10-Q 1 mpg201193010q.htm FORM 10-Q MPG 2011.9.30 10Q


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

Commission File Number: 001-31717
________________________
MPG OFFICE TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
04-3692625
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
355 South Grand Avenue Suite 3300
Los Angeles, CA
(Address of principal executive offices)
 
90071
(Zip Code)
(213) 626-3300
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer £
Accelerated filer x
Non-accelerated filer £
Smaller reporting company £

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of November 4, 2011
Common Stock, $0.01 par value per share
 
50,995,275 shares



MPG OFFICE TRUST, INC.

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

TABLE OF CONTENTS


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



PART I—FINANCIAL INFORMATION

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

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
September 30, 2011
 
December 31, 2010
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land
$
248,835

 
$
313,942

Acquired ground leases
55,801

 
55,801

Buildings and improvements
1,929,743

 
2,280,878

Land held for development
77,938

 
92,001

Tenant improvements
285,431

 
300,052

Furniture, fixtures and equipment
2,143

 
20,512

 
2,599,891

 
3,063,186

Less: accumulated depreciation
(640,882
)
 
(668,328
)
Investments in real estate, net
1,959,009

 
2,394,858

 
 
 
 
Cash and cash equivalents
106,757

 
46,864

Restricted cash
86,731

 
142,795

Rents and other receivables, net
3,833

 
5,809

Deferred rents
54,259

 
60,609

Deferred leasing costs and value of in-place leases, net
74,103

 
91,311

Deferred loan costs, net
10,139

 
13,972

Other assets
9,782

 
14,794

Total assets
$
2,304,613

 
$
2,771,012

 
 
 
 
LIABILITIES AND DEFICIT
 
 
   
Liabilities:
 
 
   
Mortgage and other loans
$
3,034,714

 
$
3,576,493

Accounts payable and other liabilities
145,910

 
196,015

Acquired below-market leases, net
27,097

 
44,026

Total liabilities
3,207,721

 
3,816,534

 
 
 
 
Deficit:
 
 
   
Stockholders’ Deficit:
 
 
   
7.625% Series A Cumulative Redeemable Preferred Stock,
    $0.01 par value, $25.00 liquidation preference, 50,000,000 shares
    authorized; 9,730,370 and 10,000,000 shares issued and outstanding
    at September 30, 2011 and December 31, 2010, respectively
97

 
100

Common stock, $0.01 par value, 100,000,000 shares authorized;
    50,993,595 and 48,925,499 shares issued and outstanding at
    September 30, 2011 and December 31, 2010, respectively
510

 
489

Additional paid-in capital
702,733

 
702,556

Accumulated deficit and dividends
(1,477,397
)
 
(1,594,407
)
Accumulated other comprehensive loss
(19,874
)
 
(29,079
)
Total stockholders’ deficit
(793,931
)
 
(920,341
)
Noncontrolling Interests:
 
 
   
Common units of our Operating Partnership
(109,177
)
 
(125,181
)
Total deficit
(903,108
)
 
(1,045,522
)
Total liabilities and deficit
$
2,304,613

 
$
2,771,012





See accompanying notes to consolidated financial statements.

1


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Revenue:
 
 
 
 
 
 
 
Rental
$
50,881

 
$
52,886

 
$
153,333

 
$
159,915

Tenant reimbursements
20,935

 
20,890

 
62,119

 
63,817

Parking
8,996

 
8,853

 
26,895

 
28,444

Management, leasing and development services
2,590

 
1,281

 
4,715

 
3,304

Interest and other
614

 
2,609

 
2,580

 
3,057

Total revenue
84,016

 
86,519

 
249,642

 
258,537

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
20,892

 
20,661

 
61,378

 
60,356

Real estate taxes
7,516

 
7,355

 
22,167

 
21,669

Parking
2,231

 
2,461

 
6,945

 
7,463

General and administrative
5,258

 
8,073

 
17,257

 
22,197

Other expense
1,986

 
1,540

 
5,665

 
4,592

Depreciation and amortization
24,680

 
25,953

 
73,655

 
79,065

Impairment of long-lived assets
9,330

 

 
9,330

 

Interest
54,018

 
48,438

 
156,070

 
140,825

Loss from early extinguishment of debt

 

 
164

 

Total expenses
125,911

 
114,481

 
352,631

 
336,167

 
 
 
 
 
 
 
 
Loss from continuing operations before equity in
     net loss of unconsolidated joint venture and
     gain on sale of real estate
(41,895
)
 
(27,962
)
 
(102,989
)
 
(77,630
)
Equity in net loss of unconsolidated joint venture
204

 
204

 
(129
)
 
601

Gain on sale of real estate

 

 

 
16,591

Loss from continuing operations
(41,691
)
 
(27,758
)
 
(103,118
)
 
(60,438
)
 
 
 
 
 
 
 
 
Discontinued Operations:
 
 
 
 
 
 
 
Loss from discontinued operations before gains on
     settlement of debt and sale of real estate
(688
)
 
(11,510
)
 
(32,053
)
 
(58,197
)
Gains on settlement of debt
62,531

 
9,030

 
190,380

 
58,151

Gains on sale of real estate
10,215

 
14,689

 
73,844

 
14,689

Income from discontinued operations
72,058

 
12,209

 
232,171

 
14,643

 
 
 
 
 
 
 
 
Net income (loss)
30,367

 
(15,549
)
 
129,053

 
(45,795
)
Net (income) loss attributable to common units of our
     Operating Partnership
(2,915
)
 
2,455

 
(13,193
)
 
7,292

Net income (loss) attributable to MPG Office Trust, Inc.
27,452

 
(13,094
)
 
115,860

 
(38,503
)
Preferred stock dividends
(4,637
)
 
(4,766
)
 
(14,169
)
 
(14,298
)
Preferred stock redemption discount
2,780

 

 
2,780

 

Net income (loss) available to common stockholders
$
25,595

 
$
(17,860
)
 
$
104,471

 
$
(52,801
)
 
 
 
 
 
 
 
 
Basic income (loss) per common share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.77
)
 
$
(0.58
)
 
$
(2.05
)
 
$
(1.34
)
Income from discontinued operations
1.28

 
0.22

 
4.17

 
0.26

Net income (loss) available to common stockholders per share
$
0.51

 
$
(0.36
)
 
$
2.12

 
$
(1.08
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
49,961,007

 
48,874,308

 
49,342,879

 
48,701,639

 
 
 
 
 
 
 
 
Amounts attributable to MPG Office Trust, Inc.:
 
 
 
 
 
 
 
Loss from continuing operations
$
(36,443
)
 
$
(23,828
)
 
$
(89,642
)
 
$
(51,364
)
Income from discontinued operations
63,895

 
10,734

 
205,502

 
12,861

 
$
27,452

 
$
(13,094
)
 
$
115,860

 
$
(38,503
)



See accompanying notes to consolidated financial statements.

2


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
For the Nine Months Ended
 
September 30, 2011
 
September 30, 2010
 
 
Cash flows from operating activities:
 
 
 
Net income (loss)
$
129,053

 
$
(45,795
)
Adjustments to reconcile net income (loss) to net cash (used in)
     provided by operating activities (including discontinued operations):
 
 
   
Equity in net loss of unconsolidated joint venture
129

 
(601
)
Depreciation and amortization
80,003

 
98,191

Impairment of long-lived assets
23,218

 
18,820

Gains on settlement of debt
(190,380
)
 
(58,151
)
Gains on sale of real estate
(73,844
)
 
(31,280
)
Loss from early extinguishment of debt
399

 
485

Deferred rent expense
1,547

 
1,534

Provision for doubtful accounts
918

 
1,643

Revenue recognized related to below-market
     leases, net of acquired above-market leases
(9,094
)
 
(14,387
)
Deferred rental revenue
(476
)
 
(3,717
)
Compensation cost for share-based awards, net
3,022

 
3,804

Amortization of deferred loan costs
4,393

 
5,287

Unrealized (gain) loss due to hedge ineffectiveness, net
(890
)
 
1,417

Changes in assets and liabilities:
 
 
   
Rents and other receivables
(1,025
)
 
(4,190
)
Deferred leasing costs
(5,989
)
 
(12,339
)
Other assets
934

 
147

Accounts payable and other liabilities
22,238

 
56,882

Net cash (used in) provided by operating activities
(15,844
)
 
17,750

Cash flows from investing activities:
 
 
   
Proceeds from dispositions of real estate, net
136,506

 
106,340

Expenditures for improvements to real estate
(8,654
)
 
(16,723
)
Investment in unconsolidated joint venture
(620
)
 

Decrease (increase) in restricted cash
50,766

 
(4,969
)
Net cash provided by investing activities
177,998

 
84,648

Cash flows from financing activities:
 
 
   
Proceeds from:
 
 
 
Mortgage loans
33,750

 

Construction loans

 
2,781

Principal payments on:
 
 
   
Mortgage loans
(119,938
)
 
(98,687
)
Construction loans

 
(29,234
)
Unsecured term loan
(15,000
)
 
(7,420
)
Capital leases
(391
)
 
(869
)
Payment of loan costs
(695
)
 

Other financing activities
13

 

Net cash used in financing activities
(102,261
)
 
(133,429
)
Net change in cash and cash equivalents
59,893

 
(31,031
)
Cash and cash equivalents at beginning of period
46,864

 
90,982

Cash and cash equivalents at end of period
$
106,757

 
$
59,951


3


MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)
 
For the Nine Months Ended
 
September 30, 2011
 
September 30, 2010
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
150,418

 
$
152,567

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

 
$
150,274

Debt and related interest forgiven by lender
123,929

 
58,151

Mortgage loan and related interest satisfied in connection
     with transfer of deed
181,083

 

Mortgage loan and related interest satisfied in connection
     with deed-in-lieu of foreclosure

 
24,500

Increase in fair value of interest rate swaps and caps, net
14,639

 
2,076

Accrual for real estate improvements and purchases of
     furniture, fixtures, and equipment
565

 
860

Common units of our Operating Partnership converted to common stock

 
180

Fair value of common stock issued in redemption of
     Series A preferred stock
4,995

 

 
 
 
 





See accompanying notes to consolidated financial statements.

4


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Organization and Description of Business

As used in these consolidated financial statements and related notes, the terms “MPG Office Trust,” the “Company,” “us,” “we” and “our” refer to MPG Office Trust, Inc. Additionally, the term “Properties in Default” refers to our Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand properties, whose mortgage loans were in default as of September 30, 2011 and where our ultimate goal is to exit the assets. In addition to the mortgage loans secured by the Properties in Default, the mortgage loan secured by Two California Plaza is also in default as of September 30, 2011. We have excluded Two California Plaza from the Properties in Default because our goal is to modify the loan with the special servicer rather than to dispose of the asset.

We are a self-administered and self-managed real estate investment trust (“REIT”), and we operate as a REIT for federal income tax purposes. We are the largest owner and operator of Class A office properties in the Los Angeles Central Business District (“LACBD”).

Through our controlling interest in MPG Office, L.P. (the “Operating Partnership”), of which we are the sole general partner and hold an approximate 88.8% interest, and the subsidiaries of our Operating Partnership, including MPG TRS Holdings, Inc., MPG TRS Holdings II, Inc., and MPG Office Trust Services, Inc. and its subsidiaries (collectively known as the “Services Companies”), we own, manage and lease real estate located in: the greater Los Angeles area of California; Orange County, California; San Diego, California; and Denver, Colorado. These locales primarily consist of office properties, parking garages and land parcels.

As of September 30, 2011, our Operating Partnership indirectly owns whole or partial interests in 20 office properties, off-site parking garages, and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 88.8% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in Maguire Macquarie Office, LLC, an unconsolidated joint venture formed in conjunction with Charter Hall Office REIT (“Charter Hall”), our Operating Partnership’s share of the Total Portfolio is 10.6 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office properties from which we derive our net income or loss, which we recognize in accordance with U.S. generally accepted accounting principles (“GAAP”). The aggregate square footage of our Effective Portfolio has not been reduced to reflect our limited partners’ 11.2% share of our Operating Partnership.

Our property statistics as of September 30, 2011 are as follows:

 
Number of
 
Total Portfolio
 
Effective Portfolio
 
Properties
 
Buildings
 
Square
Feet
 
Parking
Square
Footage
 
Parking
Spaces
 
Square
Feet
 
Parking
Square
Footage
 
Parking
Spaces
Wholly owned properties
11

 
18

 
8,916,638

 
4,612,484

 
13,928

 
8,916,638

 
4,612,484

 
13,928

Properties in Default
4

 
6

 
1,011,440

 
1,060,775

 
3,422

 
1,011,440

 
1,060,775

 
3,422

Unconsolidated joint venture
5

 
16

 
3,490,778

 
1,865,448

 
5,561

 
698,155

 
373,090

 
1,113

 
20

 
40

 
13,418,856

 
7,538,707

 
22,911

 
10,626,233

 
6,046,349

 
18,463

Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excluding Properties in Default
 
 
 
 
84.0
%
 
 
 
 
 
83.8
%
 
 
 
 
Properties in Default
 
 
 
 
63.7
%
 
 
 
 
 
63.7
%
 
 
 
 
Including Properties in Default
 
 
 
 
82.4
%
 
 
 
 
 
81.9
%
 
 
 
 



5


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of September 30, 2011, the majority of our Total Portfolio is located in six Southern California markets: the LACBD; the Tri-Cities area of Pasadena, Glendale and Burbank; the Cerritos submarket; the Central Orange County and Brea submarkets of Orange County; and the Sorrento Mesa submarket of San Diego County. We also have an interest in one property in Denver, Colorado (a joint venture property). We directly manage the properties in our Total Portfolio through our Operating Partnership and/or our Services Companies, except for Stadium Towers Plaza and 500 Orange Tower (each of which is in receivership) and Cerritos Corporate Center. On October 27, 2011, 700 North Central and 801 North Brand were placed in receivership. As a result, we no longer manage these properties.

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 September 30, 2011. The Properties in Default do not meet the criteria to be held for sale as they are expected to be disposed of other than by sale. Accordingly, the assets and liabilities of Properties in Default are included in our consolidated balance sheets as of September 30, 2011 and December 31, 2010, and their results of operations are presented as part of continuing operations in the consolidated statements of operations for all periods presented. The assets and liabilities of these properties will be removed from our consolidated balance sheet and the results of operations will be reclassified to discontinued operations in our consolidated statements of operations upon ultimate disposition of each property. See Note 13 “Properties in Default—Overview” for the assets and obligations associated with Properties in Default included in our consolidated balance sheets as of September 30, 2011 and December 31, 2010.

Certain amounts in the consolidated financial statements for prior years have been reclassified to reflect the activity of discontinued operations.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could ultimately differ from such estimates.

The balance sheet data as of December 31, 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

6


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Commission (“SEC”) on March 16, 2011.

Note 3Liquidity

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

The following are our expected actual and potential sources of liquidity, which we currently believe will be sufficient to meet our near-term liquidity needs:

Unrestricted and restricted cash;

Cash generated from operations;

Asset dispositions;

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

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

Proceeds from additional secured or unsecured debt financings.

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

Asset Dispositions—

During the past several years, we have systematically disposed of assets in order to (1) preserve cash, through the disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the disposition of strategically-identified non-core properties with equity value.

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


7


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

During the nine months ended September 30, 2011, we disposed of the 500 Orange Center development site, 701 North Brand, 550 South Hope, the Westin® Pasadena Hotel, 2600 Michelson and City Tower. We received net proceeds from these transactions totaling $136.5 million, net of transaction costs, of which $78.6 million was used to repay the mortgage loan secured by the hotel and the adjacent Plaza Las Fuentes office building and $39.8 million was applied by the special servicers to the mortgages loans secured by 550 South Hope and 2600 Michelson. The remaining $18.1 million of net proceeds, combined with $2.1 million of loan reserves released to us after repayment of the mortgage, will be used for general corporate purposes.

On October 28, 2011, the Company and subsidiary entities entered into an agreement with Charter Hall and affiliates of Beacon Capital Partners, LLC (“Beacon”) relating to the transfer of Charter Hall’s 80% interest in the joint venture to Beacon, the sale of the joint venture’s interests in Wells Fargo Center (Denver) and San Diego Tech Center to Beacon, the sale of the Company’s development rights at San Diego Tech Center to Beacon, and a lump sum payment by Beacon to the Company in consideration for the Company’s agreement to terminate its right to receive certain fees. Net proceeds from the transactions to the Company are expected to total approximately $45 million. See Note 19 “Subsequent Events.”

We intend to exit several additional non-core assets in 2011 or 2012, if possible, including but not limited to Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand (all of which are currently in default under their respective mortgage loans, as described below). We may not be able to exit Stadium Towers Plaza and 500 Orange Tower in a timely manner or on a cooperative basis. 700 North Central and 801 North Brand are in cooperative foreclosure proceedings and we expect this process to be completed in early 2012. Other than the sale of our 20% interest in Wells Fargo Center (Denver) and San Diego Tech Center, and the development rights at San Diego Tech Center to Beacon described above, we do not anticipate any additional cash-generating dispositions in the near term, and have a very limited number of assets remaining that could potentially be sold in the near term to generate net cash proceeds.

Proceeds from Additional Secured or Unsecured Debt Financings

On August 2, 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building and received proceeds totaling $33.1 million. We are currently in negotiations to obtain up to $11.3 million of mezzanine financing on the property, but our ability to secure such mezzanine financing on favorable terms or at all is uncertain. We do not currently have arrangements for any other future secured financings and do not expect to obtain any other secured debt financings in the near term that will generate net cash proceeds. We currently do not believe that we will be able to address challenges to our longer-term liquidity position (particularly debt maturities, leasing costs, capital expenditures and recourse obligations) through future secured debt financings. Given the current limited access to credit and our financial condition, it will also be highly challenging to obtain any significant unsecured financings in the near term.

Payments in Connection with Loans

Debt Service—

As of September 30, 2011, we had $3.0 billion of total consolidated debt, including $0.8 billion of debt associated with mortgages in default (as described below). Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. The lockbox and cash management arrangements contained in most of our loan agreements provide that substantially all of the income generated by our special purpose property-owning subsidiaries is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. With the exception of the mortgages in default, cash is distributed to us only

8


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses.

During 2010, we made debt service payments totaling $187.3 million (including payments funded from reserves), and the respective special servicers of the mortgages in default applied $12.4 million of restricted cash held at the property level to pay contractual principal and interest on the mortgage loans secured by 2600 Michelson, 550 South Hope, Park Place II and Pacific Arts Plaza. During the nine months ended September 30, 2011, we made debt service payments totaling $109.1 million, and the respective special servicers of the mortgages in default applied $42.9 million of restricted cash held at the property level to pay contractual interest on the mortgage loans secured by Two California Plaza, 550 South Hope, Stadium Towers Plaza, 500 Orange Tower, City Tower, 700 North Central and 801 North Brand. We made no debt service payments with unrestricted cash during the nine months ended September 30, 2011 related to mortgages in default subsequent to the default date.

Certain of our special purpose property-owning subsidiaries were in default as of September 30, 2011 under commercial mortgage-backed securities (“CMBS”) mortgages totaling approximately $0.8 billion secured by five separate office properties totaling approximately 2.3 million square feet (Stadium Towers Plaza, 500 Orange Tower, Two California Plaza, 700 North Central and 801 North Brand). As a result of the defaults under these mortgage loans, pursuant to contractual rights the respective special servicers have required that tenant rental payments be deposited in restricted lockbox accounts. As such, we do not have direct access to these rental payments, and the disbursement of cash from these restricted lockbox accounts to us is at the discretion of the special servicers. We remained the title holder on each of these assets as of September 30, 2011.

The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. On September 23, 2011, the special servicer for the mortgage loans secured by 700 North Central and 801 North Brand commenced cooperative foreclosure proceedings with respect to these two properties, and on October 27, 2011, the properties were placed in receivership. See Note 19 “Subsequent Events.” We have reached an agreement with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

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

9


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


On July 12, 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center requesting that it be transferred into special servicing. On October 6, 2011, the loan was transferred into special servicing.

Principal Payment Obligations—

As our debt matures, our principal payment obligations also present significant future cash requirements. We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and current economic conditions. We do not have any committed financing sources available to refinance our debt as it matures. The non-recourse loans secured by Brea Corporate Place and Brea Financial Commons mature on May 1, 2012. The total indebtedness encumbering these properties is $109.0 million as of September 30, 2011. The non-recourse mortgage loan secured by KPMG Tower matures on October 9, 2012. The total indebtedness encumbering KPMG Tower is $400.0 million as of September 30, 2011.

Payments to Extend, Refinance, Modify or Exit Loans—

Because of our limited unrestricted cash and the reduced market value of our assets when compared with the significant debt balances on those assets, upcoming debt maturities present cash obligations that the relevant special purpose property-owning subsidiary obligor may not be able to satisfy. For assets that we do not or cannot dispose of and for which the relevant property-owning subsidiary is unable or unwilling to fund the resulting obligations, we may seek to extend or refinance the applicable loans or may default upon such loans. Historically, extending or refinancing loans has required principal paydowns and the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancings will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions will affect our ability to fund our other liquidity uses. In addition, the terms of the extensions or refinancings may include significantly restrictive operational and financial covenants. The default by the relevant special purpose property-owning subsidiary obligor upon any such loans could result in foreclosure of the property.

Note 4Land Held for Development

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

 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Interest expense
$

 
$

 
$

 
$
2.1

Indirect project costs

 

 

 
0.3

 
$

 
$

 
$

 
$
2.4



10


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5Rents and Other Receivables, Net

Our rents and other receivables are presented net of the following in our consolidated balance sheets (in thousands):

 
September 30, 2011
 
December 31, 2010
Allowance for doubtful accounts
$
2,128

 
$
2,878


We recorded the following provisions for doubtful accounts (in thousands):
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
Provision for doubtful accounts
$
918

 
$
1,643


Note 6Intangible Assets and Liabilities

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

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

 
$
38,317

Accumulated amortization
(34,955
)
 
(33,819
)
 
$
2,938

 
$
4,498

 
 
 
 
Acquired in-place leases
 
 
 
Gross amount
$
112,033

 
$
127,442

Accumulated amortization
(98,810
)
 
(105,534
)
 
$
13,223

 
$
21,908

 
 
 
 
Acquired below-market leases
 
 
 
Gross amount
$
(141,988
)
 
$
(164,940
)
Accumulated amortization
114,891

 
120,914

 
$
(27,097
)
 
$
(44,026
)


11


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
$
445

 
$
1,184

 
$
(2,987
)
2012
1,689

 
4,066

 
(10,968
)
2013
776

 
2,917

 
(6,263
)
2014
11

 
1,992

 
(3,334
)
2015
5

 
1,245

 
(1,626
)
Thereafter
12

 
1,819

 
(1,919
)
 
$
2,938

 
$
13,223

 
$
(27,097
)

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.

The impact of the amortization of acquired below-market leases, net of acquired above-market leases, on our rental income and of acquired in-place leases on our depreciation and amortization expense is as follows (in millions):

 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Continuing Operations
 
 
 
 
 
 
 
Rental income
$
2.6

 
$
4.6

 
$
8.3

 
$
10.4

Depreciation and amortization expense
1.2

 
2.2

 
3.8

 
5.7

 
 
 
 
 
 
 
 
Discontinued Operations
 
 
 
 
 
 
 
Rental income
$

 
$
1.4

 
$
0.8

 
$
4.0

Depreciation and amortization expense

 
0.9

 
0.6

 
3.1



12


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 7Investment in Unconsolidated Joint Venture

We own a 20% interest in our Maguire Macquarie Office, LLC joint venture with Charter Hall 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.

On October 28, 2011, the Company and subsidiary entities entered into an agreement with Charter Hall and affiliates of Beacon relating to the transfer of Charter Hall’s 80% interest in the joint venture to Beacon, the sale of the joint venture’s interests in Wells Fargo Center (Denver) and San Diego Tech Center to Beacon, and a lump sum payment by Beacon to the Company in consideration for the Company’s agreement to terminate its right to receive certain fees. See Note 19 “Subsequent Events.”

A summary of our transactions and balances with the joint venture is as follows (in thousands):

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Management, investment advisory and
     development fees and leasing commissions
 
$
2,550

 
$
1,050

 
$
4,578

 
$
2,996


 
 
September 30, 2011
 
December 31, 2010
Accounts receivable
 
$
1,293

 
$
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 September 30, 2011 and December 31, 2010.

We are not obligated to recognize our share of losses from the joint venture in excess of our basis pursuant to the provisions of Real Estate Investments—Equity Method and Joint Ventures Subsections of FASB Codification Topic 970, Real Estate—General. Accordingly, we did not record the following losses in our consolidated statements of operations because our basis in the joint venture has been reduced to zero (in thousands):

 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
Unallocated losses
$
1,150

 
$
3,214


The cumulative unallocated losses not recorded in our consolidated statements of operations are as follows (in thousands):

 
September 30, 2011
 
September 30, 2010
Cumulative unallocated losses
$
1,150

 
$
7,233


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.


13


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 8Mortgage and Other Loans

Consolidated Debt

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

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

 
$
70,468

 
$
70,468

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

 
38,532

 
38,532

Plaza Las Fuentes (2)
8/9/2016
 
4.50
%
 
33,708

 

Total variable-rate loans
 
 
 
 
142,708

 
109,000

 
 
 
 
 
 
 
   
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
   
KPMG Tower (3)
10/9/2012
 
7.16
%
 
400,000

 
400,000

Total floating-rate debt
 
 
 
 
542,708

 
509,000

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

 
550,000

Two California Plaza
5/6/2017
 
5.50
%
 

 
470,000

Gas Company Tower
8/11/2016
 
5.10
%
 
458,000

 
458,000

777 Tower
11/1/2013
 
5.84
%
 
273,000

 
273,000

US Bank Tower
7/1/2013
 
4.66
%
 
260,000

 
260,000

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

 
125,000

801 North Brand
4/6/2015
 
5.73
%
 

 
75,540

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

 
44,370

700 North Central
4/6/2015
 
5.73
%
 

 
27,460

Total fixed-rate debt
 
 
 
 
1,710,370

 
2,283,370

Total debt, excluding mortgages in default
 
 
 
 
2,253,078

 
2,792,370

 
 
 
 
 
 
 
   
Mortgages in Default
 
 
 
 
 
 
   
Two California Plaza (4)
5/6/2017
 
10.50
%
 
470,000

 

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

 
110,000

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

 
100,000

801 North Brand (5)
4/6/2015
 
10.73
%
 
75,540

 

700 North Central (5)
4/6/2015
 
10.73
%
 
27,460

 

Total mortgages in default
 
 
 
 
783,000

 
210,000

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

 
200,000

City Tower
 
 
 
 

 
140,000

2600 Michelson
 
 
 
 

 
110,000

Plaza Las Fuentes
 
 
 
 

 
80,100

701 North Brand
 
 
 
 

 
33,750

Unsecured term loan
 
 
 
 

 
15,000

Total debt repaid/properties disposed of during 2011
 
 
 

 
578,850

Total consolidated debt
 
 
 
 
3,036,078

 
3,581,220

Debt discount
 
 
 
 
(1,364
)
 
(4,727
)
Total consolidated debt, net
 
 
 
 
$
3,034,714

 
$
3,576,493

__________
(1)
As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 6.50% during the loan term.
(2)
The loan bears interest at a rate equal to the greater of (1) 4.50% or (2) LIBOR plus 3.50%.
(3)
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

14


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

effectively fixes the LIBOR rate at 5.564%.
(4)
Our special purpose property-owning subsidiary that owns Two California Plaza is in default on the mortgage loan secured by the property. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. If we are successful in modifying the mortgage loan, the settlement date and treatment of principal will be as set forth in the modified loan agreement.
(5)
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.

As of September 30, 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 6.86% (or 5.55% excluding mortgages in default) as of September 30, 2011 and 6.32% (or 5.52% excluding mortgages in default) as of December 31, 2010.

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

Mortgage Loan Settled Upon Disposition

City Tower—

On July 22, 2011, we disposed of City Tower located in Orange, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition, we were relieved of the obligation to repay the $140.0 million mortgage and mezzanine loans secured by the property as well as accrued contractual and default interest. We recorded a $62.5 million gain on settlement of debt as part of discontinued operations during the three months ended September 30, 2011 as a result of the difference between the fair value assigned to the property in the transaction and the principal amounts due under the mortgage and mezzanine loans and accrued contractual and default interest that were forgiven by the lender upon disposition. The impact of this gain on settlement of debt was $1.11 per share for the three months ended September 30, 2011.

Mortgage Loan Financing

Plaza Las Fuentes—

On August 1, 2011, we completed a $33.8 million financing secured by the Plaza Las Fuentes office building located in Pasadena, California. Net proceeds totaled $33.1 million, which will be used for general corporate purposes.

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


15


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Mortgages in Default

As of September 30, 2011, we are in default on $0.8 billion of non-recourse mortgage loans that have contractual maturity dates in 2015 and 2017 per the terms of the loan agreements. The special servicers with respect to those loans have the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. For properties that are disposed of, the actual settlement date of the loan will depend upon when the property is disposed of either by the Company or the special servicer, as applicable. Management does not intend to settle this amount with unrestricted cash. We expect that this amount will be settled in a non-cash manner at the time of disposition. For any properties that we are successful in modifying the mortgage loan, the settlement date and treatment of principal and interest (including default interest) will be as set forth in the modified loan agreement.

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 Nine Months Ended
 
 
 
 
September 30, 2011
 
September 30, 2010
Property
 
Initial Default Date
 
Contractual Interest
 
Default Interest
 
Contractual Interest
 
Default Interest
Stadium Towers Plaza
 
August 11, 2009
 
$
4,387

 
$
3,792

 
$
4,387

 
$
3,792

500 Orange Tower
 
January 6, 2010
 
4,906

 
4,171

 
4,906

 
4,094

Two California Plaza
 
March 7, 2011
 
14,935

 
13,773

 

 

700 North Central
 
June 6, 2011
 
533

 
451

 

 

801 North Brand
 
June 6, 2011
 
1,466

 
1,239

 

 

 
 
 
 
$
26,227

 
$
23,426

 
$
9,293

 
$
7,886


The continuing default by our special purpose property-owning subsidiaries under non-recourse mortgage loans gives the special servicers with respect to those loans the contractual right to accelerate the maturity of the debt and the right to foreclose on the property underlying such loans, but they have not done so. There are several potential outcomes with respect to the mortgages in default, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale or a negotiated modification to the terms of the loans. We are in various stages of negotiations with the special servicers on each of the mortgages in default, with the goal of reaching a cooperative resolution for each property quickly. On September 23, 2011, the special servicer for the mortgage loans secured by 700 North Central and 801 North Brand commenced cooperative foreclosure proceedings with respect to these two properties, and on October 27, 2011, the properties were placed in receivership. See Note 19 “Subsequent Events.” We have reached an agreement with the special servicer that releases us from nearly all potential claims (including most recourse triggers) and establishes a definitive outside date by which we will exit Stadium Towers Plaza and 500 Orange Tower. We may not be able to exit these assets prior to the respective outside dates. We also cannot assure you that we will be successful in modifying the Two California Plaza mortgage, which may ultimately result in our inability to retain ownership of that property.

Notices of Imminent Default

Following notices from us, in March 2011 the non-recourse mortgage loans encumbering Wells Fargo Tower and US Bank Tower were transferred into special servicing. We took this proactive step to commence discussions regarding the non-recourse mortgage loans encumbering these properties at an early stage with the respective special servicers. In June 2011, the special servicer for Wells Fargo Tower transferred the mortgage loan back to the master servicer, and the loan has not been modified. The mortgage loan encumbering US Bank Tower remains in special servicing as of September 30, 2011. We also delivered a notice of imminent default to the master

16


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

servicer for the non-recourse mortgage loan on Gas Company Tower in March 2011 requesting that the loan be transferred into special servicing. As of September 30, 2011, the master servicer has not transferred the Gas Company Tower mortgage loan into special servicing, and we do not expect a transfer into special servicing to occur in the near term. As of September 30, 2011, the mortgage loans secured by Wells Fargo Tower, US Bank Tower and Gas Company Tower are not in default, and we do not intend to dispose of these assets.

On July 12, 2011, we delivered a notice of imminent default to the master servicer for the non-recourse mortgage loan secured by Glendale Center requesting that it be transferred into special servicing. On October 6, 2011, the loan was transferred into special servicing.

Operating Partnership Contingent Obligations

As a condition to closing the fixed-rate mortgage loan on 3800 Chapman, our Operating Partnership entered into a debt service guaranty. Under this debt service guaranty, our Operating Partnership agreed to guarantee the prompt payment of the monthly debt service amount (but not the payment of principal) and all amounts to be deposited into (i) a property tax and insurance reserve, (ii) a capital reserve, and (iii) a leasing rollover reserve. In the absence of any rental income from the property, the total amount our Operating Partnership could owe the lender under the debt service guaranty from October 1, 2011 through the May 6, 2017 loan maturity is $19.7 million. This amount includes estimates of future property tax and insurance reserve requirements. Actual amounts to be deposited with the lender may vary from these estimates. In addition, the $19.7 million estimate assumes no mitigation through rental income, including rent derived from in-place leases as of September 30, 2011.

In addition to the guaranty described above, all of the Company’s $3.0 billion of consolidated debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non-recourse loans can become partially or fully recourse against our Operating Partnership if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:

The special purpose property-owning subsidiary’s or Operating Partnership’s filing a voluntary petition for bankruptcy;

The special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity;

Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and

Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of our Operating Partnership or the Company.

In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.


17


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of September 30, 2011, to our knowledge the Company has not triggered any of the “non-recourse carve out” guarantees on its otherwise non-recourse loans. The maximum amount our Operating Partnership would be required to pay under a “non-recourse carve out” guarantee is the principal amount of the loan (or a total of $3.0 billion as of September 30, 2011). The maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to our Operating Partnership pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due the lender from our Operating Partnership in the event a “non-recourse carve out” guarantee is triggered would be reduced by the net proceeds received from the disposition of the office building, which management believes would not be sufficient to cover the maximum potential amount due if the “non-recourse carve out” guarantee was triggered, depending on the particular asset.

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. and are presented as noncontrolling interests in the deficit section of our consolidated balance sheets.

Noncontrolling common units of our Operating Partnership have essentially the same economic characteristics as shares of our common stock as they share equally in the net income or loss and distributions of our Operating Partnership. Our limited partners have the right to redeem all or part of their noncontrolling common units of our Operating Partnership at any time. At the time of redemption, we have the right to determine whether to redeem the noncontrolling common units of our Operating Partnership for cash, based upon the fair value of an equivalent number of shares of our common stock at the time of redemption, or exchange them for unregistered shares of our common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distribution and similar events. We maintain an effective registration statement to register the resale of shares of our common stock we issue in exchange for noncontrolling common units of our Operating Partnership.

The following table sets forth the number of noncontrolling common units of our Operating Partnership outstanding and the aggregate redemption value of those units based on the closing price of our common stock as well as the ownership interest of those units in our Operating Partnership on each respective date:

 
September 30, 2011
 
December 31, 2010
Outstanding noncontrolling common units of our Operating Partnership
6,446,777

 
6,446,777

Ownership interest in MPG Office, L.P. of outstanding noncontrolling common units
11.2
%
 
11.6
%
Aggregate redemption value of outstanding noncontrolling common units of our Operating Partnership (in millions)
$
13.6

 
$
17.7



18


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The aggregate redemption value does not necessarily represent the amount that would be distributed with respect to each common unit in the event of a termination or liquidation of the Company and our Operating Partnership. In the event of a termination or liquidation of the Company and our Operating Partnership, it is expected that in most cases each common unit would be entitled to a liquidating distribution equal to the amount payable with respect to each share of the Company’s common stock.

Net income or loss attributable to noncontrolling common units of our Operating Partnership is allocated based on their relative ownership percentage of the Operating Partnership during the period. The noncontrolling ownership interest percentage is determined by dividing the number of noncontrolling common units outstanding by the total of the controlling and noncontrolling units outstanding during the period. The issuance or redemption of additional shares of common stock or common units results in changes to our limited partners’ ownership interest in our Operating Partnership as well as the net assets of the Company. As a result, all equity-related transactions result in an allocation between stockholders’ deficit and the noncontrolling common units of our Operating Partnership in the consolidated balance sheet and statement of deficit to account for any change in ownership percentage during the period.

Our limited partners’ weighted average share of our net income (loss) is as follows:

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Weighted average share of net income (loss) allocated to noncontrolling common units of our Operating Partnership
 
11.3
%
 
12.1
%
 
11.5
%
 
12.2
%

Note 10Deficit and Comprehensive Income (Loss)

Equity Transactions

During the three months ended September 30, 2011, the Company entered into agreements providing for the exchange of shares of its 7.625% Series A Cumulative Redeemable Preferred Stock (“Series A preferred stock”) for shares of its common stock. Details of the exchanges are as follows:

 
 
Series A
Preferred Stock
Exchanged
 
Common Stock
Issued
 
Exchange Ratio (Common Shares Issued per Preferred Share)
 
Series A
Preferred Stock Value Per Share
 
Common Stock Value Per Share
July 25, 2011 exchange
 
218,635

 
1,127,597

 
5.157

 
$
19.00

 
$
3.684

July 27, 2011 exchange
 
50,995

 
262,981

 
5.157

 
16.50

 
3.200


In connection with the exchanges, we recorded a $2.8 million preferred stock redemption discount in our consolidated statements of operations for the three and nine months ended September 30, 2011 that is added to our net income (loss) available to common stockholders for use in the calculation of earnings per share. The preferred stock redemption discount represents the excess of the carrying amount of our Series A preferred stock, including cumulative dividends not declared, over the fair value of the consideration transferred to the holders of our Series A preferred stock at the time of exchange.


19


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Deficit

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

 
MPG Office
Trust, Inc.
 
Noncontrolling
Interests
 
Total
Balance, December 31, 2010
$
(920,341
)
 
$
(125,181
)
 
$
(1,045,522
)
Net income
115,860

 
13,193

 
129,053

Adjustment for preferred dividends not declared
(1,630
)
 
1,630

 

Preferred stock redemption discount
2,780

 

 
2,780

Exchange of preferred stock
(2,780
)
 

 
(2,780
)
Compensation cost for share-based awards, net
2,975

 

 
2,975

Other comprehensive income
9,205

 
1,181

 
10,386

Balance, September 30, 2011
$
(793,931
)
 
$
(109,177
)
 
$
(903,108
)
 
 
 
 
 
 
Balance, December 31, 2009
$
(754,020
)
 
$
(102,957
)
 
$
(856,977
)
Net loss
(38,503
)
 
(7,292
)
 
(45,795
)
Redemption of common units of our Operating Partnership
(119
)
 
119

 

Adjustment for preferred dividends not declared
(1,738
)
 
1,738

 

Compensation cost for share-based awards, net
3,624

 

 
3,624

Other comprehensive income
1,703

 
234

 
1,937

Balance, September 30, 2010
$
(789,053
)
 
$
(108,158
)
 
$
(897,211
)


20


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Comprehensive Income (Loss)

A summary of our comprehensive income (loss) is as follows (in thousands):

 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Net income (loss)
$
30,367

 
$
(15,549
)
 
$
129,053

 
$
(45,795
)
Interest rate swaps assigned to lenders:
 
 
   
 
 
 
   
Reclassification adjustment for realized
    gains included in net income (loss)
(165
)
 
(415
)
 
(3,363
)
 
(1,745
)
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
   
 
 
 
   
Unrealized holding gains
5,844

 
1,181

 
14,652

 
2,104

Reclassification adjustment for unrealized (gain) loss included in net income (loss)
(338
)
 
1,244

 
(903
)
 
1,244

 
5,506

 
2,425

 
13,749

 
3,348

 
 
 
   
 
 
 
   
Interest rate caps:
 
 
   
 
 
 
   
Realized holding losses

 

 
(13
)
 
(28
)
Reclassification adjustment for realized
    losses included in net income (loss)

 
83

 
13

 
362

 

 
83

 

 
334

 
 
 
   
 
 
 
   
Comprehensive income (loss)
$
35,708

 
$
(13,456
)
 
$
139,439

 
$
(43,858
)
 
 
 
   
 
 
 
   
Comprehensive income (loss) attributable to:
 
 
   
 
 
 
   
MPG Office Trust, Inc.
$
31,669

 
$
(11,830
)
 
$
123,435

 
$
(38,538
)
Common units of our Operating Partnership
4,039

 
(1,626
)
 
16,004

 
(5,320
)
 
$
35,708

 
$
(13,456
)
 
$
139,439

 
$
(43,858
)
The components of accumulated other comprehensive loss are as follows (in thousands):

 
September 30, 2011
 
December 31, 2010
Deferred gain on assignment of interest rate swap agreements, net
$
1,364

 
$
4,727

Interest rate swap
(15,830
)
 
(29,579
)
 
$
(14,466
)
 
$
(24,852
)
Accumulated other comprehensive loss attributable to:
 
 
   
MPG Office Trust, Inc.
$
(19,874
)
 
$
(29,079
)
Common units of our Operating Partnership
5,408

 
4,227

 
$
(14,466
)
 
$
(24,852
)


21


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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.

We have recorded stock-based compensation cost as part of general and administrative expense in the consolidated statements of operations as follows (in thousands):

 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
Stock-based compensation cost, net
$
3,022

 
$
3,804


The unrecognized compensation cost related to unvested share-based payments expected to be recognized in the consolidated statement of operations over a weighted average period of approximately 1.8 years is as follows(in thousands):
 
September 30, 2011
Unrecognized stock-based compensation cost
$
3,357


Note 12Earnings (Loss) per Share

Basic net income or loss available to common stockholders is computed by dividing reported net income or loss available to common stockholders by the weighted average number of common and contingently issuable shares outstanding during each period. As discussed in Note 8 to the consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on March 16, 2011, we do not issue common stock in settlement of vested restricted stock unit awards until the earliest to occur of (1) the third or fifth anniversary of the grant date, depending upon the vesting period per the grant agreement, (2) the occurrence of a change in control (as defined in the underlying grant agreements), or (3) the recipient’s separation from service. In accordance with the provisions of FASB Codification Topic 260, Earnings Per Share, we include vested restricted stock units in the calculation of basic income or loss per share since the shares will be issued for no cash consideration, and all the necessary conditions for issuance have been satisfied as of the vesting date.

A reconciliation of our income (loss) per share is as follows (in thousands, except share and per share amounts):
 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Numerator:
 
 
   
 
 
 
 
Net income (loss) attributable to
     MPG Office Trust, Inc.
$
27,452

 
$
(13,094
)
 
$
115,860

 
$
(38,503
)
Preferred stock dividends
(4,637
)
 
(4,766
)
 
(14,169
)
 
(14,298
)
Preferred stock redemption discount
2,780

 

 
2,780

 

Net income (loss) available to 
      common stockholders
$
25,595

 
$
(17,860
)
 
$
104,471

 
$
(52,801
)
 
   
 
   
 
   
 
   
Denominator:
   
 
   
 
   
 
   
Weighted average number of
     common shares outstanding
49,961,007

 
48,874,308

 
49,342,879

 
48,701,639

Net income (loss) available to common
     stockholders per share – basic
$
0.51

 
$
(0.36
)
 
$
2.12

 
$
(1.08
)

22


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following common stock equivalents were excluded from the calculation of diluted earnings per share because they were anti-dilutive due to our loss from continuing operations (in thousands):

 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Nonqualified stock options
972

 
1,096

 
1,242

 
918

Restricted stock units
608

 
935

 
611

 
935

Nonvested restricted common stock
605

 
68

 
605

 
68


Note 13Properties in Default

Overview

For purposes of this footnote, Stadium Towers Plaza, 500 Orange Tower, 700 North Central and 801 North Brand are reported as Properties in Default because their respective mortgage loans were in default as of September 30, 2011 and our ultimate goal is to exit the assets. Although the mortgage loan on Two California Plaza was also in default as of September 30, 2011, we have excluded it from the Properties in Default because our goal is to modify the loan with the special servicer rather than to dispose of the asset. As a result of the defaults under these mortgage loans, pursuant to contractual rights the respective special servicers have required that tenant rental payments be deposited in restricted lockbox accounts. As such, we do not have direct access to these rental payments, and the disbursement of cash from these restricted lockbox accounts to us is at the discretion of the special servicers.

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

On September 23, 2011, the special servicer for the mortgage loans secured by 700 North Central and 801 North Brand commenced cooperative foreclosure proceedings with respect to these two properties, and on October 27, 2011, the properties were placed in receivership. See Note 19 “Subsequent Events.”


23


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

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

 
September 30, 2011
 
December 31, 2010
Investments in real estate, net
$
199,484

 
$
420,725

Restricted cash
3,418

 
30,023

Deferred leasing costs and value of in-place leases, net
2,534

 
8,862

Other
4,227

 
8,248

Assets associated with Properties in Default
$
209,663

 
$
467,858

 
 
 
   
Mortgage loans
$
313,000

 
$
660,000

Accounts payable and other liabilities
36,738

 
77,744

Acquired below-market leases, net
2,383

 
9,996

Obligations associated with Properties in Default
$
352,121

 
$
747,740


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

Intangible Assets and Liabilities

Our estimate of the benefit to rental income of amortization of acquired below-market leases related to Properties in Default over the next five years is as follows (in thousands):

 
Acquired Below-
Market Leases 
2011
$
181

2012
662

2013
469

2014
280

2015
252

Thereafter
539

 
$
2,383


Note 14Impairment of Long-Lived Assets

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification Topic 360, we assess whether there has been impairment in the value of our investments in real estate whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Our impairment evaluation process is more fully described in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on March 16, 2011.

The $9.3 million impairment charge recorded in continuing operations was a result of an analysis as of September 30, 2011 of our properties that showed indications of potential impairment. We estimated fair value based on the sales price negotiated with the buyer. None of the other real estate assets in our portfolio were determined to be impaired as of September 30, 2011 as a result of our analysis.


24


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 15Dispositions and Discontinued Operations

Dispositions

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

 
Q1
 
$

 
$

 
$

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

 
Q2
 
33.8

 
5.1

 

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

 
Q2
 
200.0

 
72.5

 

Westin® Pasadena Hotel
 
Pasadena, CA
 
266,000

 
Q2
 

 
55.3

 
0.2

2600 Michelson (4)
 
Irvine, CA
 
309,742

 
Q2
 
110.0

 
44.7

 

City Tower (5)
 
Orange, CA
 
412,839

 
Q3
 
140.0

 
72.7

 

__________
(1)
Gains on disposition, including settlement of debt, are recorded in the consolidated statement of operations in the period the property is disposed of. Impairment losses are recorded in the consolidated statement of operations when the carrying value exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and/or in the period of disposition.
(2)
In 2010, we recorded a $9.1 million impairment charge to reduce our investment in 701 North Brand to its estimated fair value as of December 31, 2010. We recorded a $1.2 million gain on sale of real estate and a $3.9 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.
(3)
In 2009, we recorded a $48.1 million impairment charge to reduce our investment in 550 South Hope to its estimated fair value as of June 30, 2009. We recorded a $7.1 million gain on sale of real estate and a $65.4 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.
(4)
In 2009, we recorded a $9.5 million impairment charge to reduce our investment in 2600 Michelson to its estimated fair value as of June 30, 2009. We recorded a $13.9 million impairment charge and a $58.6 million gain on settlement of debt during the three months ended June 30, 2011 upon disposition of this property.
(5)
In 2009, we recorded a $54.9 million impairment charge to reduce our investment in City Tower to its estimated fair value as of December 31, 2009. We recorded a $10.2 million gain on sale of real estate and a $62.5 million gain on settlement of debt during the three months ended September 30, 2011 upon disposition of this property.

500 Orange Center Development Site—

On January 27, 2011, we disposed of the 500 Orange Center development site located in Orange, California. We received proceeds from this transaction of $4.7 million, net of transaction costs, which will be used for general corporate purposes. No gain on sale of real estate or impairment was recorded during the nine months ended September 30, 2011 related to the disposition of this property.

701 North Brand—

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


25


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

550 South Hope—

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

Westin® Pasadena Hotel—

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

2600 Michelson—

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

City Tower—

On July 22, 2011, we disposed of City Tower located in Orange, California in cooperation with the special servicer on the mortgage loan. As a result of the disposition we were relieved of the obligation to repay the $140.0 million mortgage and mezzanine loans secured by the property as well as accrued contractual and default interest. We recorded a $62.5 million gain on settlement of debt as part of discontinued operations during the three months ended September 30, 2011 as a result of the difference between the fair value assigned to the property in the transaction and the principal amounts due under the mortgage and mezzanine loans and accrued contractual and default interest that were forgiven by the lender upon disposition. Additionally, we recorded a $10.2 million gain on sale of real estate as part of discontinued operations during the three months ended September 30, 2011 upon disposition of this property.


26


MPG OFFICE TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Discontinued Operations

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

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
Revenue:
 
 
 
 
 
 
 
 
Rental
 
$
574

 
$
12,004

 
$
11,508

 
$
45,335

Tenant reimbursements
 
7

 
3,081

 
1,841

 
9,856

Hotel operations
 

 
4,867

 
8,368

 
15,060

Parking
 
36

 
1,052

 
1,178

 
4,292

Interest and other
 

 
4,868

 
171

 
5,043

Total revenue
 
617

 
25,872

 
23,066

 
79,586

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
   
 
 
 
 
Rental property operating and maintenance
 
195

 
4,758

 
4,259

 
15,346

Hotel operating and maintenance
 

 
3,485

 
6,039

 
10,775

Real estate taxes
 
40

 
1,837

 
1,282

 
6,309

Parking