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Brookfield DTLA Fund Office Trust Investor Inc. - Quarter Report: 2018 June (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 June 30, 2018
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
 
Smaller reporting company ¨
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 August 10, 2018, 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 JUNE 30, 2018

TABLE OF CONTENTS

 
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 

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)

 
June 30, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Investments in Real Estate:
 
 
 
Land
$
227,555

 
$
227,555

Buildings and improvements
2,214,731

 
2,208,498

Tenant improvements
337,904

 
320,269

Investments in real estate, gross
2,780,190

 
2,756,322

Less: accumulated depreciation
379,834

 
342,465

Investments in real estate, net
2,400,356

 
2,413,857

 
 
 
 
Cash and cash equivalents
103,885

 
31,958

Restricted cash
32,771

 
35,547

Rents, deferred rents and other receivables, net
145,834

 
129,482

Intangible assets, net
50,888

 
58,289

Deferred charges, net
65,955

 
69,635

Prepaid and other assets, net
7,181

 
9,047

Total assets
$
2,806,870

 
$
2,747,815

 
 
 
 
LIABILITIES AND DEFICIT
 
 
 
Liabilities:
 
 
 
Mortgage loans, net
$
2,105,588

 
$
1,991,692

Accounts payable and other liabilities
65,203

 
80,810

Due to affiliates
2,379

 
11,273

Intangible liabilities, net
14,086

 
16,239

Total liabilities
$
2,187,256

 
$
2,100,014

 
 
 
 
Commitments and Contingencies (See Note 15)

 









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)

 
June 30, 2018
 
December 31, 2017
 
 
 
 
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 June 30, 2018
    and December 31, 2017
$
400,674

 
$
391,400

Noncontrolling Interests:
 
 
 
Series A-1 preferred interest
392,116

 
383,510

Senior participating preferred interest
25,948

 
25,548

Series B preferred interest
185,633

 
190,291

Total mezzanine equity
1,004,371

 
990,749

 
 
 
 
Stockholders’ Deficit:
 
 
 
Common stock, $0.01 par value, 1,000 shares
    issued and outstanding as of June 30, 2018
    and December 31, 2017
—

 
—

Additional paid-in capital
194,210

 
194,210

Accumulated deficit
(277,441
)
 
(256,877
)
Accumulated other comprehensive income (loss)
365

 
(273
)
Noncontrolling interest – Series B common interest
(301,891
)
 
(280,008
)
Total stockholders’ deficit
(384,757
)
 
(342,948
)
Total liabilities and deficit
$
2,806,870

 
$
2,747,815















See accompanying notes to condensed consolidated financial statements.

2
Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands)

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue:
 
 
 
 
 
 
 
Rental income
$
38,921

 
$
40,147

 
$
79,950

 
$
80,215

Tenant reimbursements
23,976

 
24,150

 
46,081

 
47,770

Parking
9,334

 
9,357

 
18,471

 
18,569

Interest and other
11,963

 
2,416

 
14,903

 
5,431

Total revenue
84,194

 
76,070

 
159,405

 
151,985

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
24,582

 
24,795

 
47,908

 
47,910

Real estate taxes
10,566

 
9,309

 
20,616

 
18,920

Parking
2,377

 
2,081

 
5,129

 
4,730

Other expense
2,699

 
1,321

 
3,353

 
2,367

Depreciation and amortization
23,138

 
24,321

 
47,564

 
49,685

Interest
26,096

 
22,744

 
49,878

 
46,980

Total expenses
89,458

 
84,571

 
174,448

 
170,592

 
 
 
 
 
 
 
 
Net loss
(5,264
)
 
(8,501
)
 
(15,043
)
 
(18,607
)
Net loss attributable to
    noncontrolling interests:
 
 
 
 
 
 
 
Series A-1 preferred interest –
    current dividends
4,303

 
4,303

 
8,606

 
8,606

Senior participating preferred interest –
    redemption measurement adjustment
768

 
(191
)
 
2,425

 
(135
)
Series B preferred interest –
    current dividends
3,921

 
3,861

 
7,800

 
5,505

Series B common interest –
    allocation of net loss
(9,889
)
 
(11,050
)
 
(22,584
)
 
(21,908
)
Net loss attributable to Brookfield DTLA
(4,367
)
 
(5,424
)
 
(11,290
)
 
(10,675
)
Series A preferred stock –
    current dividends
4,637

 
4,637

 
9,274

 
9,274

Net loss available to common interest
    holders of Brookfield DTLA
$
(9,004
)
 
$
(10,061
)
 
$
(20,564
)
 
$
(19,949
)











See accompanying notes to condensed consolidated financial statements.

3
Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Net loss
$
(5,264
)
 
$
(8,501
)
 
$
(15,043
)
 
$
(18,607
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Derivative transactions:
 
 
 
 
 
 
 
    Unrealized derivative holding gains (losses)
835

 
(117
)
 
2,537

 
763

    Reclassification adjustment for realized
        gains included in net loss
—

 
—

 
(1,198
)
 
—

           Total other comprehensive
              income (loss)
835

 
(117
)
 
1,339

 
763

 
 
 
 
 
 
 
 
Comprehensive loss
(4,429
)
 
(8,618
)
 
(13,704
)
 
(17,844
)
Less: comprehensive loss attributable to
         noncontrolling interests
(460
)
 
(3,138
)
 
(3,052
)
 
(7,532
)
Comprehensive loss available to
    common interest holders of
    Brookfield DTLA
$
(3,969
)
 
$
(5,480
)
 
$
(10,652
)
 
$
(10,312
)






























See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

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) Income
 
Non-
controlling
Interest
 
Total
Stockholders’
Deficit
 
 
Common
Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
1,000

 
$
—

 
$
194,210

 
$
(256,877
)
 
$
(273
)
 
$
(280,008
)
 
$
(342,948
)
Net loss
 
 
 
 
 
 
 
(11,290
)
 
 
 
(3,753
)
 
(15,043
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
638

 
701

 
1,339

Dividends on Series A
    preferred stock, Series A-1
    preferred interest,
    senior participating
    preferred interest and
    Series B preferred interest
 
 
 
 
 
 
 
(9,274
)
 
 
 
(18,831
)
 
(28,105
)
Balance, June 30, 2018
1,000

 
$
—

 
$
194,210

 
$
(277,441
)
 
$
365

 
$
(301,891
)
 
$
(384,757
)

 
 
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, 2016
1,000

 
$
—

 
$
194,210

 
$
(215,264
)
 
$
(1,607
)
 
$
(235,774
)
 
$
(258,435
)
Net loss
 
 
 
 
 
 
 
(10,675
)
 
 
 
(7,932
)
 
(18,607
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
363

 
400

 
763

Dividends on Series A
    preferred stock, Series A-1
    preferred interest,
    senior participating
    preferred interest and
    Series B preferred interest
 
 
 
 
 
 
 
(9,274
)
 
 
 
(13,976
)
 
(23,250
)
Balance, June 30, 2017
1,000

 
$
—

 
$
194,210

 
$
(235,213
)
 
$
(1,244
)
 
$
(257,282
)
 
$
(299,529
)
















See accompanying notes to condensed consolidated financial statements.

5
Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
Cash flows from operating activities:
 
 
 
Net loss
$
(15,043
)
 
$
(18,607
)
Adjustments to reconcile net loss to net cash
     provided by operating activities:
 
 
 
Depreciation and amortization
47,564

 
49,685

Provision for (recovery of) doubtful accounts
—

 
(5
)
Amortization of below-market leases/
    above-market leases
73

 
(892
)
Straight-line rent amortization
(8,024
)
 
(3,632
)
Amortization of tenant inducements
1,992

 
1,799

Amortization of debt issuance costs and discounts
4,307

 
2,881

Changes in assets and liabilities:
 
 
 
Rents, deferred rents and other receivables, net
(10,320
)
 
2,253

Deferred charges, net
(1,339
)
 
(3,254
)
Prepaid and other assets, net
3,828

 
3,475

Accounts payable and other liabilities
(4,829
)
 
(13,004
)
Due to affiliates
(8,894
)
 
(13,036
)
Net cash provided by operating activities
9,315

 
7,663

Cash flows from investing activities:
 
 
 
Expenditures for real estate improvements
(35,270
)
 
(26,522
)
Net cash used in investing activities
(35,270
)
 
(26,522
)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage loans
323,500

 
470,000

Principal payments on mortgage loans
(211,831
)
 
(551,988
)
(Distributions to) contributions from
    noncontrolling interests
(14,483
)
 
111,892

Financing fees paid
(2,080
)
 
(7,397
)
Net cash provided by financing activities
95,106

 
22,507

Net change in cash, cash equivalents and
    restricted cash
69,151

 
3,648

Cash, cash equivalents and restricted cash at beginning of period
67,505

 
90,385

Cash, cash equivalents and restricted cash at end of period
$
136,656

 
$
94,033







See accompanying notes to condensed consolidated financial statements.

6
Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
46,244

 
$
45,434

 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
Accrual for real estate improvements
$
14,214

 
$
24,572

Accrual for deferred leasing costs
2,789

 
1,853

 
 
 
 
Writeoff of fully depreciated buildings and improvements
$
—

 
$
3,992

Writeoff of fully depreciated tenant improvements
—

 
45,130

Writeoff of fully amortized deferred charges
—

 
16,743

Writeoff of fully amortized intangible assets
—

 
54,532

Writeoff of fully amortized intangible liabilities
—

 
16,130

Increase in fair value of interest rate swaps, net
2,537

 
763

 
 
 
 




See accompanying notes to condensed consolidated financial statements.

7
Table of Contents


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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”).

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 is a Class A office property 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 condensed consolidated 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 Basis of Presentation

The accompanying 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, 2017 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 27, 2018.

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 purposes of 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.

Accounting Pronouncements Adopted in 2018

Effective January 1, 2018, Brookfield DTLA adopted the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-18, Restricted Cash to Accounting Standards Codification (“ASC”) Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to show the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on a retrospective basis. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017. As a result of the adoption of ASU 2016-18, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the condensed consolidated statement of cash flows since such balances are now included in total cash at both the beginning and end of the reporting period. As a result, for the six months ended June 30, 2017 the Company used net cash in investing activities of $26.5 million instead of $14.7 million as previously reported.

Effective January 1, 2018, Brookfield DTLA adopted, on a modified retrospective basis, the guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). ASU 2014-09, as amended by subsequent ASUs on the topic, 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. The adoption of this pronouncement did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this guidance did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.

Effective January 1, 2018, Brookfield DTLA adopted, on a prospective basis, the guidance in ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or as a business by providing a basis to determine when a set of assets and activities acquired is not a business. We expect that future acquisitions of operating and development properties, if any, will be accounted for as asset acquisitions under the new guidance, instead of as business combinations under the previous guidance. Additionally, we expect that most of the transaction costs associated with any future acquisitions will be capitalized in the consolidated balance sheet as part of the purchase price of the property acquired instead of being expensed as incurred in the consolidated statement of operations as part of acquisition-related expenses.

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets to ASC Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 clarifies the scope of recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606. The adoption of this guidance did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.

Accounting Pronouncements Effective January 1, 2019

Leases

In February 2016, the FASB issued an update (“ASU 2016-02”) to ASC Topic 842, Leases, to amend the accounting guidance for leases. ASU 2016-02 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. The guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on a principle of whether or not the lease is effectively a financed purchase. For all leases with a term greater than 12 months, lessees are required to record a right-of-use asset representing its right to use the underlying asset for the lease term and a liability to make lease payments on its balance sheet and will recognize lease expense generally on a straight‑line basis over the lease term in its statement of

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

operations. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election by class of underlying asset not to recognize lease assets or liabilities on its balance sheet. If a lessee makes this election, it will recognize lease expense for such leases using the effective interest method.

We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements, and we currently believe that the adoption of this standard will not significantly change the accounting for operating leases on Brookfield DTLA’s consolidated balance sheet where we are the lessor, and that such leases will be accounted for in a similar manner. Under ASU 2016‑02, initial direct costs for both lessees and lessors will include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, Brookfield DTLA may no longer be able to capitalize internal leasing costs and instead may be required to expense these costs as incurred. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted.

In January 2018, the FASB released an exposure draft to amend ASU 2016-02 that would (1) simplify transition requirements for both lessees and lessors by adding an option that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) provide a practical expedient for lessors that would permit lessors to make an accounting election to not separate nonlease components from the associated lease components if certain criteria are met.

In March 2018, the FASB finalized the changes with respect to optional transition relief and approved a practical expedient for lessors that would permit lessors to make an accounting policy election to not separate nonlease components from the associated lease components, by class of underlying asset, if the following two criteria are met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the lease component would be classified as an operating lease if accounted for separately. For leases where we are the lessor, we currently believe that we will elect the optional transition relief and that we will meet the noted criteria to not be required to bifurcate and separately report nonlease components, such as common area maintenance revenue, for operating leases in our consolidated statement of operations. As a result, we currently believe that leases where we are the lessor will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. The FASB is expected to issue an ASU codifying these changes. We currently expect to adopt this standard effective January 1, 2019 using the practical expedients proposed in the standard and the changes approved by the FASB.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Other

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging. ASU 2017-12 introduced amendments intended to make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. All transition requirements and elections should be applied to hedging relationships existing as of the date of adoption and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

Accounting Pronouncements Effective January 1, 2020

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019, with early adoption permitted as of the fiscal year beginning after December 15, 2018, including adoption in an interim period using a modified-retrospective approach. We are currently evaluating the impact of the adoption of this guidance 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)

Note 3—Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
103,885

 
$
31,958

 
$
45,759

 
$
30,301

Restricted cash
32,771

 
35,547

 
48,274

 
60,084

    Total cash, cash equivalents and
        restricted cash
$
136,656

 
$
67,505

 
$
94,033

 
$
90,385


Restricted cash consists primarily of deposits for tenant improvements and leasing commissions, real estate taxes, debt service reserves and other items as required by certain of our mortgage loan agreements.

Note 4—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):

 
June 30, 2018
 
December 31, 2017
 
 
 
 
Allowance for doubtful accounts
$
206

 
$
206

Accumulated amortization of tenant inducements
14,447

 
12,455


Brookfield DTLA recorded no provision for doubtful accounts during the three and six months ended June 30, 2018, respectively, and no provision for doubtful accounts and a recovery of doubtful accounts of $5 thousand during the three and six months ended June 30, 2017, respectively.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 5—Intangible Assets and Liabilities

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

 
June 30, 2018
 
December 31, 2017
Intangible Assets
 
 
 
In-place leases
$
66,365

 
$
66,365

Tenant relationships
30,078

 
30,078

Above-market leases
31,270

 
31,270

 
127,713

 
127,713

Less: accumulated amortization
76,825

 
69,424

Intangible assets, net
$
50,888

 
$
58,289

 
 
 
 
Intangible Liabilities
 
 
 
Below-market leases
$
59,561

 
$
59,561

Less: accumulated amortization
45,475

 
43,322

Intangible liabilities, net
$
14,086

 
$
16,239


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
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Rental income
$
(278
)
 
$
324

 
$
(73
)
 
$
892

Depreciation and amortization expense
2,360

 
3,283

 
5,175

 
7,570



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

As of June 30, 2018, the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2018, the next four years and thereafter is as follows (in thousands):

 
In-Place
Leases
 
Other
Intangible Assets
 
Intangible
Liabilities
 
 
 
 
 
 
2018
$
2,593

 
$
1,776

 
$
1,598

2019
5,617

 
4,306

 
3,178

2020
4,972

 
3,415

 
2,972

2021
4,734

 
3,328

 
2,800

2022
4,022

 
3,050

 
2,493

Thereafter
5,532

 
7,543

 
1,045

 
$
27,470

 
$
23,418

 
$
14,086


Note 6—Deferred Charges, Net

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

 
June 30, 2018
 
December 31, 2017
 
 
 
 
Accumulated amortization of deferred leasing costs
$
44,782

 
$
39,762



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 7—Mortgage Loans

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

 
Contractual
Maturity Date
 
 
 
Principal Amount as of
 
 
Interest Rate
 
June 30, 2018
 
December 31, 2017
Floating-Rate Debt
 
 
 
 
 
 
 
Variable-Rate Loans:
 
 
 
 
 
 
 
Wells Fargo Center–North Tower (1)
4/9/2019
 
4.32
%
 
$
370,000

 
$
370,000

Wells Fargo Center–North Tower (2)
4/9/2019
 
7.32
%
 
55,000

 
55,000

Wells Fargo Center–North Tower (3)
4/9/2019
 
9.07
%
 
45,000

 
45,000

Wells Fargo Center–South Tower (4)
12/6/2018
 
5.71
%
 
250,000

 
250,000

777 Tower (5)
11/1/2018
 
4.17
%
 
220,000

 
220,000

EY Plaza (6)
11/27/2020
 
6.53
%
 
35,000

 
—

Total variable-rate loans
 
 
 
 
975,000

 
940,000

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate Loan:
 
 
 
 
 
 
 
EY Plaza (7)
11/27/2020
 
3.90
%
 
230,000

 
—

Total floating-rate debt
 
 
 
 
1,205,000

 
940,000

 
 
 
 
 
 
 
 
Fixed-Rate Debt:
 
 
 
 
 
 
 
BOA Plaza
9/1/2024
 
4.05
%
 
400,000

 
400,000

Gas Company Tower
8/6/2021
 
3.47
%
 
319,000

 
319,000

Gas Company Tower
8/6/2021
 
6.50
%
 
131,000

 
131,000

Figueroa at 7th
3/1/2023
 
3.88
%
 
58,500

 
—

Total fixed-rate debt
 
 
 
 
908,500

 
850,000

 
 
 
 
 
 
 
 
Debt Refinanced:
 
 
 
 
 
 
 
EY Plaza
 
 
 
 
—

 
176,831

Figueroa at 7th
 
 
 
 
—

 
35,000

Total debt refinanced
 
 
 
 
—

 
211,831

 
 
 
 
 
 
 
 
Total debt
 
 
 
 
2,113,500

 
2,001,831

Less: unamortized debt issuance costs
 
 
 
 
7,912

 
10,139

Total debt, net
 
 
 
 
$
2,105,588

 
$
1,991,692

__________
(1)
This loan bears interest at LIBOR plus 2.25%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).
(2)
This loan bears interest at LIBOR plus 5.25%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

(3)
This loan bears interest at LIBOR plus 7.00%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 3.69%. 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 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of June 30, 2018, a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures.
(5)
This loan bears interest at LIBOR plus 2.18%. 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 amounts and loan to value ratios (as specified in the loan agreement). As of June 30, 2018, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. See “—Debt Maturities—777 Tower” below.
(6)
This loan bears interest at LIBOR plus 4.55%. 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 3.50%.
(7)
This loan bears interest at LIBOR plus 1.65%. As required by the loan agreement, we have entered into interest rate swap agreements to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.25%. The effective interest rate of 3.90% includes interest on the swaps.

Debt Refinanced

Figueroa at 7th—

On February 6, 2018, Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million, of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes. The new $58.5 million loan bears interest at a fixed rate equal to 3.88%, requires the payment of interest-only until maturity, and matures on March 1, 2023. The loan is locked out from prepayment until March 1, 2020, after which it can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 1, 2022, after which the loan may be repaid without penalty.

EY Plaza—

On March 29, 2018, Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.6 million, of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder to be used for general corporate purposes. The new $265.0 million loan is comprised of a $230.0 million mortgage loan and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% and 4.55%, respectively, requires the payment of interest-only until maturity, and matures on November 27, 2020. The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) and payment of early termination fees to the counterparties to the interest rate swap agreements, as long as the mezzanine loan has been repaid in full prior to any prepayment of the mortgage loan.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

As required by the mortgage and mezzanine loan agreements, on March 29, 2018 the Company entered into derivative financial instruments to manage the risk of fluctuations in interest rates on its condensed consolidated statement of operations. See Note 13 “Financial Instruments.”

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of June 30, 2018, our debt to be repaid during the remainder of 2018, the next four years and thereafter is as follows (in thousands):

2018
$
470,000

2019
470,000

2020
265,000

2021
450,000

2022
—

Thereafter
458,500

 
$
2,113,500


As of June 30, 2018, $601.0 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), $1,054.0 million may be prepaid with prepayment penalties, and $58.5 million is locked out from prepayment until March 1, 2020.

777 Tower—

Brookfield DTLA currently intends to extend the $220.0 million mortgage loan secured by 777 Tower on or about its November 1, 2018 maturity date. The Company has two options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts and loan to value ratios (as specified in the loan agreement). As of June 30, 2018, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. We are in discussions with the lender to extend the maturity date of this loan for one year, and the Company does not expect to make a principal paydown when the loan is extended (based on current market conditions).

Wells Fargo Center–South Tower—

Brookfield DTLA currently intends to extend or refinance the $250.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 6, 2018 maturity date. The Company has three options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of June 30, 2018, we meet the criteria specified in the loan agreement to extend the maturity date of this loan for one year.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur.

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 June 30, 2018 and were in compliance with the amounts required by the loan agreements.

Note 8—Mezzanine Equity

Mezzanine equity in the condensed consolidated balance sheets is comprised of the Series A preferred stock, a Series A-1 preferred interest, a senior participating preferred interest, and a Series B preferred interest (collectively, the “Preferred Interests”). The Series A-1 preferred interest, senior participating preferred interest and Series B 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, senior participating preferred interest, Series B preferred interest, and 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 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 June 30, 2018 and December 31, 2017. Adjustments to increase the carrying amount to redemption value are recorded in the condensed consolidated statement of operations as a redemption measurement adjustment.

Series A Preferred Stock

As of June 30, 2018 and December 31, 2017, 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 DTLA Holdings.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

No dividends were declared on the Series A preferred stock during the six months ended June 30, 2018 and 2017. 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 June 30, 2018, the cumulative amount of unpaid dividends totals $157.4 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.

As of June 30, 2018, the Series A preferred stock is reported at its redemption value of $400.7 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through June 30, 2018.

Series A-1 Preferred Interest

The Series A-1 preferred interest is held by DTLA Holdings or wholly owned subsidiaries of DTLA Holdings and has a stated value of $225.7 million.

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 common component of the Series A interest and 52.34% to the common component of the Series B interest, which is held by 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 June 30, 2018, the Series A-1 preferred interest is reported at its redemption value of $392.1 million calculated using its liquidation value of $225.7 million plus $166.4 million of accumulated and unpaid dividends on such Series A-1 preferred interest through June 30, 2018.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Senior Participating Preferred Interest

Brookfield DTLA Fund Properties III LLC (“DTLA OP”) issued a senior participating preferred interest to DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. As of June 30, 2018 and December 31, 2017, the senior participating preferred interest represents a 4.0% participating interest in the residual value of DTLA OP.

During the six months ended June 30, 2018, Brookfield DTLA made distributions totaling $2.0 million to DTLA Holdings as returns of investment related to the senior participating preferred interest using cash on hand.

As of June 30, 2018, the senior participating preferred interest is reported at its redemption value of $25.9 million using the value of the participating interest.

Series B Preferred Interest

At the time of the merger with MPG, DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, to fund up to $260.0 million of its future cash needs, for which it will be entitled to receive a preferred return, if and when called by New OP.

The Series B preferred interest in New OP held by DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in New OP may limit 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.

During the six months ended June 30, 2018, Brookfield DTLA made distributions totaling $12.5 million to DTLA Holdings as preferred returns on the Series B preferred interest using cash on hand.

As of June 30, 2018, the Series B preferred interest is reported at its redemption value of $185.6 million calculated using its liquidation value of $174.8 million plus $10.8 million of accumulated and unpaid dividends on such Series B preferred interest through June 30, 2018.


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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 six months ended June 30, 2018 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
 
Series B
Preferred
Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
9,730,370

 
$
391,400

 
$
383,510

 
$
25,548

 
$
190,291

 
$
990,749

Current dividends
 
 
 
9,274

 
8,606

 
—

 
7,800

 
25,680

Distributions to holders
 
 
 
 
 
 
 
(2,025
)
 
(12,458
)
 
(14,483
)
Redemption measurement adjustment
 
 
 
 
 
 
 
2,425

 
 
 
2,425

Balance, June 30, 2018
9,730,370

 
$
400,674

 
$
392,116

 
$
25,948

 
$
185,633

 
$
1,004,371


Note 9—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest consist of equity interests of New OP, DTLA OP and New OP, respectively, which are owned directly by DTLA Holdings. These noncontrolling interests are presented as mezzanine equity in the condensed consolidated balance sheet. See Note 8 “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.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 10—Accumulated Other Comprehensive Income (Loss)

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(70
)
 
$
(2,493
)
 
$
(574
)
 
$
(3,373
)
Other comprehensive income (loss)
    before reclassifications
835

 
(117
)
 
2,537

 
763

Amounts reclassified from accumulated
    other comprehensive loss
—

 
—

 
(1,198
)
 
—

Net current-period
    other comprehensive income (loss)
835

 
(117
)
 
1,339

 
763

Balance at end of period
$
765

 
$
(2,610
)
 
$
765

 
$
(2,610
)

Note 11—Income Taxes

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, we will be subject to federal and state income tax on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may be subject to certain state or local income taxes, or franchise taxes on its REIT activities.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Brookfield DTLA recorded provisions for income taxes of $1.7 million and $0.2 million during the six months ended June 30, 2018 and 2017, respectively. The income tax provision for the six months ended June 30, 2018 is primarily the result of the sale of artwork no longer on display at our Wells Fargo Center office properties due to renovation activities. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act amended the Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Effective January 1, 2018, the Act reduced the corporate tax rate from a maximum rate of 35% to a flat rate of 21% for businesses. Since Brookfield DTLA has elected to qualify as a REIT with the intent of distributing 100% of its taxable income, there was no material impact to the Company’s condensed consolidated financial statements.

Uncertain Tax Positions

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 June 30, 2018 and December 31, 2017, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. As of June 30, 2018, Brookfield DTLA’s 2013 tax period and 2014, 2015 and 2016 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 12—Fair Value Measurements

The valuation of Brookfield DTLA’s interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use 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 net assets (liabilities) measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):

 
 
 
 
Fair Value Measurements Using
 
 
Total
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets (Liabilities)
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Interest rate swaps at:
 
 
 
 
 
 
 
 
June 30, 2018
 
$
1,963

 
$
—

 
$
1,963

 
$
—

December 31, 2017
 
(574
)
 
—

 
(574
)
 
—

 
 
 
 
 
 
 
 
 
Interest rate caps at:
 
 
 
 
 
 
 
 
June 30, 2018
 
$
37

 
$
—

 
$
37

 
$
—

December 31, 2017
 
15

 
—

 
15

 
—


Note 13—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
 
 
June 30, 2018
 
December 31, 2017
Derivatives designated as cash flow hedging instruments:
 
 
 
Interest rate swaps
 
$
1,963

 
$
(574
)

Interest rate swap assets are included in prepaid and other assets, net and interest rate swap liabilities are included in accounts payable and other liabilities in the condensed consolidated balance sheet.


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Table of Contents


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

 
Amount of Gain (Loss)
Recognized in AOCL
 
Amount of Gain (Loss)
Reclassified from
AOCL to Statement
of Operations
Derivatives designated as cash flow hedging instruments:
 
 
 
Interest rate swaps for the six months ended:
 
 
 
June 30, 2018
$
2,537

 
$
1,198

June 30, 2017
763

 
—


Interest Rate Swaps—

As of June 30, 2018, Brookfield DTLA held the following interest rate swaps pursuant to the terms of the EY Plaza mortgage and mezzanine loan agreements (in thousands, except percentages and dates):

 
 
Notional
Amount
 
Swap
Rate
 
LIBOR
Spread
 
Effective
Rate
 
Expiration
Date
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
174,743

 
2.18
%
 
1.65
%
 
3.83
%
 
11/2/2020
Interest rate swap
 
54,206

 
2.47
%
 
1.65
%
 
4.12
%
 
11/2/2020
 
 
$
228,949

 
2.25
%
 
1.65
%
 
3.90
%
 
 

As required by the EY Plaza mortgage loan agreement, on March 29, 2018 the Company entered into an interest rate swap agreement with a notional amount of $54.2 million and a swap rate of 2.47%, which effectively fixes the LIBOR portion of the interest rate at 4.12%. The swap requires net settlement each month.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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):

 
June 30, 2018
 
December 31, 2017
 
 
 
 
Wells Fargo Center–North Tower
$
370,000

 
$
370,000

Wells Fargo Center–North Tower
55,000

 
55,000

Wells Fargo Center–North Tower
45,000

 
45,000

Wells Fargo Center–South Tower
270,000

 
270,000

777 Tower
220,000

 
220,000

EY Plaza
35,000

 
—

 
$
995,000

 
$
960,000


As required by the EY Plaza mezzanine loan agreement, on March 29, 2018 the Company entered into an interest rate cap agreement with a notional amount of $35.0 million that limits the LIBOR portion of the interest rate to 3.50%. The cap agreement expires on October 1, 2019.

Other Financial Instruments

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

 
June 30, 2018
 
December 31, 2017
 
 
 
 
Estimated fair value
$
2,103,784

 
$
2,003,600

Carrying amount
2,113,500

 
2,001,831


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 fair value measurement is determined on the basis of current market expectations using assumptions that market participants would use when pricing liabilities, including assumptions about risk. The estimated fair value of mortgage loans is classified as Level 3.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 14—Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings.

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Property management fee expense
$
1,993

 
$
2,040

 
$
3,925

 
$
4,091

Asset management fee expense
1,582

 
1,582

 
3,165

 
3,165

General, administrative and
    reimbursable expenses
851

 
597

 
1,249

 
1,237

Leasing and construction management fees
634

 
700

 
917

 
847


Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager and Brookfield DTLA reimburses the Manager for the actual cost of such premiums.

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Insurance expense
$
1,972

 
$
1,947

 
$
3,927

 
$
3,880



28
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 15—Commitments and Contingencies

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.


29
Table of Contents

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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”).

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 is Class A office property 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;
 
•
Capital expenditures;
 
•
Contributions from DTLA Holdings; and
 
•
Payments in connection with loans; and
 
•
Proceeds from additional secured or
unsecured debt financings.
 
•
Distributions to DTLA Holdings.

Potential Sources of Liquidity—

Cash on Hand—

As of June 30, 2018 and December 31, 2017, Brookfield DTLA had cash and cash equivalents totaling $103.9 million and $32.0 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 June 30, 2018:

 
 
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

 
18.7
%
 
91.0
%
 
$
32,781,569

 
$
25.62

Wells Fargo Center–North Tower
 
1,400,639

 
18.6
%
 
85.9
%
 
31,087,787

 
25.85

Gas Company Tower
 
1,345,163

 
17.9
%
 
90.8
%
 
30,338,960

 
24.83

EY Plaza
 
1,224,967

 
16.3
%
 
89.9
%
 
27,411,815

 
24.90

Wells Fargo Center–South Tower
 
1,124,960

 
14.9
%
 
76.3
%
 
21,510,474

 
25.06

777 Tower
 
1,024,835

 
13.6
%
 
68.5
%
 
17,911,972

 
25.50

 
 
7,525,992

 
100.0
%
 
84.6
%
 
$
161,042,577

 
$
25.30

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of June 30, 2018. This amount reflects total base rent before any rent abatements as of June 30, 2018 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 June 30, 2018 for the twelve months ending June 30, 2019 are approximately $9.1 million, or $1.44 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 June 30, 2018, plus currently available space, for the remainder of 2018, each of the nine calendar years beginning January 1, 2019 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
134,024

 
2.1
%
 
$
2,486,478

 
1.6
%
 
$
18.55

 
$
18.59

2019
 
524,165

 
8.2
%
 
12,856,093

 
8.0
%
 
24.53

 
25.29

2020
 
333,116

 
5.2
%
 
8,550,953

 
5.3
%
 
25.67

 
27.17

2021
 
403,882

 
6.3
%
 
10,933,874

 
6.8
%
 
27.07

 
29.63

2022
 
654,924

 
10.3
%
 
17,526,356

 
10.9
%
 
26.76

 
29.96

2023
 
881,635

 
13.9
%
 
21,311,189

 
13.2
%
 
24.17

 
28.23

2024
 
444,026

 
7.0
%
 
11,743,050

 
7.3
%
 
26.45

 
31.57

2025
 
700,283

 
11.0
%
 
19,207,684

 
11.9
%
 
27.43

 
32.88

2026
 
561,547

 
8.8
%
 
12,861,250

 
8.0
%
 
22.90

 
28.61

2027
 
151,596

 
2.4
%
 
4,034,004

 
2.5
%
 
26.61

 
35.53

Thereafter
 
1,576,193

 
24.8
%
 
39,531,646

 
24.5
%
 
25.08

 
38.04

Total expiring leases
 
6,365,391

 
100.0
%
 
$
161,042,577

 
100.0
%
 
$
25.30

 
$
31.38

Currently available
 
1,160,601

 
 
 
 
 
 
 
 
 
 
Total rentable square feet
7,525,992

 
 
 
 
 
 
 
 
 
 
__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of June 30, 2018. This amount reflects total base rent before any rent abatements as of June 30, 2018 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 June 30, 2018 for the twelve months ending June 30, 2019 are approximately $9.1 million, or $1.44 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.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the six months ended June 30, 2018. Management believes that on average our current in‑place rents are at market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the six months ended June 30, 2018:

 
Leasing Activity
 
Percentage Leased
 
 
 
 
Leased square feet as of December 31, 2017
6,530,729

 
86.8
 %
     Expirations
(333,643
)
 
(4.4
)%
     New leases
116,937

 
1.5
 %
     Renewals
51,368

 
0.7
 %
Leased square feet as of June 30, 2018
6,365,391

 
84.6
 %

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 DTLA Holdings—

Drawdowns under Capital Commitment—

At the time of the merger with MPG, DTLA Holdings 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. The Company received no contributions under this commitment during the six months ended June 30, 2018. As of August 13, 2018, $85.2 million is available to the Company under this commitment for future funding.

Other Contributions—

The Company received no other contributions during the six months ended June 30, 2018.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Proceeds from Additional Secured or Unsecured Debt Financings—

Figueroa at 7th—

On February 6, 2018, Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million, of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes.

EY Plaza—

On March 29, 2018, Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.6 million, of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder to be used for general corporate purposes.

Wells Fargo Center–South Tower—

As of June 30, 2018, a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of August 13, 2018, no funds have been drawn against the future advance amount.

Potential Uses of Liquidity—

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

Property Operations—

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. Should the cash generated by Brookfield DTLA’s properties not be sufficient to fund their operations, such cash would be provided by 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.

At the time of the merger with MPG, DTLA Holdings made a commitment to make 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 will be entitled to receive a preferred return, if and when called by New OP. As of August 13, 2018, $85.2 million is available to the Company under this commitment for future funding.


35
Table of Contents


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 will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending approximately $116 million over the next ten years, with the majority (approximately $101 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 atrium renovations at Wells Fargo Center, upgrades to fire alarm, security and HVAC systems, elevator upgrades, parking structure lighting, and roof replacements.

As of June 30, 2018, a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of August 13, 2018, no funds have been drawn against the future advance amount.

Payments in Connection with Loans—

Debt Maturities—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to extend the mortgage loan secured by 777 Tower on or about its scheduled maturity in November 2018. The Company has two options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts and loan to value ratios (as specified in the loan agreement). As of June 30, 2018 and through the date of this report, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. We are in discussions with the lender to extend the maturity date of this loan for one year, and the Company does not expect to make a principal paydown when the loan is extended (based on current market conditions). There can be no assurance that this extension can be accomplished.

Brookfield DTLA currently intends to extend or refinance the $250.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 6, 2018 maturity date. The Company has three options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of June 30, 2018, we meet the criteria specified in the loan agreement to extend the maturity date of this loan for one year.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Distributions to DTLA Holdings—

During the six months ended June 30, 2018, Brookfield DTLA made distributions totaling $12.5 million to DTLA Holdings as preferred returns on the Series B preferred interest and distributions totaling $2.0 million to DTLA Holdings as returns of investment related to the senior participating preferred interest using cash on hand.

Indebtedness

As of June 30, 2018, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of June 30, 2018 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
$
908.5

 
43
%
 
4.19
%
 
5 years
Variable-rate swapped to fixed-rate
230.0

 
11
%
 
3.90
%
 
3 years
Variable-rate (1)
975.0

 
46
%
 
5.11
%
 
1 year
 
$
2,113.5

 
100
%
 
4.58
%
 
3 years
__________
(1)
As of June 30, 2018, a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of August 13, 2018, no funds have been drawn against the future advance amount.


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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 June 30, 2018 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–North Tower (2)
4.32
%
 
4/9/2019
 
$
370,000

 
$
16,221

Wells Fargo Center–North Tower (3)
7.32
%
 
4/9/2019
 
55,000

 
4,084

Wells Fargo Center–North Tower (4)
9.07
%
 
4/9/2019
 
45,000

 
4,140

Wells Fargo Center–South Tower (5)
5.71
%
 
12/6/2018
 
250,000

 
14,473

777 Tower (6)
4.17
%
 
11/1/2018
 
220,000

 
9,301

EY Plaza (7)
6.53
%
 
11/27/2020
 
35,000

 
2,318

Total variable-rate loans
 
 
 
 
975,000

 
50,537

 
 
 
 
 
 
 
 
Variable-Rate Swapped to Fixed-Rate
    Loan:
 
 
 
 
 
 
 
EY Plaza (8)
3.90
%
 
11/27/2020
 
230,000

 
9,086

Total floating-rate debt
 
 
 
 
1,205,000

 
59,623

 
 
 
 
 
 
 
 
Fixed-Rate Debt
 
 
 
 
 
 
 
BOA Plaza
4.05
%
 
9/1/2024
 
400,000

 
16,425

Gas Company Tower
3.47
%
 
8/6/2021
 
319,000

 
11,232

Gas Company Tower
6.50
%
 
8/6/2021
 
131,000

 
8,633

Figueroa at 7th
3.88
%
 
3/1/2023
 
58,500

 
2,301

Total fixed-rate rate debt
 
 
 
 
908,500

 
38,591

Total debt
 
 
 
 
2,113,500

 
$
98,214

Less: unamortized debt issuance costs
 
 
 
7,912

 
 
Total debt, net
 
 
 
 
$
2,105,588

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
This loan bears interest at LIBOR plus 2.25%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).
(3)
This loan bears interest at LIBOR plus 5.25%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 7.00%. 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 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement).
(5)
This loan bears interest at LIBOR plus 3.69%. 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 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of June 30, 2018, a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of August 13, 2018, no funds have been drawn against the future advance amount.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

(6)
This loan bears interest at LIBOR plus 2.18%. 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 amounts and loan to value ratios (as specified in the loan agreement). As of June 30, 2018, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. See “—Debt Maturities—777 Tower” below.
(7)
This loan bears interest at LIBOR plus 4.55%. 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 3.50%.
(8)
This loan bears interest at LIBOR plus 1.65%. As required by the loan agreement, we have entered into interest rate swap agreements to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.25%. The effective interest rate of 3.90% includes interest on the swaps.

Debt Refinanced

Figueroa at 7th—

On February 6, 2018, Brookfield DTLA refinanced the mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $58.0 million, of which $35.0 million was used to repay the mortgage loan that previously encumbered the property, with the remainder used for general corporate purposes. The new $58.5 million loan bears interest at a fixed rate equal to 3.88%, requires the payment of interest-only until maturity, and matures on March 1, 2023. The loan is locked out from prepayment until March 1, 2020, after which it can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until November 1, 2022, after which the loan may be repaid without penalty.

EY Plaza—

On March 29, 2018, Brookfield DTLA refinanced the mortgage loan secured by the EY Plaza office property and received net proceeds totaling $263.6 million, of which $175.8 million was used to repay the mortgage loan that previously encumbered the property, with the remainder to be used for general corporate purposes. The new $265.0 million loan is comprised of a $230.0 million mortgage loan and a $35.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.65% and 4.55%, respectively, requires the payment of interest-only until maturity, and matures on November 27, 2020. The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) and payment of early termination fees to the counterparties to the interest rate swap agreements, as long as the mezzanine loan has been repaid in full prior to any prepayment of the mortgage loan.


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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

777 Tower—

Brookfield DTLA currently intends to extend the $220.0 million mortgage loan secured by 777 Tower on or about its November 1, 2018 maturity date. The Company has two options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts and loan to value ratios (as specified in the loan agreement). As of June 30, 2018 and through the date of this report, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date. We are in discussions with the lender to extend the maturity date of this loan for one year, and the Company does not expect to make a principal paydown when the loan is extended (based on current market conditions). There can be no assurance that this extension can be accomplished.

Wells Fargo Center–South Tower—

Brookfield DTLA currently intends to extend or refinance the $250.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 6, 2018 maturity date. The Company has three options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of June 30, 2018, we meet the criteria specified in the loan agreement to extend the maturity date of this loan for one year.

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. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur.

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 June 30, 2018 and were in compliance with the amounts required by the loan agreements.



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Discussion of Results of Operations

Comparison of the Three Months Ended June 30, 2018 to June 30, 2017

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

 
For the Three Months Ended
 
Increase/
(Decrease)
 
%
Change
 
June 30, 2018
 
June 30, 2017
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
38.9

 
$
40.1

 
$
(1.2
)
 
(3
)%
Tenant reimbursements
24.0

 
24.2

 
(0.2
)
 
(1
)%
Parking
9.4

 
9.4

 
—

 
—
 %
Interest and other
12.0

 
2.4

 
9.6

 
400
 %
Total revenue
84.3

 
76.1

 
8.2

 
11
 %
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
24.6

 
24.8

 
(0.2
)
 
(1
)%
Real estate taxes
10.6

 
9.3

 
1.3

 
14
 %
Parking
2.4

 
2.1

 
0.3

 
14
 %
Other expense
2.7

 
1.3

 
1.4

 
108
 %
Depreciation and amortization
23.1

 
24.3

 
(1.2
)
 
(5
)%
Interest
26.1

 
22.8

 
3.3

 
14
 %
Total expenses
89.5

 
84.6

 
4.9

 
6
 %
Net loss
$
(5.2
)
 
$
(8.5
)
 
$
3.3

 
 

Rental Income

Rental income decreased $1.2 million, or 3%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, primarily as a result of a 1% decrease in occupancy.

Interest and Other Revenue

Interest and other revenue increased $9.6 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, primarily due to proceeds totaling $9.3 million received from the sale of artwork no longer on display at our Wells Fargo Center office properties due to renovation activities.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Real Estate Taxes Expense

Real estate taxes expense increased $1.3 million, or 14%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, primarily due to increased property tax assessments at our Figueroa at 7th retail property.

Other Expense

Other expense increased $1.4 million for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 as a result of income tax provisions recorded related to the sale of artwork.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $1.2 million, or 5%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, largely as a result of reduced amortization of acquired in-place lease intangible assets.

Interest Expense

Interest expense increased $3.3 million, or 14%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, mainly due to increases in LIBOR rates combined with an increase in debt outstanding at EY Plaza due to refinancing activity at the end of March 2018.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Comparison of the Six Months Ended June 30, 2018 to June 30, 2017

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

 
For the Six Months Ended
 
Increase/
(Decrease)
 
%
Change
 
June 30, 2018
 
June 30, 2017
 
 
Revenue:
 
 
 
 
 
 
 
Rental income
$
79.9

 
$
80.2

 
$
(0.3
)
 
—
 %
Tenant reimbursements
46.1

 
47.8

 
(1.7
)
 
(4
)%
Parking
18.5

 
18.6

 
(0.1
)
 
(1
)%
Interest and other
14.9

 
5.4

 
9.5

 
176
 %
Total revenue
159.4

 
152.0

 
7.4

 
5
 %
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
47.9

 
47.9

 
—

 
—
 %
Real estate taxes
20.6

 
18.9

 
1.7

 
9
 %
Parking
5.1

 
4.7

 
0.4

 
9
 %
Other expense
3.4

 
2.4

 
1.0

 
42
 %
Depreciation and amortization
47.5

 
49.7

 
(2.2
)
 
(4
)%
Interest
49.9

 
47.0

 
2.9

 
6
 %
Total expenses
174.4

 
170.6

 
3.8

 
2
 %
Net loss
$
(15.0
)
 
$
(18.6
)
 
$
3.6

 
 

Tenant Reimbursements Revenue

Tenant reimbursements revenue decreased $1.7 million, or 4%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily as a result of a 2% decrease in occupancy.

Interest and Other Revenue

Interest and other revenue increased $9.5 million for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily due to proceeds totaling $9.3 million received from the sale of artwork no longer on display at our Wells Fargo Center office properties due to renovation activities.

Real Estate Taxes Expense

Real estate taxes expense increased $1.7 million, or 9%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily due to increased property tax assessments at our Figueroa at 7th retail property.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Other Expense

Other expense increased $1.0 million, or 42%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, primarily as a result of income tax provisions recorded related to the sale of artwork.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $2.2 million, or 4%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 as a result of decreased amortization of accrued in-place leases.

Interest Expense

Interest expense increased $2.9 million, or 6%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, mainly due to increases in LIBOR rates combined with an increase in debt outstanding at EY Plaza due to refinancing activity at the end of March 2018.

Discussion of Condensed Consolidated Cash Flows

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.

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 Six Months Ended
 
Dollar
Change
 
June 30, 2018
 
June 30, 2017
 
 
(In thousands)
Net cash provided by operating activities
$
9,315

 
$
7,663

 
$
1,652

Net cash used in investing activities
(35,270
)
 
(26,522
)
 
(8,748
)
Net cash provided by financing activities
95,106

 
22,507

 
72,599



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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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 six months ended June 30, 2018 totaled $9.3 million, compared to net cash provided by operating activities of $7.7 million during the six months ended June 30, 2017. The $1.7 million increase is primarily due to changes in working capital.

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 $35.3 million during the six months ended June 30, 2018, compared to net cash used in investing activities of $26.5 million during the six months ended June 30, 2017. The $8.7 million increase is the result of an increase in expenditures for improvements to real estate, including atrium renovations and elevator upgrades at Wells Fargo Center totaling $3.9 million.

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 provided by financing activities totaled $95.1 million during the six months ended June 30, 2018, compared to net cash provided by financing activities of $22.5 million during the six months ended June 30, 2017. Net proceeds from the refinancing of the EY Plaza and Figueroa at 7th mortgage loans, partially offset by distributions to the Series B and senior participating preferred interests, was the main source of the net cash provided by financing activities during the six months ended June 30, 2018. Contributions from the Series B preferred interest, partially offset by cash used to refinance the Wells Fargo Center–North Tower mortgage loan, was the primary driver of net cash provided by financing activities during the six months ended June 30, 2017.

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet transactions, arrangements or obligations as of the date this report was filed, June 30, 2018 and December 31, 2017, 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 June 30, 2018, including any guaranteed or minimum commitments under contractual obligations (in thousands):

 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
 
Principal payments on
     mortgage loans
$
470,000

 
$
470,000

 
$
265,000

 
$
450,000

 
$
—

 
$
458,500

 
$
2,113,500

Interest payments –
 
 

 
 
 
 
 
 
 
 
 
 
Fixed-rate debt (1)
19,454

 
38,591

 
38,697

 
30,590

 
18,726

 
27,828

 
173,886

Variable-rate swapped to
    fixed-rate debt
4,580

 
9,073

 
8,926

 
—

 
—

 
—

 
22,579

Variable-rate debt (2)
22,957

 
8,949

 
2,108

 
—

 
—

 
—

 
34,014

Tenant-related
     commitments (3)
59,097

 
25,631

 
9,937

 
1,763

 
2,112

 
3,554

 
102,094

 
$
576,088

 
$
552,244

 
$
324,668

 
$
482,353

 
$
20,838

 
$
489,882

 
$
2,446,073

__________
(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 June 30, 2018 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 June 30, 2018.

Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by 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)

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Property management fee expense
$
1,993

 
$
2,040

 
$
3,925

 
$
4,091

Asset management fee expense
1,582

 
1,582

 
3,165

 
3,165

General, administrative and
    reimbursable expenses
851

 
597

 
1,249

 
1,237

Leasing and construction management fees
634

 
700

 
917

 
847


Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager and Brookfield DTLA reimburses the Manager for the actual cost of such premiums.

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

 
For the Three Months Ended
 
For the Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Insurance expense
$
1,972

 
$
1,947

 
$
3,927

 
$
3,880


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 27, 2018 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 June 30, 2018.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Recent Accounting Pronouncements

Accounting Pronouncements Adopted in 2018

Effective January 1, 2018, Brookfield DTLA adopted the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-18, Restricted Cash to Accounting Standards Codification (“ASC”) Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to show the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on a retrospective basis. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2018 and 2017. As a result of the adoption of ASU 2016-18, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the condensed consolidated statement of cash flows since such balances are now included in total cash at both the beginning and end of the reporting period.

Effective January 1, 2018, Brookfield DTLA adopted, on a modified retrospective basis, the guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). ASU 2014-09, as amended by subsequent ASUs on the topic, 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. The adoption of this pronouncement did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this guidance did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.

Effective January 1, 2018, Brookfield DTLA adopted, on a prospective basis, the guidance in ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or as a business by providing a basis to determine when a set of assets and activities acquired is not a business. We expect that future acquisitions of operating and development properties, if any, will be accounted for as asset acquisitions under the new guidance, instead of as business combinations under the previous guidance. Additionally, we expect that most of the transaction costs associated with any future acquisitions will be capitalized in the consolidated balance sheet as part of the purchase price of the property acquired instead of being expensed as incurred in the consolidated statement of operations as part of acquisition-related expenses.


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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Effective January 1, 2018, Brookfield DTLA adopted, on a retrospective basis, the guidance in ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets to ASC Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 clarifies the scope of recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606. The adoption of this guidance did not have an impact on Brookfield DTLA’s condensed consolidated financial statements.

Accounting Pronouncements Effective January 1, 2019

Leases

In February 2016, the FASB issued an update (“ASU 2016-02”) to ASC Topic 842, Leases, to amend the accounting guidance for leases. ASU 2016-02 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. The guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on a principle of whether or not the lease is effectively a financed purchase. For all leases with a term greater than 12 months, lessees are required to record a right-of-use asset representing its right to use the underlying asset for the lease term and a liability to make lease payments on its balance sheet and will recognize lease expense generally on a straight‑line basis over the lease term in its statement of operations. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election by class of underlying asset not to recognize lease assets or liabilities on its balance sheet. If a lessee makes this election, it will recognize lease expense for such leases using the effective interest method. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted.

We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements, and we currently believe that the adoption of this standard will not significantly change the accounting for operating leases on Brookfield DTLA’s consolidated balance sheet where we are the lessor, and that such leases will be accounted for in a similar manner. Under ASU 2016‑02, initial direct costs for both lessees and lessors will include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, Brookfield DTLA may no longer be able to capitalize internal leasing costs and instead may be required to expense these costs as incurred.

In January 2018, the FASB released an exposure draft to amend ASU 2016-02 that would (1) simplify transition requirements for both lessees and lessors by adding an option that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) provide a practical expedient for lessors that would permit lessors to make an accounting election to not separate nonlease components from the associated lease components if certain criteria are met.


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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 March 2018, the FASB finalized the changes with respect to optional transition relief and approved a practical expedient for lessors that would permit lessors to make an accounting policy election to not separate nonlease components from the associated lease components, by class of underlying asset, if the following two criteria are met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the lease component would be classified as an operating lease if accounted for separately. For leases where the Company is the lessor, we currently believe that we will elect the optional transition relief and that we will meet the noted criteria to not be required to bifurcate and separately report nonlease components, such as common area maintenance revenue, for operating leases in our consolidated statement of operations. As a result, we currently believe that leases where the Company is the lessor will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. The FASB is expected to issue an ASU codifying these changes. We currently expect to adopt this standard effective January 1, 2019 using the practical expedients proposed in the standard and the changes approved by the FASB.

Other

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging. ASU 2017-12 introduced amendments intended to make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. All transition requirements and elections should be applied to hedging relationships existing as of the date of adoption and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

Accounting Pronouncements Effective January 1, 2020

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019, with early adoption permitted as of the fiscal year beginning after December 15, 2018, including adoption in an interim period using a modified-retrospective approach. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


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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 27, 2018 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2017.

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, G. Mark Brown, 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 June 30, 2018.

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 June 30, 2018 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.

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.

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;


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•
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;

•
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

•
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 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 27, 2018. 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 July 31, 2018, the cumulative amount of unpaid dividends totaled $159.0 million.

Item 4.
(Removed and Reserved).


Item 5.
Other Information.

None.


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Item 6.
Exhibits.

Exhibit No.
 
Exhibit Description
 
Certification of Principal Executive Officer dated August 13, 2018
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Principal Financial Officer dated August 13, 2018
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Certification of Principal Executive Officer and Principal Financial Officer dated
August 13, 2018 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 August 13, 2018

 
BROOKFIELD DTLA FUND OFFICE
    TRUST INVESTOR INC.
 
 
Registrant
 
 
 
 
 
 
By:
/s/ G. MARK BROWN
 
 
 
G. Mark Brown
 
 
 
Chairman of the Board
 
 
 
(Principal executive officer)
 
 
 
 
 
 
By:
/s/ EDWARD F. BEISNER
 
 
 
Edward F. Beisner
 
 
 
Chief Financial Officer
 
 
 
(Principal financial officer)
 
 
 
 
 

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