MPG Office Trust Inc. (MPG), a real estate investment trust (“REIT”), has recently renewed its lease agreement with Southern California Gas Company, the largest natural gas distribution utility in the U.S. With the lease renewal, the lessee will continue to occupy approximately 350,000 square feet of space at The Gas Company Tower in Downtown Los Angeles.
 
Southern California Gas Company is a regulated subsidiary of Fortune 500 energy services holding company Sempra Energy (SRE). It provides natural gas to about 20.5 million consumers across a service territory spanning approximately 20,000 square miles in diverse terrain throughout Central and Southern California, from Visalia to the Mexican border.
 
The leased property is located in close proximity to public transportation services and offers a premier office environment with state-of-the-art facilities. With the lease, MPG Office Trust has strengthened its position in the market. The company is the largest owner and operator of Class A office properties in the Los Angeles central business district, and specializes as a full-service real estate company focusing primarily on the Southern California market. 
 
The company is currently in a defensive mode and is focusing more on shoring up the balance sheet. MPG Office Trust has suspended its common and preferred dividends in an effort to save cash. In addition, the company continues to successfully extend debt maturities. By the end of the last reported quarter, MPG Office Trust had $4.0 billion of consolidated debt, and $91.2 million of cash and cash equivalents.
 
MPG Office Trust’s debt burden was primarily due to its acquisition binge. In 2007, the company bought $2.875 billion of assets at the height of the real estate bubble. The acquisition put the company heavily in debt, and it is now trying to de-lever its balance sheet.
 
However, MPG Office Trust has assets in some of the best long-term, supply-constrained office markets in the country. Rents continue to increase as leases roll, which is a positive sign. In addition, new construction in the company’s core markets has virtually come to a halt, which is encouraging for long-term prospects. We maintain our Neutral rating on MPG Office Trust with a Zacks #2 Rank, which translates to a short-term ‘Buy’ recommendation.
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