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Brookfield DTLA Fund Office Trust Investor Inc. - Quarter Report: 2016 March (Form 10-Q)

Table of Contents


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, 2016
 
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: 001-36135
________________________
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-2616226
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
250 Vesey Street, 15th Floor
New York, NY
(Address of principal executive offices)
 
10281
(Zip Code)
(212) 417-7000
(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 Website, 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 ¨
Non-accelerated filer x
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

As of May 13, 2016, 100% of the registrant’s common stock (all of which is privately owned and is not traded on any public market) was held by Brookfield DTLA Holdings LLC.


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements.
 
 
 
Condensed Consolidated Balance Sheets
     (unaudited) as of March 31, 2016 and December 31, 2015
 
 
Condensed Consolidated Statements of Operations
     (unaudited) for the three months ended
     March 31, 2016 and 2015
 
 
Condensed Consolidated Statements of Comprehensive Loss
     (unaudited) for the three months ended
     March 31, 2016 and 2015
 
 
Condensed Consolidated Statements of Stockholders’ Deficit
     (unaudited) for the three months ended
     March 31, 2016 and 2015
 
 
Condensed Consolidated Statements of Cash Flows
     (unaudited) for the three months ended
     March 31, 2016 and 2015
 
 
Notes to Condensed 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.
Mine Safety Disclosures.
 
Item 5.
Other Information.
 
Item 6.
Exhibits.
 
Signatures
 
 
 
 
 
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
 

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)

 
March 31, 2016
 
December 31, 2015
 
 
 
 
ASSETS
 
 
 
Investments in Real Estate:
 
 
 
Land
$
227,555

 
$
227,555

Buildings and improvements
2,168,562

 
2,167,746

Tenant improvements
281,940

 
279,948

 
2,678,057

 
2,675,249

Less: accumulated depreciation
273,620

 
256,130

Investments in real estate, net
2,404,437

 
2,419,119

 
 
 
 
Cash and cash equivalents
34,877

 
53,736

Restricted cash
50,117

 
53,830

Rents, deferred rents and other receivables, net
98,362

 
95,690

Intangible assets, net
93,725

 
99,710

Deferred charges, net
65,799

 
66,791

Prepaid and other assets, net
12,938

 
9,134

Total assets
$
2,760,255

 
$
2,798,010

 
 
 
 
LIABILITIES AND DEFICIT
 
 
 
Liabilities:
 
 
 
Mortgage loans, net
$
2,112,045

 
$
2,111,405

Accounts payable and other liabilities
78,376

 
105,004

Due to affiliates, net
13,054

 
9,335

Intangible liabilities, net
28,590

 
30,208

Total liabilities
$
2,232,065

 
$
2,255,952

 
 
 
 
Commitments and Contingencies (See Note 13)

 










See accompanying notes to condensed consolidated financial statements.

1
Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited; in thousands, except share amounts)

 
March 31, 2016
 
December 31, 2015
 
 
 
 
LIABILITIES AND DEFICIT (continued)
 
 
 
Mezzanine Equity:
 
 
 
7.625% Series A Cumulative Redeemable Preferred Stock,
    $0.01 par value, 9,730,370 shares issued and
    outstanding as of March 31, 2016
    and December 31, 2015
$
358,941

 
$
354,304

Noncontrolling Interests:
 
 
 
Series A-1 preferred interest
353,387

 
349,084

Senior participating preferred interest
23,863

 
23,207

Total mezzanine equity
736,191

 
726,595

 
 
 
 
Stockholders’ Deficit:
 
 
 
Common stock, $0.01 par value, 1,000 shares
    issued and outstanding as of March 31, 2016
    and December 31, 2015
—

 
—

Additional paid-in capital
191,710

 
191,710

Accumulated deficit
(187,205
)
 
(177,879
)
Accumulated other comprehensive loss
(4,437
)
 
(2,580
)
Noncontrolling interest – Series B common interest
(208,069
)
 
(195,788
)
Total stockholders’ deficit
(208,001
)
 
(184,537
)
Total liabilities and deficit
$
2,760,255

 
$
2,798,010

















See accompanying notes to condensed consolidated financial statements.

2
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands)

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
Revenue:
 
 
 
Rental income
$
40,327

 
$
38,803

Tenant reimbursements
22,889

 
21,641

Parking
9,125

 
8,673

Interest and other
2,472

 
4,391

Total revenue
74,813

 
73,508

 
 
 
 
Expenses:
 
 
 
Rental property operating and maintenance
23,261

 
22,205

Real estate taxes
9,673

 
9,988

Parking
2,060

 
1,916

Other expense
737

 
226

Depreciation and amortization
25,076

 
24,589

Interest
23,978

 
23,645

Total expenses
84,785

 
82,569

 
 
 
 
Net loss
(9,972
)
 
(9,061
)
Net loss attributable to
    noncontrolling interests:
 
 
 
Series A-1 preferred interest –
    current dividends
4,303

 
4,303

Senior participating preferred interest –
    current dividends
—

 
587

Senior participating preferred interest –
    redemption measurement adjustment
656

 
760

Series B common interest –
    allocation of net loss
(10,242
)
 
(10,127
)
Net loss attributable to Brookfield DTLA
(4,689
)
 
(4,584
)
Series A preferred stock –
    current dividends
4,637

 
4,637

Net loss available to common interest
    holders of Brookfield DTLA
$
(9,326
)
 
$
(9,221
)













See accompanying notes to condensed consolidated financial statements.

3
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; in thousands)

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Net loss
$
(9,972
)
 
$
(9,061
)
 
 
 
 
Other comprehensive loss:
 
 
 
Derivative transactions:
 
 
 
    Derivative holding losses
(3,896
)
 
(2,534
)
 
 
 
 
Comprehensive loss
(13,868
)
 
(11,595
)
Comprehensive loss attributable to
    noncontrolling interests
7,322

 
5,803

Comprehensive loss available to
    common interest holders of
    Brookfield DTLA
$
(6,546
)
 
$
(5,792
)




































See accompanying notes to condensed consolidated financial statements.


4
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited; in thousands, except share amounts)

 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total
Stockholders’
Deficit
 
 
Common
Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
1,000

 
$
—

 
$
191,710

 
$
(177,879
)
 
$
(2,580
)
 
$
(195,788
)
 
$
(184,537
)
Net loss
 
 
 
 
 
 
 
(4,689
)
 
 
 
(5,283
)
 
(9,972
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
(1,857
)
 
(2,039
)
 
(3,896
)
Dividends on Series A
    preferred stock, Series A-1
    preferred interest and
    senior participating
    preferred interest
 
 
 
 
 
 
 
(4,637
)
 
 
 
(4,959
)
 
(9,596
)
Balance, March 31, 2016
1,000

 
$
—

 
$
191,710

 
$
(187,205
)
 
$
(4,437
)
 
$
(208,069
)
 
$
(208,001
)

 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total
Stockholders’
Deficit
 
 
Common
Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
1,000

 
$
—

 
$
191,710

 
$
(137,339
)
 
$
(2,066
)
 
$
(150,703
)
 
$
(98,398
)
Net loss
 
 
 
 
 
 
 
(4,584
)
 
 
 
(4,477
)
 
(9,061
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
(1,208
)
 
(1,326
)
 
(2,534
)
Dividends on Series A
    preferred stock, Series A-1
    preferred interest and
    senior participating
    preferred interest
 
 
 
 
 
 
 
(4,637
)
 
 
 
(5,650
)
 
(10,287
)
Balance, March 31, 2015
1,000

 
$
—

 
$
191,710

 
$
(146,560
)
 
$
(3,274
)
 
$
(162,156
)
 
$
(120,280
)



















See accompanying notes to condensed consolidated financial statements.

5
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
Cash flows from operating activities:
 
 
 
Net loss
$
(9,972
)
 
$
(9,061
)
Adjustments to reconcile net loss to net cash
     provided by operating activities:
 
 
 
Depreciation and amortization
25,076

 
24,589

Provision for doubtful accounts
31

 
(202
)
Amortization of below-market leases/
    above-market leases
(450
)
 
(623
)
Straight-line rent amortization
(3,265
)
 
(3,295
)
Amortization of tenant inducements
788

 
515

Amortization of discounts and deferred financing costs
1,267

 
1,262

Changes in assets and liabilities:
 
 
 
Rents, deferred rents and other receivables
(195
)
 
1,445

Due to affiliates, net
3,719

 
3,437

Deferred charges
(1,777
)
 
(8,630
)
Prepaid and other assets
(3,805
)
 
(1,967
)
Accounts payable and other liabilities
(1,026
)
 
3,819

Net cash provided by operating activities
10,391

 
11,289

Cash flows from investing activities:
 
 
 
Expenditures for improvements to real estate
(10,443
)
 
(19,840
)
Decrease (increase) in restricted cash
3,713

 
(519
)
Net cash used in investing activities
(6,730
)
 
(20,359
)
Cash flows from financing activities:
 
 
 
Principal payments on mortgage loans
(627
)
 
—

Dividends paid on Series A preferred stock
(21,893
)
 
—

Financing fees paid
—

 
(31
)
Net cash used in financing activities
(22,520
)
 
(31
)
Net change in cash and cash equivalents
(18,859
)
 
(9,101
)
Cash and cash equivalents at beginning of period
53,736

 
125,004

Cash and cash equivalents at end of period
$
34,877

 
$
115,903









See accompanying notes to condensed consolidated financial statements.

6
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
22,707

 
$
22,375

 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
Accrual for real estate improvements
$
8,655

 
$
10,816

Accrual for deferred leasing costs
2,145

 
7,765

Decrease in fair value of interest rate swap, net
(3,896
)
 
(2,534
)
 
 
 
 











See accompanying notes to condensed consolidated financial statements.

7
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Organization and Description of Business

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect subsidiary of Brookfield Office Properties Inc. (“BPO”).

Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which are Class A office properties located in the Los Angeles Central Business District (the “LACBD”).

Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.

Note 2—Basis of Presentation

As used in these consolidated and combined financial statements and related notes, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.

Principles of Consolidation and Combination and Basis of Presentation

The unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10‑Q and Rule 10-01 of Regulation S-X. 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 Brookfield DTLA as of and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of those that may be expected for a full fiscal year.

The condensed consolidated balance sheet data as of December 31, 2015 has been derived from Brookfield DTLA’s audited financial statements; however, the accompanying notes to the condensed consolidated financial statements do not include all disclosures required by GAAP.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes included in Brookfield DTLA’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2016.

Reclassifications

In December 2015, Brookfield DTLA adopted the guidance in Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We have combined the amortization of deferred financing costs ($297) and the amortization of debt discounts ($965) and presented a new total ($1,262) in the condensed consolidated statement of cash flows for the three months ended March 31, 2015 so as to reflect the presentation of such costs in the condensed consolidated balance sheet as of December 31, 2015.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for applying the acquisition method of accounting, the useful lives of assets, recoverable amounts of receivables, impairment of long-lived assets and fair value of debt. Actual results could ultimately differ from such estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09 establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This topic provides guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and requires related footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15 on Brookfield DTLA’s consolidated financial statements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. The guidance in ASU 2015-02 became effective for Brookfield DTLA beginning January 1, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, as opposed to being presented as assets. Brookfield DTLA elected to early adopt ASU 2015-03 effective as of December 31, 2015. There was no effect on our consolidated statement of operations for the three months ended March 31, 2015 as a result of adopting this pronouncement.

Income Taxes

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“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.

Qualification and taxation as a REIT depends upon Brookfield DTLA’s 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 Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate tax rates, and it may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may also be subject to certain state or local income taxes, or franchise taxes on its REIT activities.

Brookfield DTLA made no provision for income taxes in its condensed consolidated financial statements for the three months ended March 31, 2016 and 2015, respectively. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA had no unrecognized tax benefits as of March 31, 2016 and December 31, 2015, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. As of March 31, 2016, Brookfield DTLA’s 2013 tax period and 2014 tax year remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities. The 2012 tax year as well as the short tax period ended October 15, 2013 for Brookfield DTLA and its subsidiaries remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.

Note 3—Rents, Deferred Rents and Other Receivables, Net

Brookfield DTLA’s rents, deferred rents and other receivables are presented net of the following amounts in the condensed consolidated balance sheets (in thousands):

 
March 31, 2016
 
December 31, 2015
 
 
 
 
Allowance for doubtful accounts
$
515

 
$
484

Accumulated amortization of tenant inducements
7,313

 
6,525


Brookfield DTLA recorded a $31 thousand and $(202) thousand provision for doubtful accounts during the three months ended March 31, 2016 and 2015, respectively.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4—Intangible Assets and Liabilities

Brookfield DTLA’s intangible assets and liabilities are summarized as follows (in thousands):

 
March 31, 2016
 
December 31, 2015
Intangible Assets
 
 
 
In-place leases
$
110,519

 
$
110,519

Tenant relationships
46,248

 
46,248

Above-market leases
39,936

 
39,936

 
196,703

 
196,703

Less: accumulated amortization
102,978

 
96,993

Intangible assets, net
$
93,725

 
$
99,710

 
 
 
 
Intangible Liabilities
 
 
 
Below-market leases
$
76,344

 
$
76,344

Less: accumulated amortization
47,754

 
46,136

Intangible liabilities, net
$
28,590

 
$
30,208


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

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Rental income
$
450

 
$
623

Depreciation and amortization expense
4,817

 
5,646


As of March 31, 2016, the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2016, the next four years and thereafter is as follows (in thousands):

 
In-Place
Leases
 
Other
Intangible Assets
 
Intangible
Liabilities
 
 
 
 
 
 
2016
$
12,172

 
$
5,715

 
$
4,952

2017
10,274

 
6,293

 
4,859

2018
6,936

 
5,180

 
3,810

2019
5,886

 
4,346

 
3,395

2020
5,099

 
3,424

 
3,189

Thereafter
14,448

 
13,952

 
8,385

 
$
54,815

 
$
38,910

 
$
28,590



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5—Deferred Charges, Net

Brookfield DTLA’s deferred charges are presented net of the following amounts in the condensed consolidated balance sheets (in thousands):

 
March 31, 2016
 
December 31, 2015
 
 
 
 
Accumulated amortization of leasing costs
$
41,003

 
$
38,234


Note 6—Mortgage Loans

Brookfield DTLA’s debt is as follows (in thousands, except percentage amounts):

 
Contractual
Maturity Date
 
 
 
Principal Amount as of
 
 
Interest Rate
 
March 31, 2016
 
December 31, 2015
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
 
Wells Fargo Center–South Tower (1)
12/1/2016
 
2.24
%
 
$
290,000

 
$
290,000

777 Tower (2)
11/1/2018
 
2.14
%
 
200,000

 
200,000

Figueroa at 7th (3)
9/10/2017
 
2.69
%
 
35,000

 
35,000

Total variable-rate loans
 
 
 
 
525,000

 
525,000

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
EY Plaza (4)
11/27/2020
 
3.93
%
 
183,750

 
184,377

Total floating-rate debt
 
 
 
 
708,750

 
709,377

 
 
 
 
 
 
 
 
Fixed-Rate Debt:
 
 
 
 
 
 
 
Wells Fargo Center–North Tower
4/6/2017
 
5.70
%
 
550,000

 
550,000

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

 
458,000

BOA Plaza
9/1/2024
 
4.05
%
 
400,000

 
400,000

Total fixed-rate debt
 
 
 
 
1,408,000

 
1,408,000

 
 
 
 
 
 
 
 
Total debt
 
 
 
 
2,116,750

 
2,117,377

Less: unamortized discounts and debt issuance costs
 
 
 
 
4,705

 
5,972

Total debt, net
 
 
 
 
$
2,112,045

 
$
2,111,405

__________
(1)
This loan bears interest at LIBOR plus 1.80%. 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%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of December 31, 2015 and March 31, 2016, the Company did not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date.
(2)
This loan bears interest at LIBOR plus 1.70%. 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 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

(3)
This loan bears interest at LIBOR plus 2.25%. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of March 31, 2016, our debt to be repaid during the remainder of 2016, the next four years and thereafter is as follows (in thousands):

2016
$
750,892

2017
589,026

2018
204,232

2019
4,449

2020
168,151

Thereafter
400,000

 
$
2,116,750


As of March 31, 2016, $508.8 million of our debt may be prepaid without penalty, $458.0 million may be defeased (as defined in the underlying loan agreements), $550.0 million may be prepaid with prepayment penalties or defeased (as defined in the underlying loan agreement) at our option, $200.0 million may be prepaid with prepayment penalties, and $400.0 million is locked out from defeasance until September 30, 2016.

Gas Company Tower—

Brookfield DTLA currently intends to refinance the $458.0 million mortgage loan secured by Gas Company Tower on or about its August 11, 2016 maturity with new debt with a target leverage ratio of approximately 60% to 65%. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As the leverage ratio for this loan is significantly above such targeted leverage ratio, as of March 31, 2016 Brookfield DTLA anticipates the need for additional cash of approximately $88 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Wells Fargo Center–South Tower—

Brookfield DTLA currently intends to refinance the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 1, 2016 maturity date. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan. As of December 31, 2015 and March 31, 2016, the Company did not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As of March 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $95 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders.

Wells Fargo Center–North Tower—

Brookfield DTLA currently intends to refinance the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower on or about its April 6, 2017 maturity date with new debt with a target leverage ratio of approximately 60% to 65%. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As the leverage ratio for this loan is significantly above such targeted leverage ratio, as of March 31, 2016 Brookfield DTLA anticipates the need for additional cash of approximately $155 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.1 billion of mortgage 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 Brookfield DTLA Holdings if certain triggering events occur as defined in the loan agreements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended March 31, 2016 and were in compliance with the amounts required by the loan agreements, with the exception of Gas Company Tower.

Under the Gas Company Tower mortgage loan, we reported a DSCR of 0.77 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.61 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove Brookfield Properties Management (CA) Inc. as property manager of Gas Company Tower, which is the only recourse available to the lender as a result of such breach.

Pursuant to the terms of the Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, EY Plaza, and Figueroa at 7th mortgage loan agreements, we are required to provide annual audited financial statements of Brookfield DTLA Holdings to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure.

Note 7—Mezzanine Equity

Mezzanine equity in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015 is comprised of the Series A preferred stock, a Series A-1 preferred interest and a senior participating preferred interest (the “Preferred Interests”). The Series A-1 preferred interest and senior participating preferred interest are held by a noncontrolling interest holder. The Preferred Interests are classified in mezzanine equity because they are callable and the holder of the Series A-1 preferred interest and senior participating preferred interest (which also owns some of the Series A preferred stock) indirectly controls the ability to elect to redeem such instruments, through its controlling interest in the Company and its subsidiaries. There is no commitment or obligation on the part of Brookfield DTLA or Brookfield DTLA Holdings to redeem the Preferred Interests.

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of March 31, 2016 and December 31, 2015. Adjustments to increase the carrying amount to redemption value are recorded in the consolidated statement of operations as a redemption measurement adjustment.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Dividends and Distributions

On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.

During April 2016, Brookfield DTLA made a $0.3 million cash distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand. See Note 14 “Subsequent Events—Distribution to Brookfield DTLA Holdings.”

Series A Preferred Stock

As of March 31, 2016 and December 31, 2015, 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings.

On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097. See Note 13 “Commitments and Contingencies—Litigation—Merger-Related Litigation” for additional information regarding the dividend payment.

No dividends were declared on the Series A preferred stock during the three months ended March 31, 2016 and 2015. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of March 31, 2016, the cumulative amount of unpaid dividends totals $115.7 million and has been reflected in the carrying amount of the Series A preferred stock.

The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A preferred stock will rank senior to our common stock with respect to the payment of distributions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for cash at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of March 31, 2016, the Series A preferred stock is reported at its redemption value of $358.9 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through March 31, 2016.

Series A-1 Preferred Interest

The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by Brookfield DTLA Fund Properties II LLC (“New OP”), which are held by a wholly owned subsidiary of Brookfield DTLA, but only with respect to their respective preferred liquidation preferences, and share pro rata with 48.13% to the Series A-1 preferred interest and 51.87% to the Series A preferred interest based on their current liquidation preferences in accordance with their respective preferred liquidation preferences in distributions from New OP, until their preferred liquidation preferences have been reduced to zero. Thereafter, distributions will be made 47.66% to the Series A preferred interest and 52.34% to the Series B preferred interest, which is held by Brookfield DTLA Holdings. The economic terms of the Series A preferred stock mirror those of the New OP Series A preferred interests, including distributions in respect of the preferred liquidation preference.

As of March 31, 2016, the Series A-1 preferred interest is reported at its redemption value of $353.4 million calculated using its liquidation value of $225.7 million plus $127.7 million of accumulated and unpaid dividends on such Series A-1 preferred interest through March 31, 2016.

Senior Participating Preferred Interest

On October 15, 2013, Brookfield DTLA Fund Properties III LLC (“DTLA OP”) issued a senior participating preferred interest to Brookfield DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest was comprised of $240.0 million in preferred interests with a 7.0% coupon and a 4.0% participating interest in the residual value of DTLA OP, which owns 333 South Hope Co. LLC and EYP Realty LLC. As of December 31, 2015, the 7.0% preferred interests portion of the senior participating preferred interest had been fully repaid to Brookfield DTLA Holdings.

As of March 31, 2016, the senior participating preferred interest is reported at its redemption value of $23.9 million using the value of the participating interest.

During April 2016, Brookfield DTLA made a $0.3 million cash distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand. See Note 14 “Subsequent Events—Distribution to Brookfield DTLA Holdings.”


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the three months ended March 31, 2016 is as follows (in thousands, except share amounts):

 
 
Number of
Shares of
Series A
Preferred
Stock
 
Series A
Preferred
Stock
 
Noncontrolling Interests
 
Total
Mezzanine
Equity
 
 
 
 
Series A-1
Preferred
Interest
 
Senior
Participating
Preferred
Interest
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
 
9,730,370

 
$
354,304

 
$
349,084

 
$
23,207

 
$
726,595

Current dividends
 
 
 
4,637

 
4,303

 
—

 
8,940

Redemption measurement adjustment
 
 
 
 
 
 
 
656

 
656

Balance, March 31, 2016
9,730,370

 
$
358,941

 
$
353,387

 
$
23,863

 
$
736,191


Note 8—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest and senior participating preferred interest consist of equity interests of New OP and DTLA OP, respectively, which are owned directly by Brookfield DTLA Holdings. These noncontrolling interests are presented as mezzanine equity in the condensed consolidated balance sheet. See Note 7 “Mezzanine Equity.”

Stockholders’ Deficit Component

The Series B common interest ranks junior to the Series A preferred stock as to dividends and upon liquidation and is presented in the condensed consolidated balance sheet as noncontrolling interest.

During April 2016, Brookfield DTLA received a $2.5 million contribution from Brookfield DTLA Holdings, which was used for general corporate purposes. See Note 14 “Subsequent Events—Capital Contribution.”



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 9—Accumulated Other Comprehensive Loss

A summary of the change in accumulated other comprehensive loss related to Brookfield DTLA’s cash flow hedges is as follows (in thousands):

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Balance at beginning of period
$
(5,415
)
 
$
(4,337
)
Other comprehensive loss
    before reclassifications
(3,896
)
 
(2,534
)
Amounts reclassified from accumulated
    other comprehensive loss
—

 
—

Net current-period
    other comprehensive loss
(3,896
)
 
(2,534
)
Balance at end of period
$
(9,311
)
 
$
(6,871
)

Note 10—Fair Value Measurements

The valuation of Brookfield DTLA’s interest rate swap is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flow of the derivative. This analysis reflects the contractual terms of the derivative, 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.

Brookfield DTLA’s (liabilities) assets 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
 
 
Total
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
(Liabilities)
Assets (Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Interest rate swap at:
 
 
 
 
 
 
 
 
March 31, 2016
 
$
(9,311
)
 
$
—

 
$
(9,311
)
 
$
—

December 31, 2015
 
(5,415
)
 
—

 
(5,415
)
 
—

 
 
 
 
 
 
 
 
 
Interest rate caps at:
 
 
 
 
 
 
 
 
March 31, 2016
 
$
9

 
$
—

 
$
9

 
$
—

December 31, 2015
 
19

 
—

 
19

 
—



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 11—Financial Instruments

Derivative Financial Instruments

A summary of the fair value of Brookfield DTLA’s derivative financial instruments is as follows (in thousands):

 
 
 
Fair Value
 
 
 
March 31, 2016
 
December 31, 2015
Derivatives designated as cash flow hedging
    instruments:
 
 
 
 
 
Interest rate swap
 
 
$
(9,311
)
 
$
(5,415
)

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

 
Amount of Loss
Recognized in AOCL
 
Amount of Loss
Reclassified from
AOCL to Statement
of Operations
Derivatives designated as cash flow hedging instruments:
 
 
 
Interest rate swap for the three months ended:
 
 
 
March 31, 2016
$
(3,896
)
 
$
—

March 31, 2015
(2,534
)
 
—


Interest Rate Swap—

As of March 31, 2016 and December 31, 2015, Brookfield DTLA held an interest rate swap with a notional amount of $185.0 million, which was assigned to the EY Plaza mortgage loan. The swap requires net settlement each month and expires on November 2, 2020.

Interest Rate Caps—

Brookfield DTLA holds interest rate caps pursuant to the terms of certain of its mortgage loan agreements with the following notional amounts (in thousands):

 
March 31, 2016
 
December 31, 2015
 
 
 
 
Wells Fargo Center–South Tower
$
290,000

 
$
290,000

777 Tower
200,000

 
200,000

 
$
490,000

 
$
490,000



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Other Financial Instruments

The estimated fair value and carrying amount of Brookfield DTLA’s mortgage loans are as follows (in thousands):

 
March 31, 2016
 
December 31, 2015
 
 
 
 
Estimated fair value
$
2,127,293

 
$
2,114,761

Carrying amount
2,116,750

 
2,117,377


We calculated the estimated fair value of our mortgage loans by discounting the future contractual cash flows of the loans using current risk adjusted rates available to borrowers with similar credit ratings. The estimated fair value of mortgage loans is classified as Level 3.

Note 12—Related Party Transactions

Management Agreements

Brookfield DTLA has entered into arrangements with BOP Management Inc. (“BOP”), an affiliate of BPO, under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.

A summary of costs incurred by Brookfield DTLA under these arrangements is as follows (in thousands):

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Property management fee expense
$
1,959

 
$
1,903

Asset management fee expense
1,583

 
1,523

General, administrative and
    reimbursable expenses
596

 
549

Leasing and construction management fees
590

 
2,779


Insurance Agreements

Insurance premiums for Brookfield DTLA are paid by an affiliate of BPO. Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

A summary of costs incurred by Brookfield DTLA under this arrangement is as follows (in thousands):

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Insurance expense
$
1,949

 
$
2,147


Note 13—Commitments and Contingencies

Litigation

General—

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on the Company’s business, financial condition or consolidated financial statements as a whole.

Merger-Related Litigation—

Following the announcement of the execution of the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), seven putative class actions were filed against Brookfield Office Properties Inc. (“BPO”), Brookfield DTLA, Brookfield DTLA Holdings LLC, Brookfield DTLA Fund Office Trust Inc., Brookfield DTLA Fund Properties (collectively, the “Brookfield Parties”), MPG Office Trust, Inc., MPG Office, L.P., and the members of MPG Office Trust, Inc.’s board of directors. Five of these lawsuits were filed on behalf of MPG Office Trust, Inc.’s common stockholders: (i) two lawsuits, captioned Coyne v. MPG Office Trust, Inc., et al., No. BC507342 (the “Coyne Action”), and Masih v. MPG Office Trust, Inc., et al., No. BC507962 (the “Masih Action”), were filed in the Superior Court of the State of California in Los Angeles County (the “California State Court”) on April 29, 2013 and May 3, 2013, respectively; and (ii) three lawsuits, captioned Kim v. MPG Office Trust, Inc. et al., No. 24‑C-13-002600 (the “Kim Action”), Perkins v. MPG Office Trust, Inc., et al., No. 24-C-13-002778 (the “Perkins Action”) and Dell’Osso v. MPG Office Trust, Inc., et al., No. 24‑C-13-003283 (the “Dell’Osso Action”) were filed in the Circuit Court for Baltimore City, Maryland on May 1, 2013, May 8, 2013 and May 22, 2013, respectively (collectively, the “Common Stock Actions”). Two lawsuits, captioned Cohen v. MPG Office Trust, Inc. et al., No. 24-C-13-004097 (the “Cohen Action”) and Donlan v. Weinstein, et al., No. 24‑C-13-004293 (the “Donlan Action”), were filed on behalf of MPG Office Trust, Inc.’s preferred stockholders in the Circuit Court for Baltimore City, Maryland on June 20, 2013 and July 2, 2013, respectively (collectively, the “Preferred Stock Actions”).


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

In each of the Common Stock Actions, the plaintiffs allege, among other things, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties in connection with the merger by failing to maximize the value of MPG Office Trust, Inc. and ignoring or failing to protect against conflicts of interest, and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of fiduciary duty. The Kim Action further alleges that MPG Office, L.P. also aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors, and the Dell’Osso Action further alleges that MPG Office Trust, Inc. and MPG Office, L.P. aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors. On June 4, 2013, the Kim and Perkins plaintiffs filed identical, amended complaints in the Circuit Court for Baltimore City, Maryland. On June 5, 2013, the Masih plaintiffs also filed an amended complaint in the Superior Court of the State of California in Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the SEC on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.

In each of the Preferred Stock Actions, which were brought on behalf of MPG Office Trust, Inc.’s preferred stockholders, the plaintiffs allege, among other things, that, by entering into the Merger Agreement and tender offer, MPG Office Trust, Inc. breached the Articles Supplementary, which governs the issuance of the MPG preferred shares, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties by agreeing to a merger agreement that violated the preferred stockholders’ contractual rights and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of contract and fiduciary duty. On July 15, 2013, the plaintiffs in the Preferred Stock Actions filed a joint amended complaint in the Circuit Court for Baltimore City, Maryland that further alleged that MPG Office Trust, Inc.’s board of directors failed to disclose material information regarding BPO’s extension of the tender offer.

The plaintiffs in the seven lawsuits sought an injunction against the merger, rescission or rescissory damages in the event the merger was consummated, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.

On July 10, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Brookfield Parties and the other named defendants in the Common Stock Actions signed a memorandum of understanding, regarding a proposed settlement of all claims asserted therein. The parties subsequently entered into a stipulation of settlement dated November 21, 2013 providing for the release of all asserted claims, additional disclosures by MPG concerning the merger made prior to the merger’s approval, and the payment, by the defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000. After a hearing on June 4, 2014, the California State Court granted plaintiffs’ motion for final approval of the settlement, and entered a Final Order and Judgment, awarding the plaintiffs’ counsel’s attorneys’ fees and expenses in the amount of $475,000, which was paid by MPG Office LLC on June 18, 2014. BPO is seeking reimbursement for the settlement payment from MPG’s insurers.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied the plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. At a hearing on June 18, 2014, the Maryland State Court heard oral arguments on the defendants’ motion to dismiss and reserved judgment on the decision. On October 21, 2014, the parties sent a joint letter to the Maryland State Court stating that since the June 18 meeting, the parties have commenced discussions towards a possible resolution of the lawsuit, requesting that the court temporarily refrain from deciding the pending motion to dismiss to facilitate the discussions.

On March 30, 2015, the plaintiff in the Cohen Action and the defendants entered into a memorandum of understanding setting forth an agreement in principle to settle the Preferred Stock Actions on a class-wide basis and dismiss the case with prejudice in exchange for the payment of $2.25 per share of Series A preferred stock of accumulated and unpaid dividends (the “Dividend Payment”) to holders of record on a record date to be set after final approval of the settlement by the Maryland State Court, plus any attorneys’ fees awarded by the Maryland State Court to the plaintiff’s counsel. The dividend will reduce the amount of accumulated and unpaid dividends on the Series A preferred stock, and the terms of the Series A preferred stock will otherwise remain unchanged.

On August 18, 2015, the Maryland State Court entered an order preliminarily approving the settlement and scheduling a final fairness hearing for October 27, 2015. On September 28, 2015, the plaintiff filed a motion for final certification of the settlement class, final approval of the class action settlement and approval of attorneys’ fees and reimbursement of expenses, seeking a total fee and expense award of $5,250,000. The defendants submitted their opposition to the plaintiff’s fee application on October 13, 2015.

On October 16, 2015, the plaintiff filed a motion seeking discovery related to the valuation of the Dividend Payment in connection with its fee application and served related discovery requests on the defendants. On October 23, 2015, the defendants filed their opposition to that motion, as well as a motion for a protective order precluding discovery. On October 27, 2015, the Maryland State Court held a hearing to decide whether to grant final approval of the settlement and to rule on the parties’ discovery motions. At the hearing, the Court ordered limited discovery to occur prior to ruling on the fee application.

On October 28, 2015, the Maryland State Court issued an order granting final approval of the settlement. The time to appeal the order expired on November 30, 2015 without any appeals having been filed. On December 4, 2015, in accordance with the final approval order and the terms of the parties’ settlement agreement, the board of directors declared a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015. On January 4, 2016, Brookfield DTLA paid the Dividend Payment totaling $21.9 million using cash on hand.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

On December 16, 2015, after taking certain limited discovery permitted by the Maryland State Court during the October 27 hearing, the plaintiff served the defendants with its reply memorandum of law in support of its motion for attorneys’ fees and expenses. That same day, the plaintiff requested that the Court permit it to file the reply memorandum and an exhibit thereto under seal given the confidential nature of the information contained therein. On December 17, 2015, the plaintiff provided the Court with plaintiff’s counsel’s time records for the Court’s in camera review. On January 15, 2016, the defendants filed a surreply to the plaintiff’s reply memorandum after obtaining the Court’s permission to do so. After a hearing on April 6, 2016, the Maryland State Court issued an order on April 18, 2016 granting an award of attorneys’ fees and expenses to the plaintiffs totaling $2,212,688. See Note 14 “Subsequent Events—Merger-Related Litigation.”

Note 14—Subsequent Events

Merger-Related Litigation

On April 18, 2016, the Maryland State Court issued an order granting an award of attorneys’ fees and expenses to the plaintiffs in the Preferred Stock Actions totaling $2,212,688. On April 21, 2016, the Company paid the awarded amount to the plaintiffs’ counsel. BPO is seeking reimbursement for 50% of the attorneys’ fees and expenses awarded to the plaintiffs from MPG’s insurers.

Distribution to Brookfield DTLA Holdings

On April 5, 2016, Brookfield DTLA made a $0.3 million cash distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.

Capital Contribution

On April 21, 2016, Brookfield DTLA received a $2.5 million contribution from Brookfield DTLA Holdings, which was used for general corporate purposes.



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Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed 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

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect subsidiary of Brookfield Office Properties Inc. (“BPO”).

Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which are Class A office properties located in the Los Angeles Central Business District (the “LACBD”).

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“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.

Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Liquidity and Capital Resources

General

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of the holders of the Series A preferred stock. See “—Potential Uses of Liquidity—Property Operations” below.

Sources and Uses of Liquidity

Brookfield DTLA’s potential liquidity sources and uses are, among others, as follows:

 
 
Sources
 
 
Uses
 
•
Cash on hand;
 
•
Property operations;
 
•
Cash generated from operations; and
 
•
Capital expenditures;
 
•
Contributions from Brookfield
  DTLA Holdings.
 
•
Payments in connection with loans;
 
 
 
 
•
Distributions to Brookfield
DTLA Holdings; and
 
 
 
 
•
Dividend payment in connection
  with legal settlement.

Potential Sources of Liquidity—

Cash on Hand—

As of March 31, 2016 and December 31, 2015, Brookfield DTLA had cash and cash equivalents totaling $34.9 million and $53.7 million, respectively.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Cash Generated from Operations—

Brookfield DTLA’s cash generated from operations is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to its tenants. Net cash generated from operations is tied to the level of operating expenses, described below under “—Potential Uses of Liquidity.”

Occupancy levels. The following table presents leasing information for Brookfield DTLA for leases in place as of March 31, 2016:

 
 
Square Feet
 
Leased % and In-Place Rents
Property
 
Net
Building
Rentable
 
% of Net
Rentable
 
%
Leased
 
Total
Annualized
Rents (1)
 
Annualized
Rent
$/RSF (2)
 
 
 
 
 
 
 
 
 
 
 
BOA Plaza
 
1,405,428

 
18.67
%
 
93.2
%
 
$
31,278,095

 
$
23.88

Wells Fargo Center–North Tower
 
1,400,639

 
18.61
%
 
82.0
%
 
29,073,706

 
25.30

Gas Company Tower
 
1,345,163

 
17.87
%
 
88.2
%
 
27,503,003

 
23.19

EY Plaza
 
1,224,967

 
16.28
%
 
89.1
%
 
25,180,297

 
23.08

Wells Fargo Center–South Tower
 
1,124,960

 
14.95
%
 
77.0
%
 
21,524,749

 
24.85

777 Tower
 
1,024,835

 
13.62
%
 
85.3
%
 
20,545,786

 
23.51

 
 
7,525,992

 
100.00
%
 
86.0
%
 
$
155,105,636

 
$
23.95

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of March 31, 2016. This amount reflects total base rent before any rent abatements as of March 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of March 31, 2016 for the twelve months ending March 31, 2017 are approximately $11.7 million, or $1.81 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of the same date.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at March 31, 2016, plus currently available space, for the remainder of 2016, each of the nine calendar years beginning January 1, 2017 and thereafter. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.

Year
 
Total Area in
Square Feet
Covered by 
Expiring
Leases
 
Percentage
of Leased
Square Feet
 
Annualized
Rent (1)
 
Percentage of
Annualized
Rent
 
Current
Rent per
Leased
Square
Foot (2)
 
Rent per
Leased Square
Foot at
Expiration (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
143,041

 
2.2
%
 
$
3,403,803

 
2.2
%
 
$
23.80

 
$
23.90

2017
 
561,257

 
8.7
%
 
13,994,372

 
9.0
%
 
24.93

 
25.53

2018
 
683,017

 
10.5
%
 
12,203,981

 
7.9
%
 
17.87

 
18.76

2019
 
464,258

 
7.2
%
 
12,693,489

 
8.2
%
 
27.34

 
30.62

2020
 
318,367

 
4.9
%
 
8,222,993

 
5.3
%
 
25.83

 
29.31

2021
 
431,970

 
6.7
%
 
10,729,419

 
6.9
%
 
24.84

 
29.02

2022
 
745,035

 
11.5
%
 
19,125,500

 
12.3
%
 
25.67

 
31.49

2023
 
725,522

 
11.2
%
 
17,021,328

 
11.0
%
 
23.46

 
29.37

2024
 
391,323

 
6.0
%
 
9,624,508

 
6.2
%
 
24.59

 
30.98

2025
 
691,875

 
10.7
%
 
18,053,959

 
11.6
%
 
26.09

 
32.50

Thereafter
 
1,320,219

 
20.4
%
 
30,032,284

 
19.4
%
 
22.75

 
34.12

Total expiring leases
 
6,475,884

 
100.0
%
 
$
155,105,636

 
100.0
%
 
$
23.95

 
$
29.51

Currently available
 
1,050,108

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,525,992

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of March 31, 2016. This amount reflects total base rent before any rent abatements as of March 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of March 31, 2016 for the twelve months ending March 31, 2017 are approximately $11.7 million, or $1.81 per leased square foot.
(2)
Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date.
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Rental Rates and Leasing Activity. Average asking rental rates in the LACBD were essentially flat during the three months ended March 31, 2016. Management believes that on average the current in‑place rents are generally close to market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the three months ended March 31, 2016:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2015
6,443,905

 
85.6
 %
     Expirations
(99,416
)
 
(1.3
)%
     New leases
47,343

 
0.6
 %
     Renewals
84,052

 
1.1
 %
Leased square feet as of March 31, 2016
6,475,884

 
86.0
 %


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Collectability of rent from our tenants. Brookfield DTLA’s rental income depends on collecting rent from its tenants, and in particular from its major tenants. In the event of tenant defaults, Brookfield DTLA may experience delays in enforcing its rights as landlord and may incur substantial costs in pursuing legal possession of the tenant’s space and recovery of any amounts due from the tenant. 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.

Contributions from Brookfield DTLA Holdings—

During the three months ended March 31, 2016 and 2015, Brookfield DTLA received no contributions from Brookfield DTLA Holdings. To the extent that future contributions are needed, Brookfield DTLA Holdings has made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a preferred return, if and when called by New OP. As of the date of this report, no contributions have been funded under this commitment.

During April 2016, Brookfield DTLA received a $2.5 million contribution from Brookfield DTLA Holdings, which was used for general corporate purposes. See “Subsequent Events—Capital Contribution.”

Potential Uses of Liquidity—

The following are the projected uses, and some of the potential uses, of cash in the near term.

Property Operations—

BOA Plaza and EY Plaza have historically generated sufficient cash from operations to fund their operating activities. In the future, should the cash generated by Brookfield DTLA’s properties, including the properties acquired from MPG, not be sufficient to fund their operations, such cash would be provided by Brookfield DTLA Holdings or another source of funds available to the Company or, if such cash were not made available, the Company might not have sufficient cash to fund its operations. Brookfield DTLA Holdings has made a commitment to make future capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, for up to $260.0 million of its future cash needs, for which it would be entitled to receive a preferred return, if and when called by New OP. As of the date of this report, no contributions have been funded under this commitment.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Capital Expenditures—

Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain Brookfield DTLA’s properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the length of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Brookfield DTLA expects that leasing activities at its properties, including the properties acquired from MPG, will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending approximately $137 million over the next ten years, with the majority (approximately $115 million) over the next five years. The expected expenditures include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as new fire alarm systems, elevator repairs and modernizations, facade work, roof replacement and new turbines.

Payments in Connection with Loans—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the existing mortgage loans on Wells Fargo Center–North Tower and Gas Company Tower on or about their scheduled maturities (April 2017 for Wells Fargo Center–North Tower and August 2016 for Gas Company Tower) with new debt with a target leverage ratio of approximately 60% to 65%. As the leverage ratio for these loans is significantly above such targeted leverage ratio, Brookfield DTLA anticipates the need for additional cash of approximately $243 million to complete these refinancings. In addition, Brookfield DTLA currently intends to refinance the existing mortgage loan on Wells Fargo Center–South Tower on or about its scheduled maturity (December 2016) with new debt. As of March 31, 2016, the Company did not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. Brookfield DTLA anticipates the need for additional cash of approximately $95 million to complete the refinancing of the Wells Fargo Center–South Tower mortgage loan. There can be no assurance that any of these refinancings can be accomplished or what terms will be available in the market for these type of financings at the time of any refinancing.

Distributions to Brookfield DTLA Holdings—

During the three months ended March 31, 2016 and 2015, the Company made no cash distributions to Brookfield DTLA Holdings.

During April 2016, Brookfield DTLA made a $0.3 million cash distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand. See “Subsequent Events—Distribution to Brookfield DTLA Holdings.”


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Dividend Payment in Connection with Legal Settlement—

On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097. See Part II, Item 1. “Legal Proceedings—Merger‑Related Litigation” for additional information regarding the dividend payment.

Indebtedness

As of March 31, 2016, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of March 31, 2016 is as follows (in millions, except percentage and year amounts):

 
Principal
Amount
 
Percent of
Total Debt
 
Effective
Interest
Rate
 
Weighted Average
Term to
Maturity
 
 
 
 
 
 
 
 
Fixed-rate
$
1,408.0

 
66.52
%
 
5.04
%
 
3 years
Variable-rate swapped to fixed-rate
183.8

 
8.68
%
 
3.93
%
 
5 years
Variable-rate
525.0

 
24.80
%
 
2.23
%
 
1 year
 
$
2,116.8

 
100.00
%
 
4.24
%
 
3 years


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Certain information with respect to our indebtedness as of March 31, 2016 is as follows (in thousands, except percentage amounts):

 
Interest
Rate
 
Contractual
Maturity Date
 
Principal
Amount (1)
 
Annual Debt
Service
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
 
Wells Fargo Center–South Tower (2)
2.24
%
 
12/1/2016
 
$
290,000

 
$
6,586

777 Tower (3)
2.14
%
 
11/1/2018
 
200,000

 
4,339

Figueroa at 7th (4)
2.69
%
 
9/10/2017
 
35,000

 
955

Total variable-rate loans
 
 
 
 
525,000

 
11,880

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate
    Loan:
 
 
 
 
 
 
 
EY Plaza (5)
3.93
%
 
11/27/2020
 
183,750

 
7,318

Total floating-rate debt
 
 
 
 
708,750

 
19,198

 
 
 
 
 
 
 
 
Fixed-Rate Debt
 
 
 
 
 
 
 
Wells Fargo Center–North Tower
5.70
%
 
4/6/2017
 
550,000

 
31,769

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

 
23,692

BOA Plaza
4.05
%
 
9/1/2024
 
400,000

 
16,425

Total fixed-rate rate debt
 
 
 
 
1,408,000

 
71,886

Total debt
 
 
 
 
2,116,750

 
$
91,084

Less: unamortized discounts and debt
     issuance costs
 
 
 
 
4,705

 
 
Total debt, net
 
 
 
 
$
2,112,045

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
This loan bears interest at LIBOR plus 1.80%. 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%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2016, the Company did not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date.
(3)
This loan bears interest at LIBOR plus 1.70%. 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 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 2.25%. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(5)
This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Maturities

Gas Company Tower—

Brookfield DTLA currently intends to refinance the $458.0 million mortgage loan secured by Gas Company Tower on or about its August 11, 2016 maturity with new debt with a target leverage ratio of approximately 60% to 65%. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As the leverage ratio for this loan is significantly above such targeted leverage ratio, as of March 31, 2016 Brookfield DTLA anticipates the need for additional cash of approximately $88 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Wells Fargo Center–South Tower—

Brookfield DTLA currently intends to refinance the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 1, 2016 maturity date. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan. As of March 31, 2016, the Company did not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As of March 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $95 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Wells Fargo Center–North Tower—

Brookfield DTLA currently intends to refinance the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower on or about its April 6, 2017 maturity date with new debt with a target leverage ratio of approximately 60% to 65%. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.

This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As the leverage ratio for this loan is significantly above such targeted leverage ratio, as of March 31, 2016 Brookfield DTLA anticipates the need for additional cash of approximately $155 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.1 billion of mortgage 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 Brookfield DTLA Holdings if certain triggering events occur as defined in the loan agreements.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended March 31, 2016 and were in compliance with the amounts required by the loan agreements, with the exception of Gas Company Tower.

Under the Gas Company Tower mortgage loan, we reported a DSCR of 0.77 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.61 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove Brookfield Properties Management (CA) Inc. as property manager of Gas Company Tower, which is the only recourse available to the lender as a result of such breach.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Pursuant to the terms of the Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, EY Plaza, and Figueroa at 7th mortgage loan agreements, we are required to provide annual audited financial statements of Brookfield DTLA Holdings to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure.

Results of Operations

Comparison of the Three Months Ended March 31, 2016 to March 31, 2015

Condensed Consolidated Statements of Operations Information
(In millions, except percentage amounts)

 
For the Three Months Ended
 
Increase/
(Decrease)
 
%
Change
 
March 31, 2016
 
March 31, 2015
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
40.3

 
$
38.8

 
$
1.5

 
4
 %
Tenant reimbursements
22.9

 
21.6

 
1.3

 
6
 %
Parking
9.1

 
8.7

 
0.4

 
5
 %
Interest and other
2.5

 
4.4

 
(1.9
)
 
(43
)%
Total revenue
74.8

 
73.5

 
1.3

 
2
 %
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
23.2

 
22.2

 
1.0

 
5
 %
Real estate taxes
9.7

 
10.0

 
(0.3
)
 
(3
)%
Parking
2.1

 
1.9

 
0.2

 
10
 %
Other expense
0.7

 
0.3

 
0.4

 
177
 %
Depreciation and amortization
25.1

 
24.6

 
0.5

 
2
 %
Interest
24.0

 
23.6

 
0.4

 
2
 %
Total expenses
84.8

 
82.6

 
2.2

 
3
 %
Net loss
$
(10.0
)
 
$
(9.1
)
 
$
(0.9
)
 
 

Rental Income

Rental income increased $1.5 million, or 4%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, primarily as a result of higher lease rates as well as an increase in occupancy from 84.6% to 86.0%.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $1.3 million, or 6%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, primarily as a result of increased operating expenses passed through to tenants.

Interest and Other Revenue

Interest and other revenue decreased $1.9 million, or 43%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, mainly as a result of a decrease in lease termination income.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $1.0 million, or 5%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, largely due to an increase in various building maintenance costs.

Other Expense

Other expense increased $0.4 million, or 177%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, primarily due to nonrecoverable legal expense in 2016 for which there was no comparable activity during 2015.

Cash Flow

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “Liquidity and Capital Resources—Potential Uses of Liquidity—Property Operations” above.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

The following summary discussion of Brookfield DTLA’s cash flow is based on the condensed consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all‑inclusive discussion of the changes in its cash flow for the periods presented below.

 
For the Three Months Ended
 
Increase/
(Decrease)
 
March 31, 2016
 
March 31, 2015
 
 
(In thousands)
Net cash provided by operating activities
$
10,391

 
$
11,289

 
$
(898
)
Net cash used in investing activities
(6,730
)
 
(20,359
)
 
(13,629
)
Net cash used in financing activities
(22,520
)
 
(31
)
 
22,489


Operating Activities

Brookfield DTLA’s cash flow from operating activities is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to tenants and is also tied to the level of operating expenses. Net cash provided by operating activities during the three months ended March 31, 2016 totaled $10.4 million, compared to net cash provided by operating activities of $11.3 million during the three months ended March 31, 2015. The $0.9 million decrease is primarily related to changes in other working capital amounts.

Investing Activities

Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $6.7 million during the three months ended March 31, 2016, compared to net cash used in investing activities of $20.4 million during the three months ended March 31, 2015, as a result of reduced expenditures for improvements to its properties and use of restricted cash deposits during 2016.

Financing Activities

Brookfield DTLA’s cash flow from financing activities is generally impacted by our loan activity, less any dividends and distributions paid to stockholders and distributions to affiliated companies, if any. Net cash used in financing activities was $22.5 million during the three months ended March 31, 2016, primarily for payment of dividends on the Series A preferred stock.

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet arrangements as of March 31, 2016 and December 31, 2015, respectively.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of March 31, 2016, including any guaranteed or minimum commitments under contractual obligations (in thousands):

 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
 
Principal payments on
     mortgage loans
$
750,892

 
$
589,026

 
$
204,232

 
$
4,449

 
$
168,151

 
$
400,000

 
$
2,116,750

Interest payments –
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt (1)
44,944

 
24,781

 
16,425

 
16,425

 
16,470

 
60,300

 
179,345

Variable-rate swapped to
    fixed-rate debt
5,475

 
7,130

 
6,985

 
6,784

 
6,303

 
—

 
32,677

Variable-rate debt (2)
8,410

 
5,001

 
3,626

 
—

 
—

 
—

 
17,037

Tenant-related
     commitments (3)
50,502

 
21,271

 
11,785

 
963

 
520

 
6,070

 
91,111

 
$
860,223

 
$
647,209

 
$
243,053

 
$
28,621

 
$
191,444

 
$
466,370

 
$
2,436,920

__________
(1)
Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(2)
Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of March 31, 2016 plus the contractual spread per the loan agreements.
(3)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of March 31, 2016.

Related Party Transactions

Management Agreements

Brookfield DTLA has entered into arrangements with BOP Management Inc. (“BOP”), an affiliate of BPO, under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.

A summary of costs incurred by Brookfield DTLA under these arrangements is as follows (in thousands):

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Property management fee expense
$
1,959

 
$
1,903

Asset management fee expense
1,583

 
1,523

General, administrative and
    reimbursable expenses
596

 
549

Leasing and construction management fees
590

 
2,779



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Insurance Agreements

Insurance premiums for Brookfield DTLA are paid by an affiliate of BPO. Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.

A summary of costs incurred by Brookfield DTLA under this arrangement is as follows (in thousands):

 
For the Three Months Ended
 
March 31, 2016
 
March 31, 2015
 
 
 
 
Insurance expense
$
1,949

 
$
2,147


Litigation

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

Critical Accounting Policies

Please refer to Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 28, 2016 for a discussion of our critical accounting policies for “Business Combinations,” “Consolidation,” “Impairment Evaluation,” “Revenue Recognition,” and “Allowance for Doubtful Accounts.” There have been no changes to these policies during the three months ended March 31, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This topic provides guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and requires related footnote disclosures. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15 on Brookfield DTLA’s consolidated financial statements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. The guidance in ASU 2015-02 became effective for Brookfield DTLA beginning January 1, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, as opposed to being presented as assets. Brookfield DTLA elected to early adopt ASU 2015-03 effective as of December 31, 2015. There was no effect on our consolidated statement of operations for the three months ended March 31, 2015 as a result of adopting this pronouncement.

Subsequent Events

Merger-Related Litigation

On April 18, 2016, the Maryland State Court issued an order granting an award of attorneys’ fees and expenses to the plaintiffs in the Preferred Stock Actions totaling $2,212,688. On April 21, 2016, the Company paid the awarded amount to the plaintiffs’ counsel. BPO is seeking reimbursement for 50% of the attorneys’ fees and expenses awarded to the plaintiffs from MPG’s insurers.

Distribution to Brookfield DTLA Holdings

On April 5, 2016, Brookfield DTLA made a $0.3 million cash distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.

Capital Contribution

On April 21, 2016, Brookfield DTLA received a $2.5 million contribution from Brookfield DTLA Holdings, which was used for general corporate purposes.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

See Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 28, 2016 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2015.

Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Brookfield DTLA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Paul L. Schulman, our principal executive officer, and Edward F. Beisner, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2016.

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2016 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.


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PART II—OTHER INFORMATION

Item 1.
Legal Proceedings.

General

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on the Company’s business, financial condition or consolidated financial statements as a whole.

Merger-Related Litigation

Following the announcement of the execution of the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), seven putative class actions were filed against Brookfield Office Properties Inc. (“BPO”), Brookfield DTLA, Brookfield DTLA Holdings LLC, Brookfield DTLA Fund Office Trust Inc., Brookfield DTLA Fund Properties (collectively, the “Brookfield Parties”), MPG Office Trust, Inc., MPG Office, L.P., and the members of MPG Office Trust, Inc.’s board of directors. Five of these lawsuits were filed on behalf of MPG Office Trust, Inc.’s common stockholders: (i) two lawsuits, captioned Coyne v. MPG Office Trust, Inc., et al., No. BC507342 (the “Coyne Action”), and Masih v. MPG Office Trust, Inc., et al., No. BC507962 (the “Masih Action”), were filed in the Superior Court of the State of California in Los Angeles County (the “California State Court”) on April 29, 2013 and May 3, 2013, respectively; and (ii) three lawsuits, captioned Kim v. MPG Office Trust, Inc. et al., No. 24‑C-13-002600 (the “Kim Action”), Perkins v. MPG Office Trust, Inc., et al., No. 24-C-13-002778 (the “Perkins Action”) and Dell’Osso v. MPG Office Trust, Inc., et al., No. 24‑C-13-003283 (the “Dell’Osso Action”) were filed in the Circuit Court for Baltimore City, Maryland on May 1, 2013, May 8, 2013 and May 22, 2013, respectively (collectively, the “Common Stock Actions”). Two lawsuits, captioned Cohen v. MPG Office Trust, Inc. et al., No. 24-C-13-004097 (the “Cohen Action”) and Donlan v. Weinstein, et al., No. 24‑C-13-004293 (the “Donlan Action”), were filed on behalf of MPG Office Trust, Inc.’s preferred stockholders in the Circuit Court for Baltimore City, Maryland on June 20, 2013 and July 2, 2013, respectively (collectively, the “Preferred Stock Actions”).

In each of the Common Stock Actions, the plaintiffs allege, among other things, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties in connection with the merger by failing to maximize the value of MPG Office Trust, Inc. and ignoring or failing to protect against conflicts of interest, and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of fiduciary duty. The Kim Action further alleges that MPG Office, L.P. also aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors, and the Dell’Osso Action further alleges that MPG Office Trust, Inc. and MPG Office, L.P. aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors. On June 4, 2013, the Kim and Perkins plaintiffs filed identical, amended complaints in the Circuit Court for Baltimore City, Maryland. On June 5, 2013, the Masih plaintiffs also filed an amended complaint in the Superior Court of the State of California in Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.


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In each of the Preferred Stock Actions, which were brought on behalf of MPG Office Trust, Inc.’s preferred stockholders, the plaintiffs allege, among other things, that, by entering into the Merger Agreement and tender offer, MPG Office Trust, Inc. breached the Articles Supplementary, which governs the issuance of the MPG preferred shares, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties by agreeing to a merger agreement that violated the preferred stockholders’ contractual rights and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of contract and fiduciary duty. On July 15, 2013, the plaintiffs in the Preferred Stock Actions filed a joint amended complaint in the Circuit Court for Baltimore City, Maryland that further alleged that MPG Office Trust, Inc.’s board of directors failed to disclose material information regarding BPO’s extension of the tender offer.

The plaintiffs in the seven lawsuits sought an injunction against the merger, rescission or rescissory damages in the event the merger was consummated, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.

On July 10, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Brookfield Parties and the other named defendants in the Common Stock Actions signed a memorandum of understanding, regarding a proposed settlement of all claims asserted therein. The parties subsequently entered into a stipulation of settlement dated November 21, 2013 providing for the release of all asserted claims, additional disclosures by MPG concerning the merger made prior to the merger’s approval, and the payment, by the defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000. After a hearing on June 4, 2014, the California State Court granted plaintiffs’ motion for final approval of the settlement, and entered a Final Order and Judgment, awarding the plaintiffs’ counsel’s attorneys’ fees and expenses in the amount of $475,000, which was paid by MPG Office LLC on June 18, 2014. BPO is seeking reimbursement for the settlement payment from MPG’s insurers.

In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied the plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. At a hearing on June 18, 2014, the Maryland State Court heard oral arguments on the defendants’ motion to dismiss and reserved judgment on the decision. On October 21, 2014, the parties sent a joint letter to the Maryland State Court stating that since the June 18 meeting, the parties have commenced discussions towards a possible resolution of the lawsuit, requesting that the court temporarily refrain from deciding the pending motion to dismiss to facilitate the discussions.

On March 30, 2015, the plaintiff in the Cohen Action and the defendants entered into a memorandum of understanding setting forth an agreement in principle to settle the Preferred Stock Actions on a class-wide basis and dismiss the case with prejudice in exchange for the payment of $2.25 per share of Series A preferred stock of accumulated and unpaid dividends (the “Dividend Payment”) to holders of record on a record date to be set after final approval of the settlement by the Maryland State Court, plus any attorneys’ fees awarded by the Maryland State Court to the plaintiff’s counsel. The dividend will reduce the amount of accumulated and unpaid dividends on the Series A preferred stock, and the terms of the Series A preferred stock will otherwise remain unchanged.


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On August 18, 2015, the Maryland State Court entered an order preliminarily approving the settlement and scheduling a final fairness hearing for October 27, 2015. On September 28, 2015, the plaintiff filed a motion for final certification of the settlement class, final approval of the class action settlement and approval of attorneys’ fees and reimbursement of expenses, seeking a total fee and expense award of $5,250,000. The defendants submitted their opposition to the plaintiff’s fee application on October 13, 2015.

On October 16, 2015, the plaintiff filed a motion seeking discovery related to the valuation of the Dividend Payment in connection with its fee application and served related discovery requests on the defendants. On October 23, 2015, the defendants filed their opposition to that motion, as well as a motion for a protective order precluding discovery. On October 27, 2015, the Maryland State Court held a hearing to decide whether to grant final approval of the settlement and to rule on the parties’ discovery motions. At the hearing, the Court ordered limited discovery to occur prior to ruling on the fee application.

On October 28, 2015, the Maryland State Court issued an order granting final approval of the settlement. The time to appeal the order expired on November 30, 2015 without any appeals having been filed. On December 4, 2015, in accordance with the final approval order and the terms of the parties’ settlement agreement, the board of directors declared a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015. On January 4, 2016, Brookfield DTLA paid the Dividend Payment totaling $21.9 million using cash on hand.

On December 16, 2015, after taking certain limited discovery permitted by the Maryland State Court during the October 27 hearing, the plaintiff served the defendants with its reply memorandum of law in support of its motion for attorneys’ fees and expenses. That same day, the plaintiff requested that the Court permit it to file the reply memorandum and an exhibit thereto under seal given the confidential nature of the information contained therein. On December 17, 2015, the plaintiff provided the Court with plaintiff’s counsel’s time records for the Court’s in camera review. On January 15, 2016, the defendants filed a surreply to the plaintiff’s reply memorandum after obtaining the Court’s permission to do so. After a hearing on April 6, 2016, the Maryland State Court issued an order on April 18, 2016 granting an award of attorneys’ fees and expenses to the plaintiffs totaling $2,212,688. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Subsequent Events—Merger-Related Litigation.”


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Item 1A.
Risk Factors.

Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 (as set forth in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding our operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts,” “likely,” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

Although Brookfield DTLA believes that its anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many of which are beyond its control, which may cause Brookfield DTLA’s actual results, performance or achievements to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to:

•
Risks generally incident to the ownership of real property, including the ability to retain tenants and rent space upon lease expirations, the financial condition and solvency of our tenants, the relative illiquidity of real estate and changes in real estate taxes, regulatory compliance costs and other operating expenses;

•
Risks associated with the Downtown Los Angeles market, which is characterized by challenging leasing conditions, including limited numbers of new tenants coming into the market and the downsizing of large tenants in the market such as accounting firms, banks and law firms;

•
Risks related to increased competition for tenants in the Downtown Los Angeles market, including aggressive attempts by competing landlords to fill large vacancies by providing tenants with lower rental rates, increasing amounts of free rent and providing larger allowances for tenant improvements;

•
The impact or unanticipated impact of general economic, political and market factors in the regions in which Brookfield DTLA or any of its subsidiaries does business;

•
The use of debt to finance Brookfield DTLA’s business or that of its subsidiaries;


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•
The behavior of financial markets, including fluctuations in interest rates;

•
Uncertainties of real estate development or redevelopment;

•
Global equity and capital markets and the availability of equity and debt financing and refinancing within these markets;

•
Risks relating to Brookfield DTLA’s insurance coverage;

•
The possible impact of international conflicts and other developments, including terrorist acts;

•
Potential environmental liabilities;

•
Dependence on management personnel;

•
The ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom;

•
Operational and reputational risks;

•
Catastrophic events, such as earthquakes and hurricanes; and

•
Other risks and factors relating to the transactions contemplated by the Merger Agreement including, but not limited to:

•
Increases in operating costs resulting from expenses related to the MPG acquisition;

•
Failure to realize the anticipated benefits and synergies of the transactions contemplated by the Merger Agreement, including as a result of an increase in costs associated with integration or difficulty in integrating the businesses of Brookfield DTLA, BOA Plaza and EY Plaza and their respective subsidiaries, and MPG;

•
Risks resulting from any lawsuits that may arise out of or have arisen as a result of the MPG acquisition or other transactions contemplated by the Merger Agreement; and

•
The impact of legislative, regulatory and competitive changes and other risk factors relating to the real estate industry, as detailed from time to time in the reports of Brookfield DTLA and BPO filed with the SEC.

Brookfield DTLA cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on Brookfield DTLA’s forward-looking statements or information, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, Brookfield DTLA undertakes no obligation to publicly update or revise any forward‑looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.


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Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on March 28, 2016. Those risks are also relevant to our performance and financial condition. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults Upon Senior Securities.

Dividends on the Series A preferred stock are cumulative and therefore will continue to accrue at an annual rate of $1.90625 per share. As of April 30, 2016, the cumulative amount of unpaid dividends totaled $117.2 million.

Item 4.
Mine Safety Disclosures.

Not applicable.

Item 5.
Other Information.

None.


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Item 6.
Exhibits.

Exhibit No.
 
Exhibit Description
31.1*
 
Certification of Principal Executive Officer dated May 13, 2016
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
 
Certification of Principal Financial Officer dated May 13, 2016
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
 
Certification of Principal Executive Officer and Principal Financial Officer dated
May 13, 2016 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
__________
*
Filed herewith.
**
Furnished herewith.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:
As of May 13, 2016

 
BROOKFIELD DTLA FUND OFFICE
    TRUST INVESTOR INC.
 
 
Registrant
 
 
 
 
 
 
By:
/s/ PAUL L. SCHULMAN
 
 
 
Paul L. Schulman
 
 
 
President and Chief Operating Officer,
 
 
 
U.S. Commercial Operations
 
 
 
(Principal executive officer)
 
 
 
 
 
 
By:
/s/ EDWARD F. BEISNER
 
 
 
Edward F. Beisner
 
 
 
Chief Financial Officer
 
 
 
(Principal financial officer)
 
 
 
 
 

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