net of transaction costs, of which $78.6 million were used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building. The remaining $13.5 million of net proceeds, along with reserves totaling $2.1 million returned to us by the lender upon repayment of the mortgage loan, is available to us as unrestricted cash, which will be used for general corporate purposes.

In August 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building. See “Subsequent Events.”

2600 Michelson—

On June 30, 2011, we disposed of 2600 Michelson located in Irvine, California in cooperation with the special servicer on the mortgage loan. The buyer assumed $66.6 million of the $110.0 mortgage loan as part of this transaction. Additionally, we received proceeds of $2.0 million, net of transaction costs, which were applied by the

43


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

special servicer to further reduce the balance outstanding on the mortgage loan. We recorded a $58.6 million gain on settlement of debt as part of discontinued operations during the three months ended June 30, 2011 as a result of principal, and accrued contractual and default interest forgiven by the lender upon disposition.

Mortgages in Default

As of June 30, 2011, we are in default on $0.9 billion of non-recourse mortgage loans that have contractual maturity dates in 2015 and 2017 per the terms of the loan agreements. The special servicers with respect to those loans have the contractual right to accelerate the maturity of the debt and foreclose on the property underlying such loans, but they have not done so. For properties that are disposed of, the actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition. For any properties that we are successful in modifying the mortgage loan, the settlement date and treatment of principal and interest (including default interest) will be as set forth in the modified loan agreement.

The interest expense recorded in our consolidated statements of operations related to mortgages in default is as follows (in thousands):

 
 
 
 
For the Six Months Ended
 
 
 
 
June 30, 2011
 
June 30, 2010
Property
 
Initial Default Date
 
Contractual Interest
 
Default Interest
 
Contractual Interest
 
Default Interest
Stadium Towers Plaza
 
August 11, 2009
 
$
2,908

 
$
2,514

 
$
2,908

 
$
2,514

500 Orange Tower
 
January 6, 2010
 
3,253
 
2,765
 
3,253
 
2,689
City Tower (1)
 
September 11, 2010
 
4,116
 
3,520
 
0
 
0
Two California Plaza
 
March 7, 2011
 
8,329
 
7,768
 
0
 
0
801 North Brand
 
June 6, 2011
 
361
 
262
 
0
 
0
700 North Central
 
June 6, 2011
 
131
 
95
 
0
 
0
 
 
 
 
$
19,098

 
$
16,924

 
$
6,161

 
$
5,203

__________
(1)
We disposed of this property on July 22, 2011. See “Subsequent Events.”

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. We have reached agreements with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit both Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. There also can be no assurance that we will achieve a favorable outcome with respect to the disposition of 700 North Central and 801 North Brand. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.
  

44


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Notices of Imminent Default

Following notices from us, in March 2011 the non-recourse mortgage loans encumbering Wells Fargo Tower and US Bank Tower were transferred into special servicing. We took this proactive step to commence discussions regarding the non-recourse mortgage loans encumbering these properties at an early stage with the respective special servicers. In June 2011, the special servicer for Wells Fargo Tower transferred the mortgage loan back to the master servicer, and the loan has not been modified. The mortgage loan encumbering US Bank Tower remains in special servicing as of June 30, 2011. We also delivered a notice of imminent default in March 2011 to the master servicer for the non-recourse mortgage loan on Gas Company Tower requesting that the loan be transferred into special servicing. As of June 30, 2011, the master servicer has not transferred the Gas Company Tower mortgage loan into special servicing, and we do not expect a transfer into special servicing to occur in the near term. As of June 30, 2011, the mortgage loans secured by Wells Fargo Tower, US Bank Tower and Gas Company Tower are not in default, and we do not intend to dispose of these assets.

In July 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center. See “Subsequent Events.”

Operating Partnership Contingent Obligations

Debt Service Guaranty—

As a condition to closing the fixed-rate mortgage loan on 3800 Chapman, our Operating Partnership entered into a debt service guaranty. Under this debt service guaranty, 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, and (iii) the rollover reserve. The guaranty can expire before its term upon determination by the lender that the property has achieved a debt service coverage ratio (as defined in the loan agreement) of at least 1.10 to 1.00 for two consecutive calculation dates.

The following table provides information regarding our debt service guaranty as of June 30, 2011:

Property
 
Rentable
Square Feet
 
Leased
Percentage
 
Guaranty
Expiration Date
 
Annual Debt
Service (1)
 
In-Place Annual
Cash NOI (2)
3800 Chapman
 
158,767

 
75.9
%
 
5/6/2017
 
$ 2.7M
 
$ 2.8M
__________
(1)
Annual debt service represents annual interest expense only.
(2)
Tax and insurance reserve payment obligations are reflected as deductions to derive in-place annual cash NOI. In-place annual cash NOI represents actual second quarter 2011 cash NOI multiplied by four.

During the term of the guaranty 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.

The total amount our Operating Partnership would owe the lender under the debt service guaranty if the property were generating no in-place cash NOI is $1.5 million, $2.8 million, $2.8 million, $2.8 million, $2.8 million and $3.8 million for 2011, 2012, 2013, 2014, 2015 and thereafter, respectively.


45


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Non-Recourse Carve Out Guarantees

In addition to the guaranties described above, all of the Company’s $3.1 billion of consolidated debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non-recourse loans can become partially or fully recourse against our Operating Partnership if certain triggering events occur. Although these events differ from loan to loan, 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 the 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 the 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 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, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

As of June 30, 2011, to our knowledge the Company has not triggered any of the “non-recourse carve out” guarantees on its otherwise non-recourse loans. The maximum amount our Operating Partnership would be required to pay under a “non-recourse carve out” guarantee is the principal amount of the loan (or a total of $3.1 billion as of June 30, 2011). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to our Operating Partnership pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due the lender from our Operating Partnership in the event a “non-recourse carve out” guarantee is triggered would be reduced by the net proceeds received from the disposition of the office building, which management believes may not be sufficient to cover the maximum potential amount due if all of the “non-recourse carve out” guarantees were triggered, depending on the particular asset.

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 operations and common stock price would be materially adversely affected and we could become insolvent.


46


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

Our results of operations for the three and six months ended June 30, 2011 compared to June 30, 2010 were affected by dispositions made during 2010 and 2011. 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 the properties in our office portfolio, with the exception of the Properties in Default and our joint venture properties. The results of our Same Properties Portfolio are presented to highlight for investors and users of our consolidated financial statements the operating results of our on-going business. Given the default status of the Properties in Default and our current business plan, management has excluded the results of the Properties in Default from the analysis of our Same Properties Portfolio as they believe the Company ultimately will not bear the benefit or burden of the operating performance of these properties prior to their disposition. We have excluded Two California Plaza from the Properties in Default because our goal is to modify the loan with the special servicer rather than to dispose of the asset.


47


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
 
Same Properties Portfolio
 
Total Portfolio
 
For the Three
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
For the Three
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
6/30/2011
 
6/30/2010
 
 
 
6/30/2011
 
6/30/2010
 
 
Revenue:
 
 
 
 
 
 
   

 
 
 
 
 
 
 
 
Rental
$
46.5

 
$
48.2

 
$
(1.7
)
 
(4
)%
 
$
53.6

 
$
55.9

 
$
(2.3
)
 
(4
)%
Tenant reimbursements
20.4

 
20.8

 
(0.4
)
 
(2
)%
 
20.7

 
21.1

 
(0.4
)
 
(2
)%
Parking
8.7

 
9.2

 
(0.5
)
 
(5
)%
 
9.2

 
9.7

 
(0.5
)
 
(5
)%
Management, leasing and
     development services

 

 

 
 %
 
1.1

 
1.1

 

 
 %
Interest and other
0.8

 
0.1

 
0.7

 


 
1.8

 
0.2

 
1.6

 


Total revenue
76.4

 
78.3

 
(1.9
)
 
(2
)%
 
86.4

 
88.0

 
(1.6
)
 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental property operating
     and maintenance
18.5

 
17.8

 
0.7

 
4
 %
 
21.6

 
20.6

 
1.0

 
5
 %
Real estate taxes
6.7

 
6.5

 
0.2

 
3
 %
 
7.5

 
7.4

 
0.1

 
1
 %
Parking
2.2

 
2.3

 
(0.1
)
 
(4
)%
 
2.3

 
2.5

 
(0.2
)
 
(8
)%
General and administrative

 

 

 
 %
 
5.3

 
6.5

 
(1.2
)
 
(18
)%
Other expense
1.3

 
1.3

 

 
 %
 
1.9

 
1.6

 
0.3

 
19
 %
Depreciation and amortization
20.3

 
22.7

 
(2.4
)
 
(11
)%
 
25.9

 
26.2

 
(0.3
)
 
(1
)%
Interest
44.7

 
39.3

 
5.4

 
14
 %
 
56.4

 
48.4

 
8.0

 
17
 %
Loss from early extinguishment of debt
0.1

 

 
0.1

 


 
0.1

 

 
0.1

 


Total expenses
93.8

 
89.9

 
3.9

 
4
 %
 
121.0

 
113.2

 
7.8

 
7
 %
Loss from continuing operations before equity
     in net loss of unconsolidated
     joint venture
(17.4
)
 
(11.6
)
 
(5.8
)
 
 
 
(34.6
)
 
(25.2
)
 
(9.4
)
 
 
Equity in net loss of unconsolidated
     joint venture

 

 

 
 
 

 
0.2

 
(0.2
)
 
 
Loss from continuing operations
$
(17.4
)
 
$
(11.6
)
 
$
(5.8
)
 
 
 
$
(34.6
)
 
$
(25.0
)
 
$
(9.6
)
 
 
Income (loss) from discontinued operations
 
 
 
 
 
 
 
 
$
173.3

 
$
(31.2
)
 
$
204.5

 
 

Rental Revenue

Same Properties Portfolio rental revenue decreased $1.7 million, or 4%, while Total Portfolio rental revenue decreased $2.3 million, or 4%, for the three months ended June 30, 2011 as compared to June 30, 2010, primarily due to decreases in occupancy as a result of lease expirations and terminations during 2010 and 2011 at our core properties. Our Total Portfolio rental revenue was also negatively impacted by lower occupancy at the Properties in Default. 

Tenant Reimbursements Revenue

Both the Same Properties Portfolio and Total Portfolio tenant reimbursements revenue decreased $0.4 million, or 2%, for the three months ended June 30, 2011 as compared to June 30, 2010, primarily due to lower occupancy and decreases in rental property operating and maintenance billed to tenants. 

48


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Parking Revenue

Both the Same Properties Portfolio and Total Portfolio parking revenue decreased $0.5 million, or 5%, for the three months ended June 30, 2011 as compared to June 30, 2010, primarily due to a reduction in parking rates at Gas Company Tower in connection with the Southern California Gas Company lease renewal and the non-renewal of a non-tenant parking contract at an off-site garage.

Interest and Other Revenue

Total Portfolio interest and other revenue increased $1.6 million for the three months ended June 30, 2011 as compared to June 30, 2010, primarily due to a bankruptcy settlement received in 2011 with no comparable activity in 2010.

General and Administrative Expense

Total Portfolio general and administrative expense decreased $1.2 million, or 18%, for the three months ended June 30, 2011 as compared to June 30, 2010, largely as a result of lower compensation expense resulting from the departure of a member of our senior management in the fourth quarter of 2010 combined with headcount reductions resulting from property dispositions and reduced stock-based compensation costs as a result of the departure of certain members of senior management during 2010.

Depreciation and Amortization Expense

Same Properties Portfolio depreciation and amortization expense decreased $2.4 million, or 11%, for the three months ended June 30, 2011 as compared to June 30, 2010, mainly due to a reduction in the carrying amount of various properties as a result of an impairment charge recorded in connection with the writedown of Two California Plaza to its estimated fair value as of December 31, 2010.

Interest Expense

Same Properties Portfolio interest expense increased $5.4 million, or 14%, for the three months ended June 30, 2011 as compared to June 30, 2010, mainly due to the accrual of default interest on Two California Plaza. Total Portfolio interest expense increased $8.0 million, or 17%, for the three months ended June 30, 2011 as compared to June 30, 2010, primarily due to the accrual of default interest on Two California Plaza and City Tower. The mortgage loans on these properties were not in default as of June 30, 2010.

Discontinued Operations

Our income from discontinued operations of $173.3 million for the three months ended June 30, 2011 was comprised primarily of gains on settlement of debt totaling $127.8 million and gains on sale of real estate totaling $63.6 million recorded in connection with the dispositions of 701 North Brand, 550 South Hope, 2600 Michelson and the Westin® Pasadena Hotel, which were partially offset by a $13.9 million impairment charge related to the disposition of 2600 Michelson. Our loss from discontinued operations of $31.2 million for the three months ended June 30, 2010 was comprised primarily of impairment charges totaling $17.4 million recorded in connection with the writedown of 207 Goode and 17885 Von Karman to estimated fair value as of June 30, 2010.

49


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Comparison of the Six Months Ended June 30, 2011 to the Six Months Ended June 30, 2010

Consolidated Statements of Operations Information
(In millions, except percentage amounts)
 
Same Properties Portfolio
 
Total Portfolio
 
For the Six
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
For the Six
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
6/30/2011
 
6/30/2010
 
 
 
6/30/2011
 
6/30/2010
 
 
Revenue:
 
 
 
 
 
 
   

 
 
 
 
 
 
 
 
Rental
$
93.2

 
$
96.8

 
$
(3.6
)
 
(4
)%
 
$
107.3

 
$
112.8

 
$
(5.5
)
 
(5
)%
Tenant reimbursements
40.8

 
42.5

 
(1.7
)
 
(4
)%
 
41.3

 
43.0

 
(1.7
)
 
(4
)%
Parking
17.2

 
18.9

 
(1.7
)
 
(9
)%
 
18.2

 
19.9

 
(1.7
)
 
(9
)%
Management, leasing and
     development services

 

 

 
 %
 
2.1

 
2.0

 
0.1

 
5
 %
Interest and other
0.9

 
0.1

 
0.8

 


 
2.0

 
0.5

 
1.5

 


Total revenue
152.1

 
158.3

 
(6.2
)
 
(4
)%
 
170.9

 
178.2

 
(7.3
)
 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental property operating
     and maintenance
36.0

 
35.5

 
0.5

 
1
 %
 
41.8

 
41.2

 
0.6

 
1
 %
Real estate taxes
13.9

 
13.5

 
0.4

 
3
 %
 
15.0

 
14.7

 
0.3

 
2
 %
Parking
4.6

 
4.8

 
(0.2
)
 
(4
)%
 
4.8

 
5.1

 
(0.3
)
 
(6
)%
General and administrative

 

 

 
 %
 
12.0

 
14.1

 
(2.1
)
 
(15
)%
Other expense
2.5

 
2.5

 

 
 %
 
3.7

 
3.0

 
0.7

 
23
 %
Depreciation and amortization
42.3

 
45.3

 
(3.0
)
 
(7
)%
 
51.3

 
54.5

 
(3.2
)
 
(6
)%
Interest
86.8

 
78.2

 
8.6

 
11
 %
 
109.7

 
96.6

 
13.1

 
14
 %
Loss from early extinguishment of debt
0.1

 

 
0.1

 


 
0.1

 

 
0.1

 
 
Total expenses
186.2

 
179.8

 
6.4

 
4
 %
 
238.4

 
229.2

 
9.2

 
4
 %
Loss from continuing operations before equity
     in net loss of unconsolidated
     joint venture and gain on sale of real estate
(34.1
)
 
(21.5
)
 
(12.6
)
 
 
 
(67.5
)
 
(51.0
)
 
(16.5
)
 
 
Equity in net loss of unconsolidated
     joint venture

 

 

 
 
 
(0.3
)
 
0.4

 
(0.7
)
 
 
Gain on sale of real estate

 

 

 
 
 

 
16.6

 
(16.6
)
 
 
Loss from continuing operations
$
(34.1
)
 
$
(21.5
)
 
$
(12.6
)
 
 
 
$
(67.8
)
 
$
(34.0
)
 
$
(33.8
)
 
 
Income from discontinued operations
 
 
 
 
 
 
 
 
$
166.5

 
$
3.7

 
$
162.8

 
 

Rental Revenue

Same Properties Portfolio rental revenue decreased $3.6 million, or 4%, while Total Portfolio rental revenue decreased $5.5 million, or 5%, for the six months ended June 30, 2011 as compared to June 30, 2010, primarily due to decreases in occupancy as a result of lease expirations and terminations during 2010 and 2011 at our core properties. Our Total Portfolio rental revenue was also negatively impacted by lower occupancy at the Properties in Default. 

Tenant Reimbursements Revenue

Both the Same Properties Portfolio and Total Portfolio tenant reimbursements revenue decreased $1.7 million, or 4%, for the six months ended June 30, 2011 as compared to June 30, 2010, primarily due to lower occupancy and decreases in rental property operating and maintenance billed to tenants. 

50


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Parking Revenue

Both the Same Properties Portfolio and Total Portfolio parking revenue decreased $1.7 million, or 9%, for the six months ended June 30, 2011 as compared to June 30, 2010, primarily due to a reduction in parking rates at Gas Company Tower in connection with the Southern California Gas Company lease renewal and the non-renewal of a non-tenant parking contract at an off-site garage.

Interest and Other Revenue

Total Portfolio interest and other revenue increased $1.5 million for the six months ended June 30, 2011 as compared to June 30, 2010, primarily due to a bankruptcy settlement received in 2011 with no comparable activity in 2010.

General and Administrative Expense

Total Portfolio general and administrative expense decreased $2.1 million, or 15%, for the six months ended June 30, 2011 as compared to June 30, 2010, largely as a result of lower compensation expense resulting from the departure of a member of our senior management in the fourth quarter of 2010 combined with headcount reductions resulting from property dispositions and reduced stock-based compensation costs as a result of the departure of certain members of senior management during 2010.

Depreciation and Amortization Expense

Same Store Portfolio depreciation and amortization expense decreased $3.0 million, 7%, while Total Portfolio depreciation and amortization expense decreased $3.2 million, or 6%, for the six months ended June 30, 2011 as compared to June 30, 2010, mainly due to a reduction in the carrying amount of various properties as a result of impairment charges recorded in 2010.

Interest Expense

Same Properties Portfolio interest expense increased $8.6 million, or 11%, for the six months ended June 30, 2011 as compared to June 30, 2010, mainly due to the accrual of default interest on Two California Plaza. Total Portfolio interest expense increased $13.1 million, or 14%, for the six months ended June 30, 2011 as compared to June 30, 2010, primarily due to the accrual of default interest on Two California Plaza and City Tower. The mortgages on these properties were not in default as of June 30, 2010.

Gain on Sale of Real Estate

We recorded a $16.6 million gain on sale of real estate in our Total Portfolio for the six months ended June 30, 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.

Discontinued Operations

Our income from discontinued operations of $166.5 million for the six months ended June 30, 2011 was comprised primarily of gains on settlement of debt totaling $127.8 million and gains on sale of real estate totaling $63.6 million recorded in connection with the dispositions of 701 North Brand, 550 South Hope, 2600 Michelson and the Westin® Pasadena Hotel, which were partially offset by a $13.9 million impairment charge related to the disposition of 2600 Michelson.

51


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 Six Months Ended
 
Increase/
(Decrease)
 
June 30, 2011
 
June 30, 2010
 
 
(In thousands)
Net cash (used in) provided by operating activities
$
(19,965
)
 
$
11,402

 
$
(31,367
)
Net cash provided by investing activities
174,244

 
100,926

 
73,318

Net cash used in financing activities
(135,158
)
 
(132,578
)
 
(2,580
)

As discussed above, our business requires continued access to adequate cash to fund our liquidity needs. Over the last several years, we have improved our liquidity position through secured debt financings, cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, as well as reductions in our leasing costs, discretionary capital expenditures, property operating expenses, and general and administrative expenses. We are working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, leasing costs, capital expenditures and recourse obligations. 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 used in operating activities during the six months ended June 30, 2011 totaled $20.0 million, compared to net cash provided by operating activities during the six months ended June 30, 2010 of $11.4 million. Application of restricted cash totaling $33.0 million held at the property level to pay contractual interest on the mortgage loans secured by 550 South Hope, Stadium Towers Plaza, Two California Plaza, 500 Orange Tower, City Tower and 700 North Central was the primary driver of the change in net cash used by operating activities in 2011 compared to 2010.

Investing Activities

Our cash flow from investing activities is generally impacted by the amount of capital expenditures for our operating properties. During 2010 and the first six months of 2011, we focused on disposing of strategically-identified non-core properties to generate cash and properties with current or negative cash flow and/or other potential near-term cash outlay requirements to preserve cash. Net cash provided by investing activities was $174.2 million during the six months ended June 30, 2011, compared to net cash provided by investing activities of $100.9 million during the six months ended June 30, 2010. Application of restricted cash totaling $33.0 million held at the property level to pay contractual interest on the mortgage loans secured by 550 South Hope, Stadium Towers Plaza, Two California Plaza, 500 Orange Tower, City Tower and 700 North Central, combined with increased proceeds from property dispositions, were the primary drivers of the change in net cash provided by investing activities in 2011 compared to 2010.


52


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 $135.2 million during the six months ended June 30, 2011, compared to net cash used in financing activities of $132.6 million during the six months ended June 30, 2010. Increased debt repayment activity during 2011 resulting from a larger number of property dispositions and the repayment at maturity of our unsecured term loan was the primary source of the increase in net cash used in financing activities in 2011 compared to 2010. During the remainder of 2011 and in 2012, we intend to exit several additional non-core assets, if possible, including but not limited to Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand (all of which are currently in default under their respective mortgage loans), and we intend to use any funds received upon disposition to repay the mortgage loans encumbering such properties. Due to our current liquidity position and the availability of substantial net operating loss carryforwards, we do not expect to pay distributions on our common and preferred stock for the foreseeable future.

Development Properties

We continually evaluate the size, timing, costs and scope of our development 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 expect to allocate a limited amount of cash to discretionary development projects for 2011, mainly for pursuing and preserving entitlements.

Off-Balance Sheet Arrangements

We have certain off-balance sheet arrangements, which we believe are appropriately disclosed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K filed with the SEC on March 16, 2011 and elsewhere. We do not believe that any of these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.

53


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 as of June 30, 2011, including any guaranteed or minimum commitments under contractual obligations. The table does not reflect available debt extension options.

 
2011
 
2012
 
2013
 
2014
 
2015
 
Thereafter
 
Total
 
(In thousands)
Principal payments on mortgage loans –
 
 
 
 
 
 
 
 
   
 
 
 
 
Consolidated obligation, excluding
     mortgages in default
$

 
$
509,000

 
$
533,000

 
$

 
$

 
$
1,177,370

 
$
2,219,370

Mortgages in default (1)

 

 

 

 
103,000

 
820,000

 
923,000

Interest payments –
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt (2)
46,920

 
93,839

 
84,994

 
65,380

 
65,380

 
62,577

 
419,090

Variable-rate debt (3)
15,853

 
22,958

 

 

 

 

 
38,811

Mortgages in default (1) (4)
90,415

 
84,308

 
84,308

 
84,308

 
76,052

 
98,640

 
518,031

Capital leases (5)
294

 
348

 
266

 
135

 
136

 
218

 
1,397

Operating lease (6)
342

 
703

 
726

 
257

 

 

 
2,028

Lease termination agreement (7)
420

 

 

 

 

 

 
420

Property disposition obligations –
 
 
 
 
 
 
 
 
 
 
 
 
 
Joint venture properties (8)
209

 
308

 
383

 
105

 

 

 
1,005

Lease takeover obligation (9)
393

 
792

 
799

 
833

 
841

 
424

 
4,082

Tenant-related commitments (10) –
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation, excluding
     mortgages in default
15,561

 
2,890

 
416

 
966

 
318

 
12,251

 
32,402

Mortgages in default
1,803

 
2,151

 

 
5

 

 

 
3,959

Parking easement obligations (11)
560

 

 

 

 

 

 
560

Air space and ground leases (12)
1,505

 
3,010

 
3,010

 
3,400

 
3,400

 
341,158

 
355,483

 
$
174,275

 
$
720,307

 
$
707,902

 
$
155,389

 
$
249,127

 
$
2,512,638

 
$
4,519,638

__________
(1)
Amounts shown for principal payments related to mortgages in default reflect the contractual maturity dates per the loan agreements. The special servicers have the contractual right to accelerate the maturity of the debt but have not done so. For properties that are disposed of, the actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. For any properties that we are successful in modifying the mortgage loan, the settlement date will be as set forth in the modified loan agreement. Amounts shown for interest related to mortgages in default are based on contractual and default interest rates per the loan agreements. Interest amounts that were contractually due and unpaid as of June 30, 2011 are included in the 2011 column. For properties that are disposed of, management does not intend to settle principal and interest amounts with unrestricted cash. We expect that these amounts will be settled in a non-cash manner at the time of disposition. For any properties that we are successful in modifying the mortgage loan, the settlement of interest (including default interest) will be as set forth in the modified loan agreement.
(2)
The interest payments on our fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(3)
The interest payments on our variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate of 0.19% as of June 30, 2011 plus the contractual spread per the loan agreement.
(4)
Amount shown for interest payments related to mortgages in default in the 2011 column reflects interest due on the City Tower mortgage through its disposal date, July 22, 2011.
(5)
Includes principal and interest payments.
(6)
Includes operating lease obligations for subleased office space at 1733 Ocean. We have mitigated this obligation through sublease of that space to third-party tenants. The subtenants are current on their sublease payments as of June 30, 2011. The amounts mitigated through future sublease payments total $305, $630, $653 and $237 for the years ending December 31, 2011, 2012, 2013 and 2014, respectively.
(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 joint venture with Charter Hall Group.
(9)
Includes a gross lease takeover obligation at a property that was disposed of in 2009. We have partially mitigated this obligation

54


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

through a sublease of the entire space to a third-party tenant. The subtenant is current in their payments to us under their sublease.
(10)
Tenant-related commitments are based on executed leases as of June 30, 2011. We are not currently funding tenant-related commitments for mortgages in default. Amounts are being funded by the special servicers using restricted cash held at the property level.
(11)
Includes payments required under the amended parking easement for the 808 South Olive garage.
(12)
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 dates in years 2017 and 2082, respectively. The ground rent for Brea Corporate Place is calculated through the year of first reappraisal.

Related Party Transactions
    
We earn property management and investment advisory fees and leasing commissions from our joint venture with Charter Hall Group. In August 2011, Charter Hall announced it had entered into contracts to sell 100% of its interests in its U.S. portfolio, including the joint venture properties. See “Subsequent Events.” A summary of our transactions and balances with the joint venture is as follows (in thousands):

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Management, investment advisory and
     development fees and leasing commissions
 
$
1,089

 
$
985

 
$
2,028

 
$
1,946


 
 
June 30, 2011
 
December 31, 2010
Accounts receivable
 
$
2,148

 
$
1,819


Litigation

See Part II, Item 1. “Legal Proceedings.”

Critical Accounting Policies

Please refer to our Annual Report on Form 10-K filed with the SEC on March 16, 2011 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 June 30, 2011.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income or loss, the components of net income or loss, and the components of other comprehensive income or loss either in a single continuous statement of comprehensive income or loss, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income or loss as part of the consolidated statement of deficit. ASU 2011-05 will be effective for fiscal years beginning after December 15, 2011. We do not expect the adoption of ASU 2011-05 to have a material effect on our results of operations or financial position.
 



55


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Subsequent Events

Glendale Center Mortgage Loan

On July 12, 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center requesting that it be transferred into special servicing (which has not yet occurred).

City Tower Disposition

On July 22, 2011, we disposed of City Tower located in Orange, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $140.0 million mortgage loan secured by the property as well as accrued contractual and default interest.

Exchanges of Series A Preferred Stock

On July 25, 2011, the Company entered into an exchange agreement providing for the exchange of 218,635 shares of its Series A preferred stock for 1,127,597 shares of its common stock. For purposes of this exchange, the exchange ratio is 5.157 shares of common stock for each share of Series A preferred stock, with the Series A preferred stock valued at $19.00 per share and the common stock valued at $3.684 per share, the trailing five-day average closing price. The parties to the exchange have transferred their respective shares and the exchange is complete.

On July 27, 2011, the Company entered into an exchange agreement providing for the exchange of 50,995 shares of its Series A preferred stock for 262,981 shares of its common stock. For purposes of this exchange, the exchange ratio was 5.157 shares of common stock for each share of Series A preferred stock, with the Series A preferred stock valued at $16.50 per share and the common stock valued at $3.20 per share, the closing price on July 27, 2011. The parties to the exchange have transferred their respective shares and the exchange is complete.

Plaza Las Fuentes Financing

On August 1, 2011, the Company completed a $33.8 million financing secured by the Plaza Las Fuentes office building located in Pasadena, California. Net proceeds totaled approximately $33 million, which will be used for general corporate purposes.

The loan bears interest at a rate equal to the greater of (1) LIBOR plus 3.50% or (2) 4.50%, and matures on August 9, 2016. The loan can be repaid at any time prior to maturity in whole or in part without payment of any prepayment penalty or premium. If the property’s debt service coverage ratio (as defined in the loan agreement) is less than a specified amount as of any applicable measurement date, the cash flows from the property will be swept into a cash collateral account controlled by the lender to fund, among other things, monthly debt service, taxes and insurance, property operating costs and expenses, capital expenditures and leasing costs. The loan agreement also permits the Company to obtain up to $11.3 million of mezzanine financing.

Joint Venture with Charter Hall Group

On August 3, 2011, Charter Hall announced it had entered into contracts to sell 100% of its interests in its U.S. portfolio, including the joint venture properties. The closing of this sale is subject to customary closing conditions, including obtaining lender and other third party consents.    


56


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 or 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 or 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).


57


MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

A reconciliation of the net income (loss) available to common stockholders to FFO is as follows (in thousands, except per share amounts):

 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30, 2011
 
June 30, 2010
 
June 30, 2011
 
June 30, 2010
Net income (loss) available to common stockholders
$
118,424

 
$
(53,521
)
 
$
78,876

 
$
(34,941
)
 
 
 
 
 
 
 
 
 
Add:
Depreciation and amortization of real estate assets
27,212

 
31,569

 
54,999

 
66,557

 
Depreciation and amortization of real estate assets –
     unconsolidated joint venture (1)
1,730

 
1,913

 
3,431

 
3,811

 
Net income (loss) attributable to common units of our
     Operating Partnership
15,483

 
(7,421
)
 
10,278

 
(4,837
)
 
Unallocated losses – unconsolidated
     joint venture (1)
(374
)
 
(1,252
)
 
(374
)
 
(2,214
)
Deduct:
Gains on sale of real estate
63,629

 

 
63,629

 
16,591

 
 
 
 
   
 
 
 
 
Funds from operations available to common stockholders
     and unit holders (FFO)
$
98,846

 
$
(28,712
)
 
$
83,581

 
$
11,785

Company share of FFO (2) (3)
$
87,417

 
$
(25,215
)
 
$
73,927

 
$
10,337

 
 
 
 
   
 
 
 
 
FFO per share – basic
$
1.78

 
$
(0.52
)
 
$
1.51

 
$
0.21

FFO per share – diluted
$
1.75

 
$
(0.52
)
 
$
1.47

 
$
0.21

Weighted average number of common shares outstanding – basic
49,040,268

 
48,692,588

 
49,028,693

 
48,613,815

Weighted average number of common and common equivalent shares
     outstanding – diluted
50,064,195

 
49,442,240

 
50,188,916

 
49,323,558

___________
(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 approximately 88.4% and 87.8% for the three months ended June 30, 2011 and 2010, respectively.
(3)
Based on a weighted average interest in our Operating Partnership of approximately 88.4% and 87.8% for the six months ended June 30, 2011 and 2010, respectively.


58


Item 3.    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 filed with the SEC on March 16, 2011 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2010.

Item 4.    Controls and Procedures.

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, David L. Weinstein, 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 June 30, 2011.

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 June 30, 2011 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.

59


PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

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 financial statements as a whole. As described in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of OperationsIndebtedness,” 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.

Item 1A.    Risk Factors.

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, potential asset dispositions and loan modification efforts, 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:

Our failure to obtain additional capital or extend or refinance debt maturities;

Our failure to reduce our significant level of indebtedness;

Difficulties resulting from any defaults by our special purpose property-owning subsidiaries under loans that are recourse or non-recourse to our Operating Partnership;

Difficulties in disposing of several non-core assets, as discussed throughout this report;

Decreased rental rates, increased lease concessions or failure to achieve occupancy targets;

60



Our dependence on significant tenants, many of which are in industries that have been impacted by the current credit crisis and global economic slowdown;

Defaults on or non-renewal of leases by tenants;

Further decreases in the market value of our properties;

Adverse economic or real estate developments in Southern California, particularly in the LACBD or Orange County region;

The continued disruption of credit markets or a global economic slowdown;

Increased interest rates and operating costs;

Difficulty in operating the properties owned through our joint venture;

Potential loss of key personnel (most importantly members of senior management);

Our failure to maintain our status as a REIT;

Environmental uncertainties and risks related to earthquakes and other natural disasters;

Future terrorist attacks in the U.S.; 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 filed with the SEC on March 16, 2011. 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 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.

Item 2.    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.


61


Item 3.    Defaults Upon Senior Securities.

Mortgages in Default

As of June 30, 2011, certain of our special purpose property-owning subsidiaries were 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
 
Impound
Amounts
 
Total
Stadium Towers Plaza
 
August 11, 2009
 
$
16,018

 
$
66

 
$
16,084

500 Orange Tower
 
January 6, 2010
 
14,511

 
1,750

 
16,261

City Tower (1)
 
September 11, 2010
 

 

 

Two California Plaza
 
March 7, 2011
 
9,596

 
4

 
9,600

801 North Brand
 
June 6, 2011
 
1,665

 
239

 
1,904

700 North Central
 
June 6, 2011
 
555

 
100

 
655

 
 
 
 
$
42,345

 
$
2,159

 
$
44,504

__________
(1)
We disposed of this property on July 22, 2011. All unpaid amounts were forgiven by the special servicer upon disposition.

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 special servicers have the contractual right to accelerate the maturity of the debt but have not done so. For properties that are disposed of, the actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition. For any properties that we are successful in modifying the mortgage loan, the settlement date and treatment of principal and interest (including default interest) will be as set forth in the modified loan agreement.

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. We have reached agreements with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit both Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. There also can be no assurance that we will achieve a favorable outcome with respect to the disposition of 700 North Central and 801 North Brand. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

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 July 31, 2011, we have missed 11 quarterly dividend payments. The amount of dividends in arrears totals $52.3 million, which reflects the cancellation of 269,630 shares of Series A preferred stock received by the Company prior to July 31, 2011 as a result of the exchange agreements containing waivers of accrued dividends described in Part I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations—Subsequent Events—Exchanges of Series A Preferred Stock.

62


Item 4.    (Removed and Reserved).

Item 5.    Other Information.

None.

Item 6.    Exhibits.

Exhibit No.
 
Exhibit Description
31.1*
 
Certification of Principal Executive Officer dated August 9, 2011 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
 
Certification of Principal Financial Officer dated August 9, 2011 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
 
Certification of Principal Executive Officer and Principal Financial Officer dated August 9, 2011 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
__________
*
Filed herewith.
**
Furnished herewith.

(1)    This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.

63


SIGNATURES

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.

Date:
As of August 9, 2011

 
MPG OFFICE TRUST, INC.
 
 
Registrant
 
 
 
 
 
 
By:
/s/ DAVID L. WEINSTEIN
 
 
 
David L. Weinstein
 
 
 
President and Chief Executive Officer
 
 
 
(Principal executive officer)
 
 
 
 
 
 
By:
/s/ SHANT KOUMRIQIAN
 
 
 
Shant Koumriqian
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer
 
 
 
(Principal financial officer)
 

64