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EX-32.1 - EXHIBIT 32.1 - MPG Office Trust, Inc.mpg2011331ex321.htm
EX-31.1 - EXHIBIT 31.1 - MPG Office Trust, Inc.mpg2011331ex311ceo.htm
EX-31.2 - EXHIBIT 31.2 - MPG Office Trust, Inc.mpg2011331ex312cfo.htm


 
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 March 31, 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 £ 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 May 6, 2011
Common Stock, $0.01 par value per share
 
49,044,351 shares
 


MPG OFFICE TRUST, INC.
 
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2011
 
TABLE OF CONTENTS
 
 
 
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements.
 
 
 
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
 
 
Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 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 
 
 


PART I—FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
MPG OFFICE TRUST, INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
March 31, 2011
 
December 31, 2010
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land
$
313,942
 
 
$
313,942
 
Acquired ground leases
55,801
 
 
55,801
 
Buildings and improvements
2,281,390
 
 
2,280,878
 
Land held for development
87,259
 
 
92,001
 
Tenant improvements
301,058
 
 
300,052
 
Furniture, fixtures and equipment
21,287
 
 
20,512
 
 
3,060,737
 
 
3,063,186
 
Less: accumulated depreciation
(690,953
)
 
(668,328
)
Investments in real estate, net
2,369,784
 
 
2,394,858
 
 
 
 
 
Cash and cash equivalents
55,495
 
 
46,864
 
Restricted cash
115,765
 
 
142,795
 
Rents and other receivables, net
4,563
 
 
5,809
 
Deferred rents
61,069
 
 
60,609
 
Due from affiliates
1,377
 
 
1,819
 
Deferred leasing costs and value of in-place leases, net
88,216
 
 
91,311
 
Deferred loan costs, net
11,392
 
 
13,972
 
Acquired above-market leases, net
4,029
 
 
4,498
 
Other assets
13,275
 
 
8,477
 
Total assets
$
2,724,965
 
 
$
2,771,012
 
 
 
 
 
LIABILITIES AND DEFICIT
 
 
   
Liabilities:
 
 
   
Mortgage and other loans
$
3,578,627
 
 
$
3,576,493
 
Accounts payable and other liabilities
187,085
 
 
194,550
 
Capital leases payable
1,333
 
 
1,465
 
Acquired below-market leases, net
40,111
 
 
44,026
 
Total liabilities
3,807,156
 
 
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;
     49,044,351 and 48,925,499 shares issued and outstanding at
     March 31, 2011 and December 31, 2010, respectively
490
 
 
489
 
Additional paid-in capital
704,515
 
 
702,556
 
Accumulated deficit and dividends
(1,629,743
)
 
(1,594,407
)
Accumulated other comprehensive loss
(27,879
)
 
(29,079
)
Total stockholders’ deficit
(952,517
)
 
(920,341
)
Noncontrolling Interests:
 
 
   
Common units of our Operating Partnership
(129,674
)
 
(125,181
)
Total deficit
(1,082,191
)
 
(1,045,522
)
Total liabilities and deficit
$
2,724,965
 
 
$
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
 
March 31, 2011
 
March 31, 2010
Revenue:
 
 
 
Rental
$
58,032
 
 
$
62,481
 
Tenant reimbursements
21,862
 
 
23,344
 
Hotel operations
4,988
 
 
5,237
 
Parking
9,636
 
 
10,886
 
Management, leasing and development services
999
 
 
961
 
Interest and other
337
 
 
225
 
Total revenue
95,854
 
 
103,134
 
 
 
 
 
Expenses:
 
 
 
Rental property operating and maintenance
22,109
 
 
22,330
 
Hotel operating and maintenance
3,573
 
 
3,747
 
Real estate taxes
8,146
 
 
8,039
 
Parking
2,768
 
 
2,852
 
General and administrative
6,691
 
 
7,607
 
Other expense
1,752
 
 
1,439
 
Depreciation and amortization
27,862
 
 
30,962
 
Interest
62,628
 
 
57,634
 
Total expenses
135,529
 
 
134,610
 
 
 
 
 
Loss from continuing operations before equity in
     net loss of unconsolidated joint venture and
     gain on sale of real estate
(39,675
)
 
(31,476
)
Equity in net loss of unconsolidated joint venture
(312
)
 
201
 
Gain on sale of real estate
 
 
16,591
 
Loss from continuing operations
(39,987
)
 
(14,684
)
 
 
 
 
Discontinued Operations:
 
 
 
Loss from discontinued operations before gain on settlement of debt
 
 
(8,507
)
Gain on settlement of debt
 
 
49,121
 
Income from discontinued operations
 
 
40,614
 
 
 
 
 
Net (loss) income
(39,987
)
 
25,930
 
Net loss (income) attributable to common units of our
     Operating Partnership
5,205
 
 
(2,584
)
Net (loss) income attributable to MPG Office Trust, Inc.
(34,782
)
 
23,346
 
Preferred stock dividends
(4,766
)
 
(4,766
)
Net (loss) income available to common stockholders
$
(39,548
)
 
$
18,580
 
 
 
 
 
Basic (loss) income per common share:
 
 
 
Loss from continuing operations
$
(0.81
)
 
$
(0.35
)
Income from discontinued operations
 
 
0.73
 
Net (loss) income available to common stockholders per share
$
(0.81
)
 
$
0.38
 
 
 
 
 
Weighted average number of common shares outstanding
49,016,989
 
 
48,534,283
 
 
 
 
 
Amounts attributable to MPG Office Trust, Inc.:
 
 
 
Loss from continuing operations
$
(34,782
)
 
$
(12,309
)
Income from discontinued operations
 
 
35,655
 
 
$
(34,782
)
 
$
23,346
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2


MPG OFFICE TRUST, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
For the Three Months Ended
 
March 31, 2011
 
March 31, 2010
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income:
$
(39,987
)
 
$
25,930
 
Adjustments to reconcile net (loss) income to net cash (used in) provided by
     operating activities (including discontinued operations):
 
 
   
Equity in net loss of unconsolidated joint venture
312
 
 
(201
)
Depreciation and amortization
27,862
 
 
35,064
 
Gain on sale of real estate
 
 
(16,591
)
Loss from early extinguishment of debt
 
 
379
 
Gain on settlement of debt
 
 
(49,121
)
Deferred rent expense
511
 
 
511
 
Provision for doubtful accounts
658
 
 
221
 
Revenue recognized related to below-market
     leases, net of acquired above-market leases
(3,446
)
 
(4,579
)
Deferred rental revenue
(460
)
 
(2,761
)
Compensation cost for share-based awards, net
1,998
 
 
945
 
Amortization of deferred loan costs
2,580
 
 
1,955
 
Unrealized (gain) loss due to hedge ineffectiveness
(308
)
 
80
 
Changes in assets and liabilities:
 
 
   
Rents and other receivables
588
 
 
(1,680
)
Due from affiliates
442
 
 
854
 
Deferred leasing costs
(2,095
)
 
(1,787
)
Other assets
(4,624
)
 
(5,464
)
Accounts payable and other liabilities
(3,219
)
 
16,681
 
Net cash (used in) provided by operating activities
(19,188
)
 
436
 
Cash flows from investing activities:
 
 
   
Proceeds from dispositions of real estate, net
4,734
 
 
106,885
 
Expenditures for improvements to real estate
(2,293
)
 
(6,398
)
Investment in unconsolidated joint venture
(620
)
 
 
Decrease in restricted cash
27,030
 
 
13,121
 
Net cash provided by investing activities
28,851
 
 
113,608
 
Cash flows from financing activities:
 
 
   
Proceeds from:
 
 
   
Construction loans
 
 
1,632
 
Principal payments on:
 
 
   
Mortgage loans
(900
)
 
(97,279
)
Construction loans
 
 
(17,633
)
Unsecured term loan
 
 
(171
)
Capital leases
(132
)
 
(340
)
Net cash used in financing activities
(1,032
)
 
(113,791
)
Net change in cash and cash equivalents
8,631
 
 
253
 
Cash and cash equivalents at beginning of period
46,864
 
 
90,982
 
Cash and cash equivalents at end of period
$
55,495
 
 
$
91,235
 

3


MPG OFFICE TRUST, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)
 
For the Three Months Ended
 
March 31, 2011
 
March 31, 2010
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
61,912
 
 
$
47,291
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Debt forgiven by lender
$
 
 
$
49,121
 
Increase in fair value of interest rate swaps and caps, net
4,700
 
 
392
 
Accrual for real estate improvements and purchases of
     furniture, fixtures, and equipment
621
 
 
2,024
 
 
 
 
 
 
 
 
 
 
 
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, 2600 Michelson, 550 South Hope, 500 Orange Tower and City Tower properties, whose mortgage loans were in default as of March 31, 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 March 31, 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 88.4% 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, land parcels, parking garages and a hotel.
 
As of March 31, 2011, our Operating Partnership indirectly owns whole or partial interests in 24 office properties, a 350-room hotel and off-site parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 88.4% 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 12.0 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office and hotel 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’ 11.6% share of our Operating Partnership.
 
Our property statistics as of March 31, 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
14
 
 
21
 
 
9,462,979
 
 
5,306,954
 
 
16,085
 
 
9,462,979
 
 
5,306,954
 
 
16,085
 
Properties in Default
5
 
 
7
 
 
1,882,792
 
 
1,626,436
 
 
5,425
 
 
1,882,792
 
 
1,626,436
 
 
5,425
 
Unconsolidated joint venture
5
 
 
16
 
 
3,479,891
 
 
1,865,448
 
 
5,561
 
 
695,978
 
 
373,090
 
 
1,113
 
 
24
 
 
44
 
 
14,825,662
 
 
8,798,838
 
 
27,071
 
 
12,041,749
 
 
7,306,480
 
 
22,623
 
Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Properties in Default
 
 
 
 
84.0
%
 
 
 
 
 
83.7
%
 
 
 
 
Properties in Default
 
 
 
 
67.5
%
 
 
 
 
 
67.5
%
 
 
 
 
Including Properties in Default
 
 
 
 
81.9
%
 
 
 
 
 
81.1
%
 
 
 
 
 

5

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of March 31, 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, 2600 Michelson and 500 Orange Tower (each of which is in receivership), Cerritos Corporate Center and the Westin® Pasadena Hotel.
 
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 March 31, 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 March 31, 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 March 31, 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. In 2010, we focused on improving our liquidity position through cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, together with reductions in leasing costs, discretionary capital expenditures, property operating expenses and general and administrative expenses, and we continue to do so in 2011. Given the uncertainty in the economy and financial markets, management believes that access to any source of cash will be challenging and is planning accordingly. We are also working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, recourse obligations and leasing costs.
 
The following are our expected actual and potential sources of liquidity, which we currently believe will be sufficient to meet our near-term liquidity needs:
 
Unrestricted and restricted cash;
 
Cash generated from operations;
 
Asset dispositions;
 
Cash generated from the contribution of existing assets to joint ventures;
 
Proceeds from additional secured or unsecured debt financings; and/or
 
Proceeds from public or private issuance of debt or equity securities.
 
These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate adequate cash from these sources, most importantly asset dispositions and loan refinancings, we will have liquidity-related problems and will be exposed to significant risks. While we believe that we will have adequate cash for our near-term uses, significant issues with access to the liquidity sources identified above could lead to our eventual insolvency. We face additional challenges in connection with our long-term liquidity position due to debt maturities, leasing costs and other factors.
 
We continue to dispose of certain assets, which we expect will help us (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 that we believe have equity value above the debt. During 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.
 
During the three months ended March 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 were used for general corporate purposes.
 

7

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Certain of our special purpose property-owning subsidiaries were in default as of March 31, 2011 under commercial mortgage-backed securities (“CMBS”) mortgages totaling approximately $1.1 billion secured by six separate office properties totaling approximately 3.2 million square feet (Stadium Towers Plaza, 2600 Michelson, 550 South Hope, 500 Orange Tower, City Tower and Two California Plaza). 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 March 31, 2011.
 
The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. There are several potential outcomes on each of these properties, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loan. We are in various stages of negotiations with the special servicers on each of these assets, with the goal of reaching a cooperative resolution for each asset quickly. We have reached agreements that release us from nearly all potential claims (including most recourse triggers) and establish a definitive outside date by which we will exit Stadium Towers Plaza, 2600 Michelson 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 City Tower. 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 the property.
 
Following notices from us, the mortgage loans encumbering 700 North Central and 801 North Brand were transferred to special servicing in March 2011. The mortgage loans secured by these assets are not in default.
 
Following notices from us, the mortgage loans encumbering U.S. Bank Tower and Wells Fargo Tower were transferred to special servicing in March 2011. This step permits us to engage in discussions with the respective special servicers. We also delivered a notice of imminent default in March 2011 to the master servicer for the mortgage loan on Gas Company Tower requesting it be transferred to special servicing (which has not yet occurred). The mortgage loans secured by these assets are not in default.
 
During the remainder of 2011, it is likely that additional special purpose property-owning subsidiaries will default and/or send notices of imminent default on non-recourse loans where the relevant project is or will be suffering from cash shortfalls and be unable or unwilling to fund operating expenses and/or debt service obligations.
 
Following a wide marketing process, we are working to finalize the sale of the Westin® Pasadena Hotel to a specific buyer. A purchase and sale agreement and due diligence have been completed, and we are awaiting approval of the buyer from the City of Pasadena, after which management believes that there will be no significant conditions to closing.  At closing, the Company intends to repay the $79.2 million loan that presently encumbers both the hotel and the Plaza Las Fuentes office building and retail space.  We are working with a lender to potentially obtain a new mortgage secured by the Plaza Las Fuentes office building and retail space once the hotel sale and payoff of the existing loan are completed.  Proceeds from the potential new financing would be used for general corporate purposes.  While management believes that both the Westin® Pasadena Hotel sale and the new financing on Plaza Las Fuentes will occur, we cannot assure you that (1) we will obtain the City of Pasadena’s approval of the buyer, (2) we will successfully complete the disposition of the Westin® Pasadena Hotel or (3) we will be able to obtain a new mortgage on the Plaza Las Fuentes office building and retail space.  If we are unable to accomplish all of the foregoing, our liquidity situation would be significantly impacted.
 
 

8

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Our ability to dispose of any other assets we choose to market in the near term is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of current economic conditions, we cannot predict:
 
Whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
 
Whether potential buyers will be able to secure financing; and
The length of time needed to find a buyer and to close the sale of a property.
 
With respect to recent dispositions, the marketing process has often been lengthier than anticipated and projecting sale prices has proved to be difficult. This trend may continue or worsen. We also have a limited number of assets remaining that we could potentially sell in the near term to generate net proceeds.
 
In addition, certain of our material debt obligations require us to comply with financial and other covenants, including, but not limited to, net worth and liquidity covenants, due on sale clauses, change in control restrictions, listing requirements and other financial requirements. Some or all of these covenants could prevent or delay our ability to dispose of identified properties.
 
As of March 31, 2011, we had $3.6 billion of total consolidated debt, including $1.1 billion of debt associated with mortgages in default. Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. During 2010, we made debt service payments totaling $187.3 million (including payments funded from reserves), and the respective special servicers 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 three months ended March 31, 2011, we made debt service payments totaling $40.2 million, and the respective special servicers applied $22.5 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, 500 Orange Tower and City Tower. We made no debt service payments with unrestricted cash during the three months ended March 31, 2011 related to mortgages in default subsequent to the default date.
 
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.
 
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 operational and financial covenants significantly more restrictive than our current debt covenants.
 

9

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4Land Held for Development
 
A summary of the costs capitalized in connection with our real estate projects for the three months ended March 31, 2010 is as follows (in millions):
 
Interest expense
 
$
1.1
 
Indirect project costs
 
0.2
 
 
 
$
1.3
 
There were no costs capitalized in connection with our real estate projects for the three months ended March 31, 2011.
 
Note 5Rents and Other Receivables, Net
 
Rents and other receivables are presented net of allowances for doubtful accounts of $3.1 million and $2.9 million as of March 31, 2011 and December 31, 2010, respectively. For the three months March 31, 2011 and 2010, we recorded a provision for doubtful accounts of $0.7 million and $0.2 million, respectively.
 
Note 6Intangible Assets and Liabilities
 
Our identifiable intangible assets and liabilities are summarized as follows (in thousands):
 
 
March 31, 2011
 
December 31, 2010
Acquired above-market leases
 
 
 
Gross amount
$
38,317
 
 
$
38,317
 
Accumulated amortization
(34,288
)
 
(33,819
)
 
$
4,029
 
 
$
4,498
 
 
 
 
 
Acquired in-place leases
 
 
 
Gross amount
$
127,442
 
 
$
127,442
 
Accumulated amortization
(107,302
)
 
(105,534
)
 
$
20,140
 
 
$
21,908
 
 
 
 
 
Acquired below-market leases
 
 
 
Gross amount
$
(164,940
)
 
$
(164,940
)
Accumulated amortization
124,829
 
 
120,914
 
 
$
(40,111
)
 
$
(44,026
)
 
Amortization of acquired below-market leases, net of acquired above-market leases, increased our rental income in continuing operations by $3.4 million and $4.3 million for the three months ended March 31, 2011 and 2010, respectively. Rental income in discontinued operations benefited from amortization of acquired below-market leases, net of acquired above-market leases, by $0.3 million during the three months ended March 31, 2010.
 
Amortization of acquired in-place leases, included as part of depreciation and amortization, in continuing operations for the three months ended March 31, 2011 and 2010 was $1.8 million and $2.8 million, respectively. Amortization related to discontinued operations for the three months ended March 31, 2010 was $0.2 million.
 

10

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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
$
1,394
 
 
$
4,699
 
 
$
(10,708
)
2012
1,719
 
 
4,918
 
 
(12,256
)
2013
806
 
 
3,667
 
 
(7,385
)
2014
41
 
 
2,644
 
 
(4,315
)
2015
35
 
 
1,737
 
 
(2,326
)
Thereafter
34
 
 
2,475
 
 
(3,121
)
 
$
4,029
 
 
$
20,140
 
 
$
(40,111
)
 
See Note 13 “Properties in Default—Intangible Assets and Liabilities” for an estimate of the amortization of intangible assets and liabilities during the next five years related to Properties in Default.
 
Note 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. Charter Hall Group has stated that they wish to pursue an orderly exit from the joint venture. Our joint venture documents contain procedures whereby either party can trigger a formal dissolution process. This process involves multiple steps and provides the non-triggering party with various rights.
 
A summary of our transactions and balances with the joint venture is as follows (in thousands):
 
 
 
For the Three Months Ended
 
 
March 31, 2011
 
March 31, 2010
Management, investment advisory and
     development fees and leasing commissions
 
$
939
 
 
$
961
 
 
 
 
March 31, 2011
 
December 31, 2010
Accounts receivable
 
$
1,377
 
 
$
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 March 31, 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 three months ended March 31, 2010, we did not record losses totaling $1.0 million as part of our equity in net loss of unconsolidated joint venture in our consolidated statement of operations because our basis in the joint venture had been reduced to zero. As of March 31, 2010, the

11

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

cumulative unallocated losses totaled $5.0 million. As of March 31, 2011, there were no unrecognized losses from the joint venture. 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.
 
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
 
March 31, 2011
 
December 31, 2010
Floating-Rate Debt
 
 
 
 
 
 
 
Unsecured term loan (1)
5/1/2011
 
LIBOR + 3.75%
 
 
$
15,000
 
 
$
15,000
 
 
 
 
 
 
 
 
   
Variable-Rate Mortgage Loans:
 
 
 
 
 
 
   
Plaza Las Fuentes (2)
9/29/2011
 
LIBOR + 3.75%
 
 
79,200
 
 
80,100
 
Brea Corporate Place (3)
5/1/2012
 
LIBOR + 1.95%
 
 
70,468
 
 
70,468
 
Brea Financial Commons (3)
5/1/2012
 
LIBOR + 1.95%
 
 
38,532
 
 
38,532
 
Total variable-rate mortgage loans
 
 
 
 
188,200
 
 
189,100
 
 
 
 
 
 
 
 
   
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
   
KPMG Tower (4)
10/9/2012
 
7.16
%
 
400,000
 
 
400,000
 
Total floating-rate debt
 
 
 
 
603,200
 
 
604,100
 
 
 
 
 
 
 
 
   
Fixed-Rate Debt
 
 
 
 
 
 
   
Wells Fargo Tower
4/6/2017
 
5.68
%
 
550,000
 
 
550,000
 
Two California Plaza (5)
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
 
 
75,540
 
The City–3800 Chapman
5/6/2017
 
5.93
%
 
44,370
 
 
44,370
 
701 North Brand (6)
10/1/2016
 
5.87
%
 
33,750
 
 
33,750
 
700 North Central
4/6/2015
 
5.73
%
 
27,460
 
 
27,460
 
Total fixed-rate debt
 
 
 
 
1,847,120
 
 
2,317,120
 
Total debt, excluding mortgages in default
 
 
 
 
2,450,320
 
 
2,921,220
 
 
 
 
 
 
 
 
   
Mortgages in Default
 
 
 
 
 
 
   
Two California Plaza (5)
5/6/2017
 
10.50
%
 
470,000
 
 
 
550 South Hope (7) (8)
5/6/2017
 
10.67
%
 
200,000
 
 
200,000
 
City Tower (7)
5/10/2017
 
10.85
%
 
140,000
 
 
140,000
 
500 Orange Tower (7)
5/6/2017
 
10.88
%
 
110,000
 
 
110,000
 
2600 Michelson (7)
5/10/2017
 
10.69
%
 
110,000
 
 
110,000
 
Stadium Towers Plaza (7)
5/11/2017
 
10.78
%
 
100,000
 
 
100,000
 
Total mortgages in default
 
 
 
 
1,130,000
 
 
660,000
 
 
 
 
 
 
 
 
   
Total consolidated debt
 
 
 
 
3,580,320
 
 
3,581,220
 
Debt discount
 
 
 
 
(1,693
)
 
(4,727
)
Total consolidated debt, net
 
 
 
 
$
3,578,627
 
 
$
3,576,493
 
__________
(1)
This loan was repaid in full upon maturity. See Note 19 “Subsequent Events.”
(2)
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75% during the loan term, excluding extension periods. Two one-year extensions are available at our option, subject to certain conditions, some of which we may be unable to fulfill.
(3)
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest

12

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

rate to 6.50% during the loan term. This loan was extended until May 1, 2012. See Note 19 “Subsequent Events.”
(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)
On March 7, 2011, our special purpose property-owning subsidiary that owns Two California Plaza defaulted 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)
We disposed of 701 North Brand on April 1, 2011. See Note 19 “Subsequent Events.”
(7)
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.
(8)
We disposed of 550 South Hope on April 26, 2011. See Note 19 “Subsequent Events.”
 
As of March 31, 2011 and December 31, 2010, one-month LIBOR was 0.24% and 0.26%, respectively. The weighted average interest rate of our consolidated debt was 7.14% (or 5.52% excluding mortgages in default) as of March 31, 2011 and 6.32% (or 5.52% excluding mortgages in default) as of December 31, 2010.
 
Excluding mortgages in default, as of March 31, 2011 $0.6 billion of our consolidated debt may be prepaid without penalty, $1.3 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.
 
Mortgages in Default
 
As of March 31, 2011, we are in default on $1.1 billion of mortgage loans that have contractual maturity dates in 2017 per the terms of 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. 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 as part of continuing operations in our consolidated statements of operations related to mortgages in default is as follows (in thousands):
 
 
 
 
 
For the Three Months Ended
 
 
 
 
March 31, 2011
 
March 31, 2010
Property
 
Initial Default Date
 
Contractual Interest
 
Default Interest
 
Contractual Interest
 
Default Interest
550 South Hope (1)
 
August 6, 2009
 
$
2,835
 
 
$
2,500
 
 
$
2,835
 
 
$
2,500
 
2600 Michelson
 
August 11, 2009
 
1,566
 
 
1,375
 
 
1,566
 
 
1,375
 
Stadium Towers Plaza
 
August 11, 2009
 
1,446
 
 
1,250
 
 
1,446
 
 
1,250
 
500 Orange Tower
 
January 6, 2010
 
1,618
 
 
1,375
 
 
1,618
 
 
1,298
 
City Tower
 
September 11, 2010
 
2,047
 
 
1,750
 
 
 
 
 
Two California Plaza
 
March 7, 2011
 
1,795
 
 
1,828
 
 
 
 
 
 
 
 
 
$
11,307
 
 
$
10,078
 
 
$
7,465
 
 
$
6,423
 
_________
(1)
We disposed of 550 South Hope on April 26, 2011. See Note 19 “Subsequent Events.”
 

13

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. There are several potential outcomes on each of these properties, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loan. We are in various stages of negotiations with the special servicers on each of these assets, with the goal of reaching a cooperative resolution for each asset quickly. We have reached agreements that release us from nearly all potential claims (including most recourse triggers) and establish a definitive outside date by which we will exit Stadium Towers Plaza, 2600 Michelson 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 City Tower. 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 the property.
 
Notices of Imminent Default
 
Following notices from us, the mortgage loans encumbering 700 North Central and 801 North Brand were transferred to special servicing in March 2011. The mortgage loans secured by these assets are not in default.
 
Following notices from us, the mortgage loans encumbering U.S. Bank Tower and Wells Fargo Tower were transferred to special servicing in March 2011. This step permits us to engage in discussions with the respective special servicers. We also delivered a notice of imminent default in March 2011 to the master servicer for the mortgage loan on Gas Company Tower requesting it be transferred to special servicing (which has not yet occurred). The mortgage loans secured by these assets are not in default.
 
Debt Covenants
 
The terms of our Plaza Las Fuentes mortgage require our Operating Partnership to comply with financial ratios relating to minimum amounts of tangible net worth, interest coverage, fixed charge coverage and liquidity. We were in compliance with such covenants as of March 31, 2011.
 
Operating Partnership Contingent Obligations
 
In connection with the issuance of otherwise non-recourse loans obtained by certain special purpose property-owning subsidiaries of our Operating Partnership, our Operating Partnership provided various forms of partial guaranties to the lenders originating those loans. These guaranties are contingent obligations that could give rise to defined amounts of recourse against our Operating Partnership, should the special purpose property-owning subsidiaries be unable to satisfy certain obligations under otherwise non-recourse loans. These obligations are partial guaranties of certain otherwise non-recourse debt of special purpose property-owning subsidiaries of our Operating Partnership, for which the interest expense and debt is included in our consolidated financial statements.
 
In addition to the guaranties described above, all of the Company’s $3.6 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;
 

14

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 March 31, 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 $3.6 billion as of March 31, 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 would not be sufficient to cover the maximum potential amount due if the “non-recourse carve out” guarantee was triggered.
 
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 March 31, 2011 and December 31, 2010, our limited partners’ ownership interest in MPG Office, L.P. was 11.6%. 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 shelf registration statement to register the resale of shares of our common stock we issue in exchange for noncontrolling common units of our Operating Partnership.

15

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
As of March 31, 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 March 31, 2011 and December 31, 2010, the aggregate redemption value of outstanding noncontrolling common units of our Operating Partnership was $23.9 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 equity/(deficit) to account for any change in ownership percentage during the period. During the three months ended March 31, 2011 and 2010, our limited partners’ weighted average share of our net (loss) income was 11.6% and 12.2%, respectively.
 
Note 10Deficit and Comprehensive 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 loss
(34,782
)
 
(5,205
)
 
(39,987
)
Adjustment for preferred dividends not declared
(554
)
 
554
 
 
 
Compensation cost for share-based awards, net
1,960
 
 
 
 
1,960
 
Other comprehensive income
1,200
 
 
158
 
 
1,358
 
Balance, March 31, 2011
$
(952,517
)
 
$
(129,674
)
 
$
(1,082,191
)
 
 
 
 
 
 
Balance, December 31, 2009
$
(754,020
)
 
$
(102,957
)
 
$
(856,977
)
Net income
23,346
 
 
2,584
 
 
25,930
 
Adjustment for preferred dividends not declared
(582
)
 
582
 
 
 
Compensation cost for share-based awards, net
982
 
 
 
 
982
 
Other comprehensive loss
(438
)
 
(60
)
 
(498
)
Balance, March 31, 2010
$
(730,712
)
 
$
(99,851
)
 
$
(830,563
)
 

16

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Comprehensive (Loss) Income
 
The changes in the components of other comprehensive (loss) income are as follows (in thousands):
 
 
For the Three Months Ended
 
March 31, 2011
 
March 31, 2010
Net (loss) income
$
(39,987
)
 
$
25,930
 
Interest rate swaps assigned to lenders:
 
 
   
Reclassification adjustment for realized gains included in net (loss) income
(3,034
)
 
(1,048
)
 
 
 
 
Interest rate swaps:
 
 
   
Unrealized holding gains
4,700
 
 
392
 
Reclassification adjustment for unrealized gain included in net (loss) income
(308
)
 
 
 
4,392
 
 
392
 
 
 
 
   
Interest rate caps:
 
 
   
Reclassification adjustment for realized loss included in net (loss) income
 
 
158
 
 
 
 
   
Comprehensive (loss) income
$
(38,629
)
 
$
25,432
 
 
 
 
   
Comprehensive (loss) income attributable to:
 
 
   
MPG Office Trust, Inc.
$
(34,136
)
 
$
22,326
 
Common units of our Operating Partnership
(4,493
)
 
3,106
 
 
$
(38,629
)
 
$
25,432
 
The components of accumulated other comprehensive loss are as follows (in thousands):
 
 
March 31, 2011
 
December 31, 2010
Deferred gain on assignment of interest rate swap agreements, net
$
1,693
 
 
$
2,948
 
Interest rate swap
(27,361
)
 
(27,800
)
 
$
(25,668
)
 
$
(24,852
)
Accumulated other comprehensive loss attributable to:
 
 
   
MPG Office Trust, Inc.
$
(27,879
)
 
$
(29,079
)
Common units of our Operating Partnership
4,385
 
 
4,227
 
 
$
(25,668
)
 
$
(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 $2.0 million and $0.9 million for the three months ended March 31, 2011 and 2010, respectively.
 
As of March 31, 2011, the total unrecognized compensation cost related to unvested share-based payments totaled $4.0 million and is expected to be recognized in the consolidated statement of operations over a weighted average period of approximately 2.1 years.

17

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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 (loss) income per share is as follows (in thousands, except share and per share amounts):
 
 
 
For the Three Months Ended
 
 
March 31, 2011
 
March 31, 2010
Numerator:
 
 
 
   
Net (loss) income attributable to MPG Office Trust, Inc.
 
$
(34,782
)
 
$
23,346
 
Preferred stock dividends
 
(4,766
)
 
(4,766
)
Net (loss) income available to common stockholders
 
$
(39,548
)
 
$
18,580
 
 
 
   
 
   
Denominator:
 
   
 
   
Weighted average number of common shares outstanding
 
49,016,989
 
 
48,534,283
 
Net (loss) income available to common stockholders per share – basic
 
$
(0.81
)
 
$
0.38
 
 
For the three months ended March 31, 2011, approximately 1,324,000 nonqualified stock options, 606,000 shares of nonvested restricted common stock and 454,000 restricted stock units were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our net loss position. For the three months ended March 31, 2010, approximately 1,174,000 restricted stock units, 879,000 nonqualified stock options and 73,000 shares of nonvested restricted common stock were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our loss from continuing operations.
 
Note 13Properties in Default
 
Overview
 
For purposes of this footnote, Stadium Towers Plaza, 2600 Michelson, 550 South Hope, 500 Orange Tower and City Tower are reported as Properties in Default because their respective mortgage loans were in default as of March 31, 2011 and our ultimate goal is to exit the assets. Although the mortgage loan on Two California Plaza was also in default as of March 31, 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.
 
 

18

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
On January 31, 2011, 500 Orange Tower was placed in receivership pursuant to our written agreement with the special servicer. The receiver will manage the operations of the property, and we will cooperate in any sale of the property. If the property is not sold within the period specified in the agreement, the special servicer is obligated to acquire the property by either foreclosure or a deed-in-lieu of foreclosure and deliver a general release to us. We have no liability in connection with the disposition of the property 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.
As of March 31, 2011, Stadium Towers Plaza and 2600 Michelson were also in receivership pursuant to written agreements with the respective special servicers entered into during 2010. The terms of such agreements are substantially the same as the agreement described above with respect to 500 Orange Tower.
 
A summary of the assets and obligations associated with Properties in Default is as follows (in thousands):
 
 
March 31, 2011
 
December 31, 2010
Investments in real estate, net
$
418,268
 
 
$
420,725
 
Restricted cash
10,167
 
 
30,023
 
Deferred leasing costs and value of in-place leases, net
8,356
 
 
8,862
 
Other
9,639
 
 
8,248
 
Assets associated with Properties in Default
$
446,430
 
 
$
467,858
 
 
 
 
   
Mortgage loans
$
660,000
 
 
$
660,000
 
Accounts payable and other liabilities
72,755
 
 
77,744
 
Acquired below-market leases, net
9,205
 
 
9,996
 
Obligations associated with Properties in Default
$
741,960
 
 
$
747,740
 
 
Intangible Assets and Liabilities
 
As of March 31, 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 $1.9 million, $1.9 million, $1.5 million, $1.2 million, $1.0 million and $1.7 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 portfolio is evaluated for impairment on a property-by-property basis. Indicators of potential impairment include the following:
 
Change in strategy resulting in an increased or decreased holding period;
 
Low occupancy levels;
 
Deterioration of the rental market as evidenced by rent decreases over numerous quarters;

19

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Properties adjacent to or located in the same submarket as those with recent impairment issues;
 
Significant decrease in market price;
 
Tenant financial problems; and/or
 
Experience of our competitors in the same submarket.
 
During the three months ended March 31, 2011, we performed an impairment analysis on our properties that showed indications of potential impairment based on the indicators described above. No real estate assets in our portfolio were determined to be impaired as of March 31, 2011 as a result of our analysis.
 
The assessment as to whether our investments in real estate are impaired is highly subjective. The calculations involve management’s best estimate of the holding period, market comparables, future occupancy levels, rental rates, capitalization rates, lease-up periods and capital requirements for each property. A change in any one or more of these factors could materially impact whether a property is impaired as of any given valuation date.
 
One of the more significant assumptions is probability weighting whereby management may contemplate more than one holding period in its test for impairment. These scenarios can include long-, intermediate- and short-term holding periods which are probability weighted based on management’s best estimate of the likelihood of such a holding period as of the valuation date. A shift in the probability weighting towards a shorter hold scenario can increase the likelihood of impairment. For example, management may weight the holding period for a specific asset based on a 3-, 5- and 10-year hold with probability weighting of 50%, 20% and 30%, respectively. A change in those holding periods and/or a change in the probability weighting for the specific assets could result in a future impairment. As an example of the sensitivity of these estimates, we hold certain assets that if the holding period were changed by as little as a few years, those assets would have been impaired at March 31, 2011. Many factors may influence management’s estimate of holding periods, including market conditions, accessibility of capital and credit markets and recent sales activity of properties in the same submarket, our liquidity and net proceeds generated or expected to be generated by asset dispositions or lack thereof, among others. These conditions may change in a relatively short period of time, especially in light of our limited liquidity and the current economic environment.
 
Based on continuing input from our board of directors and as our business continues to evolve and we work through various alternatives with respect to certain assets, holding periods may be modified and result in additional impairment charges. Continued declines in the market value of commercial real estate also increase the risk of future impairment. As a result, key assumptions used in testing the recoverability of our investments in real estate, particularly with respect to holding periods, can change period-over-period.
 
Note 15Disposition and Discontinued Operations
 
Disposition
 
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 were used for general corporate purposes. No gain or impairment was recorded during the three months ended March 31, 2011 upon disposition of this property.
 

20

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Discontinued Operations
 
The results of discontinued operations for the three months ended March 31, 2010 are as follows (in thousands):
 
Revenue:
 
 
Rental
 
$
10,166
 
Tenant reimbursements
 
1,996
 
Parking
 
1,063
 
Other
 
84
 
Total revenue
 
13,309
 
 
 
 
Expenses:
 
   
Rental property operating and maintenance
 
3,155
 
Real estate taxes
 
1,456
 
Parking
 
348
 
Depreciation and amortization
 
4,102
 
Interest
 
12,376
 
Loss from early extinguishment of debt
 
379
 
Total expenses
 
21,816
 
 
 
   
Loss from discontinued operations before gain on settlement of debt
 
(8,507
)
Gain on settlement of debt
 
49,121
 
Income from discontinued operations
 
$
40,614
 
 
The results of operations for 2385 Northside Drive, Griffin Towers, 17885 Von Karman, Mission City Corporate Center, Park Place II, 207 Goode and Pacific Arts Plaza are reflected in the consolidated statement of operations as discontinued operations for the three months ended March 31, 2010. There were no discontinued operations for the three months ended March 31, 2011.
 
Interest expense included in discontinued operations relates to interest on mortgage loans secured by the properties disposed of. No interest expense associated with our corporate-level debt has been allocated to properties subsequent to their classification as discontinued operations.
 
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.
 
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.

21

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
We have elected to treat certain of our subsidiaries as a taxable REIT subsidiary (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes. During the three months ended March 31, 2011 and 2010, we recorded tax provisions of $0.3 million and $0.2 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 addition, 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:
 
 
 
 
 
 
 
 
March 31, 2011
 
$
(29,081
)
 
$
 
 
$
(29,081
)
 
$
 
December 31, 2010
 
(33,781
)
 
 
 
(33,781
)
 
 
 
The value of our interest rate caps is immaterial as of March 31, 2011 and December 31, 2010.
 
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

22

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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
 
March 31, 2011
 
December 31, 2010
Derivatives designated as cash flow
     hedging instruments:
   
 
   
 
 
Interest rate swap
Accounts payable
  and other liabilities
 
$
(29,081
)
 
$
(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
 
 
 
March 31, 2011
 
March 31, 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 (Loss)
Reclassified from
AOCL to Statement
of Operations
 
Location of (Loss)
Recognized in
Statement of
Operations
Derivatives designated as cash flow
     hedging instruments:
 
 
   
 
 
 
   
 
 
Interest rate swap
$
4,700
 
 
$
308
 
 
$
392
 
 
$
 
 
Interest expense
 
Interest Rate Swap—
 
As March 31, 2011 and December 31, 2010, we held an interest rate swap with a notional amount of $425.0 million. As of March 31, 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 $0.3 million during the three months ended March 31, 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 March 31, 2011 and December 31, 2010, we had transferred $25.6 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 March 31, 2011 totals $30.7 million, less the $25.6 million in cash held by our counterparty.
 
During the remainder of 2011, we expect that our return of swap collateral will be in the range of $13 million to $15 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%.
 

23

 
MPG OFFICE TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Interest Rate Caps—
 
As of March 31, 2011 and December 31, 2010, we held interest rate caps with notional amounts totaling $189.8 million. The value of our interest rate caps is immaterial as of March 31, 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 and other loans (excluding mortgages in default) is $1,968.2 million (compared to a carrying amount of $2,450.3 million) as of March 31, 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 $1.1 billion as of March 31, 2011, and they bear contractual interest at rates ranging from 10.50% to 10.88%. As of March 31, 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.
 
Note 19Subsequent Events
 
701 North Brand Disposition
 
On April 1, 2011, we completed the disposition 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 and received cash consideration.
 
550 South Hope Disposition
 
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. 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 contractual and default interest.
 
Brea Corporate Place and Brea Financial Commons Mortgage Loan
 
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.
 
Unsecured Term Loan
 
On May 1, 2011, we repaid our $15.0 million unsecured term loan upon maturity using cash on hand.    

24


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 March 31, 2011, our Operating Partnership indirectly owns whole or partial interests in 24 office properties, a 350-room hotel and off-site parking garages and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 88.4% 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 12.0 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office and hotel 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’ 11.6% share of our Operating Partnership.
 
Our property statistics as of March 31, 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
14
 
 
21
 
 
9,462,979
 
 
5,306,954
 
 
16,085
 
 
9,462,979
 
 
5,306,954
 
 
16,085
 
Properties in Default
5
 
 
7
 
 
1,882,792
 
 
1,626,436
 
 
5,425
 
 
1,882,792
 
 
1,626,436
 
 
5,425
 
Unconsolidated joint venture
5
 
 
16
 
 
3,479,891
 
 
1,865,448
 
 
5,561
 
 
695,978
 
 
373,090
 
 
1,113
 
 
24
 
 
44
 
 
14,825,662
 
 
8,798,838
 
 
27,071
 
 
12,041,749
 
 
7,306,480
 
 
22,623
 
Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Properties in Default
 
 
 
 
84.0
%
 
 
 
 
 
83.7
%
 
 
 
 
Properties in Default
 
 
 
 
67.5
%
 
 
 
 
 
67.5
%
 
 
 
 
Including Properties in Default
 
 
 
 
81.9
%
 
 
 
 
 
81.1
%
 
 
 
 
 
As of March 31, 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, 2600 Michelson and 500 Orange Tower (each of which is in receivership), Cerritos Corporate Center and the Westin® Pasadena Hotel.
 
We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our hotel property and on- and off-site parking garages. We also receive income from providing management, leasing and real estate development services with respect to our joint venture with Charter Hall Group. Charter Hall Group has stated that they wish to pursue an orderly exit from the joint

25

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

venture. To the extent the joint venture is modified or dissolved, these fees will likely be significantly reduced or eliminated.
 
Liquidity and Capital Resources
 
General
 
Our business requires continued access to adequate cash to fund our liquidity needs. In 2010, we focused on improving our liquidity position through cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, together with reductions in leasing costs, discretionary capital expenditures, property operating expenses and general and administrative expenses, and we continue to do so in 2011. Given the uncertainty in the economy and financial markets, management believes that access to any source of cash will be challenging and is planning accordingly. We are also working to proactively address challenges to our longer-term liquidity position, particularly debt maturities, recourse obligations and leasing costs.
 
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 obligations;
 
Proceeds from additional secured or unsecured debt financings; and/or
 
Development costs; and/or
 
Proceeds from public or private issuance of debt or equity securities.
 
Distributions to common and preferred stockholders and unit holders.
 
Actual and Potential Sources of Liquidity
 
Described below are our expected actual and potential sources of liquidity, which we currently believe will be sufficient to meet our near-term liquidity needs. These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate adequate cash from these sources, most importantly asset dispositions and loan refinancings, we will have liquidity-related problems and will be exposed to significant risks. While we believe that we will have adequate cash for our near-term uses, significant issues with access to the liquidity sources identified below could lead to our eventual insolvency. We face additional challenges in connection with our long-term liquidity position due to debt maturities, leasing costs and other factors. 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.
 

26

 
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 March 31, 2011 is as follows (in millions):
 
Restricted cash:
   
Leasing and capital expenditure reserves
$
23.9
 
Tax, insurance and other working capital reserves
17.3
 
Prepaid rent
26.6
 
Collateral accounts
28.0
 
Total restricted cash, excluding mortgages in default
95.8
 
Unrestricted cash and cash equivalents
55.5
 
Total restricted cash and unrestricted cash and cash equivalents,
     excluding mortgages in default
151.3
 
Restricted cash of mortgages in default
20.0
 
 
$
171.3
 
 
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 $28.0 million held in cash collateral accounts by our counterparties as of March 31, 2011, we expect that our return of swap collateral will be in the range of $13 million to $15 million during the remainder of 2011.
 
The following is a summary of our available leasing reserves (excluding mortgages in default) as of March 31, 2011 (in millions):
 
 
Restricted
Cash Accounts
LACBD
$
14.4
 
Orange County
6.0
 
Tri-Cities
2.2
 
 
$
22.6
 
 
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.”
 
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 flat or lower than 2010 levels for

27

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

the following reasons (among others):
 
Leasing activity in general continues to be soft in all of our submarkets.
 
Our 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 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. In 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 March 31, 2011, our 20 largest tenants represented 50.4% 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
We continue to dispose of certain assets, which we expect will help us (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 that we believe have equity value above the debt. 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

28

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

$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.
 
During the three months ended March 31, 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 were used for general corporate purposes.
 
Certain of our special purpose property-owning subsidiaries were in default as of March 31, 2011 under CMBS mortgages totaling approximately $1.1 billion secured by six separate office properties totaling approximately 3.2 million square feet (Stadium Towers Plaza, 2600 Michelson, 550 South Hope, 500 Orange Tower, City Tower and Two California Plaza). 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 March 31, 2011.
 
The continuing default by our special purpose property-owning subsidiaries under those non-recourse loans gives the special servicers the right to accelerate the payment on the loans and the right to foreclose on the property underlying such loan. There are several potential outcomes on each of these properties, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loan. We are in various stages of negotiations with the special servicers on each of these assets, with the goal of reaching a cooperative resolution for each asset quickly. We have reached agreements that release us from nearly all potential claims (including most recourse triggers) and establish a definitive outside date by which we will exit Stadium Towers Plaza, 2600 Michelson 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 City Tower. 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 the property.
 
Following notices from us, the mortgage loans encumbering 700 North Central and 801 North Brand were transferred to special servicing in March 2011. The mortgage loans secured by these assets are not in default.
 
Following notices from us, the mortgage loans encumbering U.S. Bank Tower and Wells Fargo Tower were transferred to special servicing in March 2011. This step permits us to engage in discussions with the respective special servicers. We also delivered a notice of imminent default in March 2011 to the master servicer for the mortgage loan on Gas Company Tower requesting it be transferred to special servicing (which has not yet occurred). The mortgage loans secured by these assets are not in default.
 
During the remainder of 2011, it is likely that additional special purpose property-owning subsidiaries will default and/or send notices of imminent default on non-recourse loans where the relevant project is or will be suffering from cash shortfalls and be unable or unwilling to fund operating expenses and/or debt service obligations.
 
Following a wide marketing process, we are working to finalize the sale of the Westin® Pasadena Hotel to a specific buyer. A purchase and sale agreement and due diligence have been completed, and we are awaiting approval of the buyer from the City of Pasadena, after which management believes that there will be no significant conditions to closing.  At closing, the Company intends to repay the $79.2 million loan that presently encumbers both the hotel and the Plaza Las Fuentes office building and retail space.  We are working with a lender to potentially obtain a new mortgage secured by the Plaza Las Fuentes office building and retail space once the hotel

29

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

sale and payoff of the existing loan are completed.  Proceeds from the potential new financing would be used for general corporate purposes.  While management believes that both the Westin® Pasadena Hotel sale and the new financing on Plaza Las Fuentes will occur, we cannot assure you that (1) we will obtain the City of Pasadena’s approval of the buyer, (2) we will successfully complete the disposition of the Westin® Pasadena Hotel or (3) we will be able to obtain a new mortgage on the Plaza Las Fuentes office building and retail space.  If we are unable to accomplish all of the foregoing, our liquidity situation would be significantly impacted.
 
Our ability to dispose of this asset (and any other assets we choose to market in the near term) is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of current economic conditions, we cannot predict:
 
Whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
 
Whether potential buyers will be able to secure financing; and
 
The length of time needed to find a buyer and to close the sale of a property.
 
With respect to recent dispositions, the marketing process has often been lengthier than anticipated and projecting sale prices has proved to be difficult. This trend may continue or worsen. We also have a limited number of assets remaining that we could potentially sell in the near term to generate net proceeds.
 
In addition, certain of our material debt obligations require us to comply with financial and other covenants, including, but not limited to, net worth and liquidity covenants, due on sale clauses, change in control restrictions, listing requirements and other financial requirements. Some or all of these covenants could prevent or delay our ability to dispose of identified properties. For a discussion of other factors that may affect our ability to dispose of certain assets, see Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 16, 2011.
 
Furthermore, we agreed to indemnify Robert F. Maguire III and related entities and other contributors from all direct and indirect adverse tax consequences in the event that our Operating Partnership directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests in 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 59.2% of our Effective Portfolio’s aggregate annualized rent as of March 31, 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 2011, with final expiration in June 2013); and
 

30

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Plaza Las Fuentes (excluding the Westin® Pasadena Hotel) (extended expiration in June 2011, 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.
 
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 Additional Secured or Unsecured Debt Financings
 
We have historically financed our asset acquisitions and operations largely from secured debt financings. We currently do not have any arrangements for future financings. All of our properties are currently encumbered, and most of our existing debt arrangements contain rates and other terms that are unlikely to be obtained in the market at this time or in the near term. Given the current limited access to credit and our financial condition, it will also be challenging to obtain any significant unsecured financings in the near term.
 
Proceeds from Public or Private Issuance of Debt or Equity Securities
 
While we currently have no plans for the public or private issuance of debt or equity securities, we may explore this liquidity source in the future. Due to market conditions, our high leverage level and our liquidity position, it may be extremely difficult to raise cash through the issuance of securities on favorable terms or at all. In the event of a successful issuance, existing equity holders would likely face substantial dilution.
 
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.
 
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

31

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 March 31, 2011, we have executed leases (excluding those related to mortgages in default) that contractually commit us to pay $29.5 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 $12.6 million in 2015 and beyond. The remaining $12.6 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.
 
As part of our effort to preserve cash, we intend to limit the amount of discretionary funds allocated to capital expenditures and leasing costs in the near term. Given the current economic environment, this is likely to result in a decrease in the number of leases we execute (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 that standard tenant concessions will increase.
 
As included in the summary table of available leasing reserves shown above, we have $22.6 million in available leasing reserves as of March 31, 2011. We incurred approximately $14 per square foot, $26 per square foot and $21 per square foot in leasing costs on new and renewal leases executed during the three months ended March 31, 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 March 31, 2011, we had $3.6 billion of total consolidated debt, including $1.1 billion of debt associated with mortgages in default. Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. 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 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 three months ended March 31, 2011, we made debt service payments totaling $40.2 million, and the respective special servicers applied $22.5 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, 500 Orange Tower and City Tower. We made no debt service payments with unrestricted cash during the three months ended March 31, 2011 related to mortgages in default subsequent to the default date.
 
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.
 

32

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

A summary of our debt maturing in 2011 and 2012 is as follows (in millions):
 
 
2011
 
2012
 
Maturity Date if
Fully Extended
Unsecured term loan
$
15.0
 
 
$
 
 
 
Mortgage loans:
   
 
 
   
 
 
 
Plaza Las Fuentes
79.2
 
 
 
 
2013
Brea Corporate Place/Brea Financial Commons
 
 
109.0
 
 
 
KPMG Tower
 
 
400.0
 
 
 
 
$
94.2
 
 
$
509.0
 
 
 
 
Our unsecured term loan matured on May 1, 2011 and was repaid using cash on hand. See “Subsequent Events.”
 
Our Brea Corporate Place/Brea Financial Commons mortgage was extended to May 2012. See “Subsequent Events.” We have no extension options remaining on this loan.
 
Our Plaza Las Fuentes mortgage has two one-year extension options remaining as of March 31, 2011. The extension requirements include, among other things, meeting a debt service coverage ratio test and a loan-to-value test. We currently meet the debt service ratio and loan-to-value tests needed to extend this loan until September 2012. If we are unable to fulfill the extension conditions, we could elect to make a paydown on this loan in order to obtain an extension. We are currently working to refinance this loan in connection with the disposition of the Westin® Pasadena Hotel so as to generate net proceeds. There can be no assurance that we will be successful in disposing of the hotel property or refinancing the office property.
 
Our KPMG Tower mortgage matures in October 2012. We expect that this loan will require a substantial paydown upon refinancing (depending on market conditions). We have not yet identified the capital source or sources required to enable us to make this significant paydown. We may seek to obtain the necessary capital through the disposition of other assets with equity above the debt and/or the issuance of debt or equity securities.
 
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 operational and financial covenants significantly more restrictive than our current debt covenants.
 
We have significant covenants in our loan agreements, including: (1) required levels of tangible worth, interest coverage, fixed charge coverage and liquidity, (2) that we will not engage in certain types of transactions without lender consent unless our stock is listed on the New York Stock Exchange (“NYSE”) and/or another

33

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

nationally recognized stock exchange, and (3) receipt of an unqualified audit opinion on our annual financial statements. Although we were in compliance with these covenants as of March 31, 2011, some of the actions we may take in connection with our liquidity situation or other circumstances outside of our control could result in non-compliance under one or more of these covenants at future measurement dates. We are taking active steps to address any potential non-compliance issues. However, any covenant modifications would likely require a payment by us to secure lender approval. No assurance can be given that we will be able to secure modifications to the covenants on terms acceptable to us or at all. The impact of non-compliance varies based on the terms of the applicable loan agreement, but in some cases could result in the acceleration of a significant financial obligation.
 
In addition, recourse obligations impact our ability to dispose of certain assets on favorable terms or at all and present challenges to our liquidity position. As described elsewhere in this report, we recently disposed of several assets and are working to dispose of several additional assets. For many of these assets, the market value of the asset is insufficient to satisfy the applicable loan balance. Although most of our property-level indebtedness is non-recourse, our Operating Partnership has several potential contingent obligations described in “IndebtednessOperating Partnership Contingent Obligations.” If project-level debt is accelerated where a project’s assets are not sufficient to repay such debt in full, any recourse obligation would require a cash payment by our Operating Partnership. The recourse obligations also impact our ability to dispose of the underlying assets on favorable terms or at all. In some cases we may 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 March 31, 2011, we had transferred $25.6 million in cash to our counterparty to satisfy our collateral posting requirement under the swap. The cost to terminate the swap as of March 31, 2011 totals $30.7 million, less the $25.6 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 March 31, 2011, one-month LIBOR was 0.24%. As of March 31, 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 $2 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 $2 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 our return of swap collateral will be in the range of $13 million to $15 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%.
 

34

 
MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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. As December 31, 2010, MPG Office Trust, Inc. had a net operating loss carryforward of approximately $814 million. Due to our current liquidity position and the availability of substantial net operating loss carryforwards, we do not expect to pay dividends and distributions on our common and preferred stock for the foreseeable future. We do not expect the need to pay distributions to our stockholders during 2011 to maintain our REIT status.
 
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 April 30, 2011, we have missed ten quarterly dividend payments totaling $47.7 million. Upon missing six quarterly dividend payments (whether consecutive or non-consecutive), the holders of our Series A Preferred Stock became entitled to elect two additional members to our board of directors (the “Preferred Directors”). On February 2, 2011, holders of our Series A Preferred Stock elected the Preferred Directors, who will serve on our board until all dividends in arrears and the then current period’s dividend have been fully paid or until such dividends have been declared, and an amount sufficient for the payment thereof has been set aside for payment.
 
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.

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MPG OFFICE TRUST, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Indebtedness
 
Mortgage and Other Loans
 
As of March 31, 2011, our consolidated debt was comprised of mortgage loans secured by 19 properties and one unsecured term loan. Our variable-rate debt bears interest at a rate based on one-month LIBOR, which was 0.24% as of March 31, 2011. A summary of our consolidated debt as of March 31, 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
$
1,847.1
 
 
51.59
%
 
5.44
%
 
5 years
Variable-rate swapped to fixed-rate
400.0
 
 
11.17
%
 
7.16
%
 
2 years
Variable-rate
203.2
 
 
5.68
%
 
3.03
%
 
1 year
Total debt, excluding mortgages in default
2,450.3
 
 
68.44
%
 
5.52
%
 
4 years
Mortgages in default
1,130.0
 
 
31.56
%
 
10.65
%
 
 
 
$
3,580.3
 
 
100.00
%
 
7.14
%