Brookfield DTLA Fund Office Trust Investor Inc. - FORM 10-Q

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EX-31.1 - PEO SECTION 302 CERTIFICATION - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2014930ex311ceo.htm
EX-31.2 - PFO SECTION 302 CERTIFICATION - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2014930ex312cfo.htm
EX-32.1 - PEO AND PFO SECTION 906 CERTIFICATION - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2014930ex321.htm
EXCEL - IDEA: XBRL DOCUMENT - Brookfield DTLA Fund Office Trust Investor Inc.	Financial_Report.xls

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 September 30, 2014
	or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to __________________

Commission File Number: 001-36135

________________________

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

(Exact name of registrant as specified in its charter)



Maryland		46-2616226
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

250 Vesey Street, 15th Floor New York, NY (Address of principal executive offices)		10281 (Zip Code)

(212) 417-7000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

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

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



Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x	Smaller reporting company ¨

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

As of November 7, 2014, 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 SEPTEMBER 30, 2014

TABLE OF CONTENTS



			Page
PART I—FINANCIAL INFORMATION

	Item 1.	Financial Statements.
		Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2014 and December 31, 2013	1
		Condensed Consolidated and Combined Statements of Operations (unaudited) for the three and nine months ended September 30, 2014 and 2013	3
		Condensed Consolidated and Combined Statements of Comprehensive (Loss) Income (unaudited) for the three and nine months ended September 30, 2014 and 2013	4
		Condensed Consolidated and Combined Statements of Stockholders’ Equity (Deficit) (unaudited) for the nine months ended September 30, 2014 and 2013	5
		Condensed Consolidated and Combined Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013	6
		Notes to Condensed Consolidated and Combined Financial Statements (unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	44
	Item 4.	Controls and Procedures.	44

PART II—OTHER INFORMATION

	Item 1.	Legal Proceedings.	45
	Item 1A.	Risk Factors.	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	49
	Item 3.	Defaults Upon Senior Securities.	49
	Item 4.	Mine Safety Disclosures.	49
	Item 5.	Other Information.	49
	Item 6.	Exhibits.	50
	Signatures		51

		Exhibit 31.1
		Exhibit 31.2
		Exhibit 32.1
		Exhibit 101 Instance Document
		Exhibit 101 Schema Document
		Exhibit 101 Calculation Linkbase Document
		Exhibit 101 Definition Linkbase Document
		Exhibit 101 Label Linkbase Document
		Exhibit 101 Presentation Linkbase Document

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands)



	September 30, 2014			December 31, 2013

ASSETS
Investments in real estate:
Land	$	229,039		$	229,039
Buildings and improvements	2,154,064			2,141,821
Tenant improvements	225,053			187,005
	2,608,156			2,557,865
Less: accumulated depreciation	(173,178		)	(121,612		)
Investments in real estate, net	2,434,978			2,436,253

Cash and cash equivalents	168,013			196,071
Restricted cash	38,544			22,797
Rents, deferred rents and other receivables, net	69,674			53,306
Intangible assets, net	129,863			157,088
Deferred charges, net	60,592			61,371
Prepaid and other assets, net	7,221			19,310
Total assets	$	2,908,885		$	2,946,196

LIABILITIES AND (DEFICIT) EQUITY
Liabilities:
Mortgage loans, net	$	2,109,487		$	1,885,605
Accounts payable and other liabilities	83,204			60,637
Due to affiliates, net	21,169			35,615
Intangible liabilities, net	40,108			44,801
Total liabilities	$	2,253,968		$	2,026,658

Commitments and Contingencies (See Note 13)

See accompanying notes to condensed consolidated and combined financial statements.

Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited; in thousands)



	September 30, 2014			December 31, 2013

LIABILITIES AND (DEFICIT) EQUITY (continued)
Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value, 9,730,370 shares issued and outstanding as of September 30, 2014 and December 31, 2013	$	353,012		$	339,101
Noncontrolling Interests:
Series A-1 preferred interest	327,567			314,658
Senior participating preferred interest	48,472			257,780
Total mezzanine equity	729,051			911,539

Stockholders’ (Deficit) Equity:
Common stock, $0.01 par value, 1,000 shares issued and outstanding as of September 30, 2014 and December 31, 2013	—			—
Additional paid-in capital	191,710			191,710
Accumulated deficit	(126,895		)	(89,177		)
Accumulated other comprehensive (loss) income	(946		)	480
Noncontrolling interest – Series B common interest	(138,003		)	(95,014		)
Total stockholders’ (deficit) equity	(74,134		)	7,999
Total liabilities and (deficit) equity	$	2,908,885		$	2,946,196

See accompanying notes to condensed consolidated and combined financial statements.

Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED AND COMBINED

STATEMENTS OF OPERATIONS

(Unaudited; in thousands)



	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2014			Sept. 30, 2013			Sept. 30, 2014			Sept. 30, 2013
Revenue:
Rental income	$	38,232		$	13,449		$	113,983		$	40,011
Tenant reimbursements	25,062			7,511			70,671			22,904
Parking	8,790			2,895			25,452			8,554
Interest and other	3,613			1,379			8,626			2,809
Total revenue	75,697			25,234			218,732			74,278

Expenses:
Rental property operating and maintenance	25,817			8,956			73,426			25,669
Real estate taxes	9,746			2,266			28,602			7,688
Parking	1,903			633			5,352			2,125
Other expense	1,289			599			2,233			1,862
Depreciation and amortization	28,399			7,360			82,509			21,664
Interest	23,447			4,389			68,238			13,091
Total expenses	90,601			24,203			260,360			72,099

Net (loss) income	(14,904		)	1,031			(41,628		)	2,179
Net income attributable to TRZ Holdings IV LLC	—			(1,031		)	—			(2,179		)
Net loss attributable to noncontrolling interests:
Series A-1 preferred interest – current dividends	(4,303		)	—			(12,909		)	—
Senior participating preferred interest – current dividends	(2,232		)	—			(9,467		)	—
Senior participating preferred interest – redemption measurement adjustment	(97		)	—			(1,225		)	—
Series B common interest – allocation of net loss	13,699			—			41,422			—
Net loss attributable to Brookfield DTLA	(7,837		)	—			(23,807		)	—
Series A preferred stock – current dividends	(4,637		)	—			(13,911		)	—
Net loss available to common interest holders of Brookfield DTLA	$	(12,474	)	$	—		$	(37,718	)	$	—

See accompanying notes to condensed consolidated and combined financial statements.

Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED AND COMBINED

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited; in thousands)



	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2014			Sept. 30, 2013			Sept. 30, 2014			Sept. 30, 2013

Net (loss) income	$	(14,904	)	$	1,031		$	(41,628	)	$	2,179

Other comprehensive loss:
Derivative transactions:
Derivative holding gains (losses)	882			—			(2,993		)	—

Comprehensive (loss) income	(14,022		)	1,031			(44,621		)	2,179
Comprehensive (income) attributable to TRZ Holdings IV LLC	—			(1,031		)	—			(2,179		)
Comprehensive loss attributable to noncontrolling interests	6,605			—			19,388			—
Comprehensive loss available to common interest holders of Brookfield DTLA	$	(7,417	)	$	—		$	(25,233	)	$	—

See accompanying notes to condensed consolidated and combined financial statements.

Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED AND COMBINED

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited; in thousands, except share amounts)



	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity (Deficit)
	Common Stock	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity (Deficit)

Balance, December 31, 2013	1,000	$	—	$	191,710	$	(89,177	)	$	480		$	(95,014	)	$	7,999
Net loss						(23,807		)				(17,821		)	(41,628		)
Other comprehensive loss									(1,426		)	(1,567		)	(2,993		)
Dividends on Series A preferred stock, Series A-1 preferred interest and senior participating preferred interest						(13,911		)				(23,601		)	(37,512		)
Balance, September 30, 2014	1,000	$	—	$	191,710	$	(126,895	)	$	(946	)	$	(138,003	)	$	(74,134	)



	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		TRZ Holdings IV LLC’s Interest		Total Member’s Equity
	Common Stock	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		TRZ Holdings IV LLC’s Interest		Total Member’s Equity

Balance, December 31, 2012	—	$	—	$	—	$	—	$	—	$	508,703	$	508,703
Net income										2,179		2,179
Issuance of common stock	1,000	—		28								28
Contributions from TRZ Holdings IV LLC, net										5,402		5,402
Balance, September 30, 2013	1,000	$	—	$	28	$	—	$	—	$	516,284	$	516,312

See accompanying notes to condensed consolidated and combined financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED AND COMBINED

STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	For the Nine Months Ended
	Sept. 30, 2014			Sept. 30, 2013
Cash flows from operating activities:
Net (loss) income	$	(41,628	)	$	2,179
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	82,509			21,664
Amortization of below-market leases/ above-market leases	(1,722		)	(1,482		)
Straight-line rent amortization	(16,631		)	(6,275		)
Amortization of tenant inducements	854			735
Amortization of debt discounts	3,394			471
Amortization of deferred financing costs	950			—
Changes in assets and liabilities:
Rents, deferred rents and other receivables	(8,582		)	(1,302		)
Due to (from) affiliates, net	8,485			(2,536		)
Deferred charges	(5,973		)	(2,673		)
Prepaid and other assets	10,316			3,190
Accounts payable and other liabilities	8,102			3,489
Net cash provided by operating activities	40,074			17,460
Cash flows from investing activities:
Expenditures for improvements to real estate	(26,586		)	(15,649		)
Increase in restricted cash	(15,746		)	—
Net cash used in investing activities	(42,332		)	(15,649		)
Cash flows from financing activities:
Proceeds from mortgage loans	435,000			—
Principal payments on mortgage loans	(214,512		)	(5,287		)
Distributions to Brookfield DTLA Holdings	(220,000		)	—
Contributions from TRZ Holdings IV LLC, net	—			5,402
Due to affiliates	(25,000		)	—
Financing fees paid	(1,288		)	—
Offering costs	—			28
Net cash (used in) provided by financing activities	(25,800		)	143
Net change in cash and cash equivalents	(28,058		)	1,954
Cash and cash equivalents at beginning of period	196,071			5,707
Cash and cash equivalents at end of period	$	168,013		$	7,661

See accompanying notes to condensed consolidated and combined financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED AND COMBINED

STATEMENTS OF CASH FLOWS (continued)

(Unaudited; in thousands)



	For the Nine Months Ended
	Sept. 30, 2014			Sept. 30, 2013
Supplemental disclosure of cash flow information:
Cash paid for interest	$	64,378		$	12,665

Supplemental disclosure of non-cash investing and financing activities:
Accrual for real estate improvements	$	19,091		$	1,626
Accrual for deferred leasing costs	2,656			2,124
Decrease in fair value of interest rate swap, net	(2,993		)	—

See accompanying notes to condensed consolidated and combined financial statements.

Table of Contents

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Description of Business

General

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

Prior to October 15, 2013, 333 South Hope Co. LLC (“333 South Hope”) and EYP Realty LLC (“EYP Realty”) were controlled by BPO through its indirect ownership interest in TRZ Holdings IV LLC (“TRZ”). TRZ owned 100% of the member units of 333 South Hope and EYP Realty, and BPO indirectly owned approximately 84% of the member units of TRZ.

On October 15, 2013, through a series of formation transactions, TRZ’s interests in 333 South Hope and EYP Realty were contributed to subsidiaries of Brookfield DTLA in exchange for preferred and common interests in Brookfield DTLA Fund Properties II LLC (“New OP”) and a preferred interest in Brookfield DTLA Fund Properties III LLC (“DTLA OP”). 333 South Hope owned Bank of America Plaza (“BOA Plaza”) and EYP Realty owned Ernst & Young Plaza (“EY Plaza”). Both of these Class A commercial properties are located in the Los Angeles Central Business District (the “LACBD”).

MPG Acquisition

On October 15, 2013, Brookfield DTLA completed the acquisition of MPG (the “merger”) pursuant to the terms of the Merger Agreement. As part of the transaction, MPG was contributed to New OP in exchange for a preferred interest in New OP. In addition to BOA Plaza and EY Plaza, Brookfield DTLA now owns Wells Fargo Center–North Tower (also known as “Wells Fargo Tower”), Wells Fargo Center–South Tower (also known as “KPMG Tower”), Gas Company Tower and 777 Tower, each of which are Class A office properties located in the LACBD that were formerly owned by MPG.

At the effective time of the merger, (i) each issued and outstanding share of MPG common stock was automatically converted into, and canceled in exchange for, the right to receive $3.15 in cash, without interest and less any required withholding tax and (ii) each issued and outstanding share of 7.625% Series A Cumulative Redeemable Preferred Stock of MPG (the “MPG Preferred Stock”) automatically, and without a vote by the holders of MPG Preferred Stock, was converted into and canceled in exchange for, the right to receive one share of the Company’s Series A preferred stock.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

In connection with the acquisition, DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings, made a tender offer to purchase all of the issued and outstanding shares of MPG Preferred Stock for cash consideration of $25.00 per share (the “offer price”). A total of 372,901 shares of MPG Preferred Stock were validly tendered into the offer and the holders thereof received the offer price for such shares. At the effective time of the merger, each share of MPG Preferred Stock that was issued and outstanding immediately prior to the merger, including each share of MPG Preferred Stock acquired by DTLA Fund Holding Co. in the offer, was exchanged for one share of Series A preferred stock of the Company with rights, terms and conditions substantially identical to those of the MPG Preferred Stock.

Note 2—Basis of Presentation

Predecessor Entities

Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the contribution of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) constitutes a transaction between entities under common control. A combination between entities that already share the same parent is not considered a business combination because there is no change in control at the parent level. Accordingly, the operations of the Predecessor Entities contributed to subsidiaries of Brookfield DTLA by TRZ on October 15, 2013 are presented in the accompanying condensed consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented and the assets and liabilities of BOA Plaza and EY Plaza were recorded at the carrying values reflected in the books and records of 333 South Hope and EYP Realty. As such, no gain or loss was recorded in the consolidated statement of operations for the year ended December 31, 2013 due to this transaction. As a result of the transaction, TRZ’s interest in the Predecessor Entities was exchanged for a preferred and common interest in New OP and a preferred interest in DTLA OP. As a result of certain redemption features in the preferred instruments, these instruments have been classified in the consolidated balance sheets as mezzanine equity. See Note 7 “Mezzanine Equity.”

As used in these condensed consolidated and combined financial statements and related notes, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to the combination of Brookfield DTLA Fund Office Trust Investor Inc. and the Predecessor Entities.

Principles of Consolidation and Combination and Basis of Presentation

The unaudited condensed consolidated and combined financial statements and related disclosures have been prepared in accordance with GAAP applicable to interim financial information and with the instructions to Form 10‑Q and Rule 10-01 of Regulation S-X. 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 and the Predecessor Entities 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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

The condensed consolidated balance sheet data as of December 31, 2013 has been derived from Brookfield DTLA’s audited financial statements; however, the accompanying notes to the condensed consolidated and combined financial statements do not include all disclosures required by GAAP.

The financial information included herein should be read in conjunction with the consolidated and combined 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 April 8, 2014, as amended on April 29, 2014.

The Company consolidates entities in which it has a controlling financial interest. In determining whether Brookfield DTLA has a controlling financial interest in an entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and Brookfield DTLA is the primary beneficiary.

A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Brookfield DTLA qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE.

Consideration of various factors includes, but is not limited to, Brookfield DTLA’s ability to direct the activities that most significantly impact the VIE’s economic performance, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the manager of and/or liquidate the entity.

The Company earns a return through an indirect investment in New OP. Brookfield DTLA Holdings, the parent of Brookfield DTLA, owns all of the common interest in New OP. Brookfield DTLA has an indirect preferred stock interest in New OP and its wholly owned subsidiary is the managing member of New OP.

The Company determined that New OP is a VIE and as a result of having the power to direct the significant activities of New OP and exposure to the economic performance of New OP, Brookfield DTLA meets the two conditions for being the primary beneficiary. Brookfield DTLA is required to continually evaluate its VIE relationships and consolidation conclusion.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Use of Estimates

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

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014‑08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires entities to disclose only disposals representing a strategic shift in operations as discontinued operations. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new standard is effective in the first quarter of 2015 for public organizations with calendar year-ends. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued. We do not believe that this update will have a material effect on Brookfield DTLA’s consolidated financial statements in future periods.

In May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements.

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 year ended December 31, 2013. Brookfield DTLA 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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate tax rates, and it may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may also be subject to certain state or local income taxes, or franchise taxes on its REIT activities.

Brookfield DTLA has made no provision for income taxes in its condensed consolidated and combined financial statements for the three and nine months ended September 30, 2014 and 2013, respectively. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

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 September 30, 2014 and December 31, 2013, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. Brookfield DTLA’s 2013 tax year remains open due to the statute of limitations and may be subject to examination by federal, state and local authorities. The Predecessor Entities’ 2010, 2011 and 2012 tax years as well as the Predecessor Entities’ short tax period ended October 15, 2013 remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.

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

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



	September 30, 2014		December 31, 2013
Allowance for doubtful accounts	$	168	$	357
Accumulated amortization of tenant inducements	3,523		2,669

Brookfield DTLA recorded a provision for doubtful accounts of $0.0 million and $0.1 million during the three and nine months ended September 30, 2014, respectively. The Predecessor Entities recorded no provision for doubtful accounts during the three and nine months ended September 30, 2013.

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 4—Intangible Assets and Liabilities

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



	September 30, 2014			December 31, 2013
Intangible Assets
In-place leases	$	110,380		$	110,380
Tenant relationships	46,248			46,248
Above-market leases	38,913			38,913
	195,541			195,541
Accumulated amortization	(65,678		)	(38,453		)
Intangible assets, net	$	129,863		$	157,088

Intangible Liabilities
Below-market leases	$	76,438		$	76,438
Accumulated amortization	(36,330		)	(31,637		)
Intangible liabilities, net	$	40,108		$	44,801

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 Nine Months Ended
	Sept. 30, 2014		Sept. 30, 2013		Sept. 30, 2014		Sept. 30, 2013
Rental income	$	474	$	489	$	1,722	$	1,482
Depreciation and amortization expense	6,143		1,275		22,626		3,700

As of September 30, 2014, the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2014, the next four years and thereafter is as follows (in thousands):



	In-Place Leases		Other Intangible Assets		Intangible Liabilities
2014	$	6,046	$	3,625	$	1,971
2015	18,221		9,733		7,107
2016	15,146		8,597		6,428
2017	9,280		5,794		5,850
2018	6,821		4,901		4,081
Thereafter	24,259		17,440		14,671
	$	79,773	$	50,090	$	40,108

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 5—Deferred Charges, Net

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



	September 30, 2014		December 31, 2013
Accumulated amortization of leasing costs	$	25,899	$	17,914
Accumulated amortization of deferred financing costs	1,102		152

Note 6—Mortgage Loans

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



	Contractual Maturity Date			Principal Amount as of
	Contractual Maturity Date	Interest Rate		Sept. 30, 2014			Dec. 31, 2013
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–South Tower (1)	12/1/2016	1.96	%	$	290,000		$	290,000
777 Tower (2)	11/1/2018	1.86	%	200,000			200,000
Figueroa at 7th (3)	9/10/2017	2.40	%	35,000			—
Total variable-rate loans				525,000			490,000

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (4)	11/27/2020	3.93	%	185,000			185,000
Total floating-rate debt				710,000			675,000

Fixed-Rate Debt:
Wells Fargo Center–North Tower	4/6/2017	5.70	%	550,000			550,000
Gas Company Tower	8/11/2016	5.10	%	458,000			458,000
BOA Plaza	9/1/2024	4.05	%	400,000			—
Total fixed-rate debt				1,408,000			1,008,000

Debt Refinanced:
BOA Plaza				—			170,191
BOA Plaza				—			44,321
Total debt refinanced				—			214,512
Total debt				2,118,000			1,897,512
Debt discounts				(8,513		)	(11,907		)
Total debt, net				$	2,109,487		$	1,885,605

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

__________


(1)	This loan bears interest at LIBOR plus 1.80%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75%.


(2)	This loan bears interest at LIBOR plus 1.70%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%.


(3)	This loan bears interest at LIBOR plus 2.25%.


(4)	This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.

As of September 30, 2014, our debt to be repaid during the remainder of 2014, the next four years and thereafter is as follows (in thousands):



2014	$	—
2015	311
2016	751,831
2017	589,026
2018	204,232
Thereafter	572,600
	$	2,118,000

As of September 30, 2014, $220.0 million of our debt may be prepaid without penalty, $458.0 million may be defeased (as defined in the underlying loan agreements), $550.0 million may be prepaid with prepayment penalties or defeased (as defined in the underlying loan agreement) at our option, $290.0 million may be prepaid with prepayment penalties, $200.0 million is locked out from prepayment until November 1, 2015, and $400.0 million locked out from defeasance until August 7, 2017.

Secured Debt Financing

On September 10, 2014, Brookfield DTLA completed a $35.0 million mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $34.6 million, which will be used for general corporate purposes, including the repayment of the Company’s $25.0 million intercompany loan with BOP Management Inc. See Note 12 “Related Party Transactions—Intercompany Loan.”

The loan bears interest at a rate equal to LIBOR plus 2.25%, matures on September 10, 2017, and requires the payment of interest-only until maturity. The mortgage loan can be repaid at any time prior to maturity, in whole or in part, without penalty.

Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). If the maturity date of the loan is extended, the loan will require the monthly payment of a principal reduction amount (as defined in the loan agreement) and interest until maturity.

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Refinancing of BOA Plaza Mortgage Loans

On August 7, 2014, Brookfield DTLA Holdings refinanced the mortgage loans secured by the BOA Plaza office property and received net proceeds totaling $399.4 million, of which $211.8 million was used to repay the mortgage loans that previously encumbered the property and $7.7 million was used to fund the loan reserves discussed below, with the remaining $179.9 million to be used for general corporate purposes, including a $150.0 million cash distribution from Brookfield DTLA to Brookfield DTLA Holdings to the holders of the senior preferred participating interest. See Note 7 “Mezzanine Equity—Senior Participating Preferred Interest.”

The new $400.0 million mortgage loan bears interest at a fixed rate equal to 4.05%, matures on September 1, 2024, and requires the payment of interest-only until maturity. The mortgage loan can be defeased upon the earlier of (i) August 7, 2017 or (ii) two years after the securitization of the loan until March 1, 2024, after which the loan can be repaid in full without penalty.

In connection with the refinancing, Brookfield DTLA Holdings was required to fund a $4.2 million tax reserve, a $3.0 million tenant improvement and leasing commission reserve, and a $0.5 million rent concession reserve at closing.

Funding of Wells Fargo Center–North Tower Collateral Reserve

In connection with the MPG acquisition, Brookfield DTLA Holdings assumed the mortgage loan secured by the Wells Fargo Center–North Tower office property. In connection with loan assumption, Brookfield DTLA Holdings agreed to deposit a total of $10.0 million into a collateral reserve account held by the lender, of which $5.0 million was deposited when the loan was assumed during 2013 and $1.25 million was funded by Brookfield DTLA in April and October 2014, respectively. The remaining $2.5 million will be paid in installments of $1.25 million in April and October 2015.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non‑recourse loans can become partially or fully recourse against Brookfield DTLA Holdings if certain triggering events occur as defined in the loan agreements.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended September 30, 2014 and were in compliance with the amounts required by the loan agreements, with the exception of Gas Company Tower.

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FINANCIAL STATEMENTS (continued)

(Unaudited)

Under the Gas Company Tower mortgage loan, we reported a DSCR of 0.82 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.62 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove Brookfield Properties Management (CA) Inc. as property manager of Gas Company Tower, which is the only recourse available to the lender as a result of such breach.

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

Note 7—Mezzanine Equity

Mezzanine equity in the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 is comprised of the Series A preferred stock, a Series A-1 preferred interest and a senior participating preferred interest (the “Preferred Interests”). The Series A-1 preferred interest and senior participating preferred interest are held by a noncontrolling interest holder. There is no commitment or obligation on the part of Brookfield DTLA or Brookfield DTLA Holdings to redeem the Preferred Interests. See “—Senior Participating Preferred Interest” below for a discussion of the distributions paid related to the senior participating preferred interest during 2014.

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 September 30, 2014 and December 31, 2013.

Other than the distributions paid to the senior participating preferred interest described below, Brookfield DTLA has not paid any cash dividends in the past. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.

Series A Preferred Stock

As of September 30, 2014 and December 31, 2013, 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings.

The fair value of the 9,730,370 shares of Series A preferred stock issued by the Company in the merger with MPG was based on an estimate of fair value of $26.00 per share. The valuation was based on available trading information for the MPG Preferred Stock and the Company’s Series A preferred stock on the day prior to and subsequent to the transaction, respectively.

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FINANCIAL STATEMENTS (continued)

(Unaudited)

No dividends were declared on the Series A preferred stock during the nine months ended September 30, 2014. 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 September 30, 2014, the cumulative amount of unpaid dividends totals $109.7 million and has been reflected in the carrying amount of the Series A preferred stock.

As of September 30, 2014, the Series A preferred stock is reported at its redemption value of $353.0 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through September 30, 2014.

Series A-1 Preferred Interest

As of September 30, 2014, the Series A-1 preferred interest is reported at its redemption value of $327.6 million calculated using its liquidation value of $225.7 million plus $101.9 million of accumulated and unpaid dividends on such Series A-1 preferred interest through September 30, 2014.

Senior Participating Preferred Interest

On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, which was comprised of $7.3 million in settlement of preferred dividends on the senior participating preferred interest through March 21, 2014 and a return of investment of $62.7 million using proceeds generated by the refinancing of EY Plaza.

On August 28, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings of $150.0 million, which was comprised of $5.5 million in settlement of preferred dividends on the senior participating preferred interest through August 28, 2014 and a return of investment of $144.5 million using proceeds generated by the refinancing of BOA Plaza.

As of September 30, 2014, the senior participating preferred interest is reported at its redemption value of $48.5 million calculated using the value of the preferred and participating interests totaling $48.3 million plus $0.2 million of accumulated and unpaid dividends on the preferred interest through September 30, 2014.

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the nine months ended September 30, 2014 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
	Number of Shares of Series A Preferred Stock	Series A Preferred Stock		Series A-1 Preferred Interest		Senior Participating Preferred Interest			Total Mezzanine Equity

Balance, December 31, 2013	9,730,370	$	339,101	$	314,658	$	257,780		$	911,539
Current dividends		13,911		12,909		9,467			36,287
Redemption measurement adjustment						1,225			1,225
Cash distributions						(220,000		)	(220,000		)
Balance, September 30, 2014	9,730,370	$	353,012	$	327,567	$	48,472		$	729,051

Note 8—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest and senior participating preferred interest consist of equity interests of New OP and DTLA OP, respectively, which are owned directly by Brookfield DTLA Holdings. These noncontrolling interests are presented in mezzanine equity in the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013. See Note 7 “Mezzanine Equity.”

Stockholders’ Equity 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 sheets as of September 30, 2014 and December 31, 2013 as noncontrolling interest.

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9—Accumulated Other Comprehensive Loss

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



	For the Three Months Ended					For the Nine Months Ended
	Sept. 30, 2014			Sept. 30, 2013		Sept. 30, 2014			Sept. 30, 2013
Balance at beginning of period	$	(2,868	)	$	—	$	1,007		$	—
Other comprehensive gain (loss) before reclassifications	882			—		(2,993		)	—
Amounts reclassified from accumulated other comprehensive loss	—			—		—			—
Net current-period other comprehensive gain (loss)	882			—		(2,993		)	—
Balance at end of period	$	(1,986	)	$	—	$	(1,986	)	$	—

Note 10—Fair Value Measurements

The valuation of Brookfield DTLA’s interest rate swap is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flow of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. We have incorporated credit valuation adjustments to appropriately reflect both our own and the respective counterparty’s non-performance risk in the fair value measurements.

Brookfield DTLA’s (liabilities) assets measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):



				Fair Value Measurements Using
	Total Fair Value			Quoted Prices in Active Markets for Identical (Liabilities) Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swap at:
September 30, 2014	$	(1,986	)	$	—	$	(1,986	)	$	—
December 31, 2013	1,007			—		1,007			—

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 11—Financial Instruments

Derivative Financial Instruments

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



	Fair Value
	September 30, 2014			December 31, 2013
Derivatives designated as cash flow hedging instruments:
Interest rate swap (liability) asset	$	(1,986	)	$	1,007

The interest rate swap liability as of September 30, 2014 is included in accounts payable and other liabilities in the condensed consolidated balance sheet, while the interest rate swap asset as of December 31, 2013 is included in prepaid and other assets in the condensed consolidated balance sheet.

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



	Amount of (Loss) Recognized in AOCL			Amount of Gain/(Loss) Reclassified from AOCL to Statement of Operations
Derivatives designated as cash flow hedging instruments:
Interest rate swap for the nine months ended:
September 30, 2014	$	(2,993	)	$	—
September 30, 2013	—			—

Interest Rate Swap—

As of September 30, 2014 and December 31, 2013, Brookfield DTLA held an interest rate swap with a notional amount of $185.0 million, which was assigned to the EY Plaza mortgage loan. The swap requires net settlement each month and expires on November 2, 2020.

Interest Rate Caps—

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



	September 30, 2014		December 31, 2013
Wells Fargo Center–South Tower	$	290,000	$	290,000
777 Tower	200,000		200,000
	$	490,000	$	490,000

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FINANCIAL STATEMENTS (continued)

(Unaudited)

The fair value of our interest rate caps was $0.3 million and $1.6 million as of September 30, 2014 and December 31, 2013, respectively.

Other Financial Instruments

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



	September 30, 2014		December 31, 2013
Estimated fair value	$	2,107,988	$	1,890,436
Carrying amount	2,109,487		1,885,605

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

Note 12—Related Party Transactions

Intercompany Loan

The Company was indebted to BOP Management Inc. under a $25.0 million promissory note dated October 11, 2013, which was included in due to affiliates, net in the condensed consolidated balance sheet as of December 31, 2013. The note bore interest at 3.25%. For the three and nine months ended September 30, 2014, the Company accrued $0.2 million and $0.6 million, respectively, of interest expense related to this note. Given the short-term nature of this instrument, fair value was determined to approximate carrying value as of December 31, 2013.

During September 2014, the Company paid $25.8 million in full settlement of the principal and interest outstanding on the intercompany loan using proceeds from the mortgage loan secured by the Figueroa at 7th retail property.

Management Agreements

The Predecessor Entities entered into arrangements with Brookfield Properties Management LLC, which is affiliated with the Company through common ownership through BPO, under which the affiliate provides property management and various other services. On October 15, 2013, these agreements were transferred to BOP Management Inc., an affiliate of BPO. The MPG properties entered into similar arrangements with BOP Management Inc. after the closing of the acquisition on October 15, 2013. Property management fees under these agreements are calculated based on 3.0% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Management Inc. an asset management fee, which is calculated based on 0.75% of the capital contributed to Brookfield DTLA Holdings.

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2014		Sept. 30, 2013		Sept. 30, 2014		Sept. 30, 2013
Property management fee expense	$	2,173	$	737	$	6,190	$	2,093
Asset management fee expense	1,540		—		4,569		—
General, administrative and reimbursable expenses	586		297		1,896		867
Leasing and construction management fees	274		162		1,959		659

Insurance Agreements

Brookfield DTLA’s properties are covered under an insurance policy entered into by BPO that provides all risk property and business interruption for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $300.0 million of earthquake insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for all of BPO’s U.S. properties. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies.

Prior to their expiration effective April 19, 2014, the MPG properties were covered under an insurance policy that provided all risk property and business interruption with an aggregate limit of $1.25 billion and a $130.0 million aggregate limit of earthquake insurance, and a terrorism insurance policy with a $1.25 billion aggregate limit. Effective April 19, 2014, the MPG properties were added to the existing BPO insurance policies described above.

Insurance premiums for Brookfield DTLA are paid by an affiliate company under common control through BPO. Brookfield DTLA reimburses the affiliate company for the actual cost of such premiums.

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2014		Sept. 30, 2013		Sept. 30, 2014		Sept. 30, 2013
Insurance expense	$	2,485	$	1,234	$	6,252	$	3,655

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NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 13—Commitments and Contingencies

Litigation

General—

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

Merger-Related Litigation—

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

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FINANCIAL STATEMENTS (continued)

(Unaudited)

Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the SEC on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.

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

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

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

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED

FINANCIAL STATEMENTS (continued)

(Unaudited)

discussions, and stating that the parties will report to the court within 45 days of the October 21 letter regarding the status of their discussions.

While the final outcome with respect to the Merger Litigations cannot be predicted with certainty, in the opinion of management after consultation with external legal counsel, any liability that may arise from such contingencies would not have a material adverse effect on the financial position, results of operations or liquidity of Brookfield DTLA.

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

and Results of Operations.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated and combined 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

General

Prior to October 15, 2013, Brookfield DTLA had not conducted any business as a separate company and had no material assets or liabilities. The operations of 333 South Hope and EYP Realty (together, the “Predecessor Entities”) contributed to Brookfield DTLA by TRZ on October 15, 2013 are presented in the condensed consolidated and combined financial statements as if they were owned by Brookfield DTLA for all historical periods presented. See Item 1. “Financial Statements.”

MPG Acquisition

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Wells Fargo Center–South Tower (also known as “KPMG Tower”), Gas Company Tower and 777 Tower, each of which are Class A office properties located in the LACBD that were formerly owned by MPG.

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.

Liquidity and Capital Resources

General

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. Over the last several years, the Predecessor Entities have maintained their liquidity position through cash generated from operations and contributions from TRZ.

Sources and Uses of Liquidity

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



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

Potential Sources of Liquidity—

Cash on Hand—

As of September 30, 2014, Brookfield DTLA had cash and cash equivalents totaling $168.0 million.

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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 September 30, 2014:



	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	18.65	%	89.9	%	$	29,283,496	$	23.18
Wells Fargo Center–North Tower	1,400,639	18.59	%	81.8	%	27,622,179		24.12
Gas Company Tower	1,345,163	17.85	%	79.2	%	22,984,090		21.58
EY Plaza	1,234,372	16.38	%	87.9	%	23,185,434		21.36
Wells Fargo Center–South Tower	1,124,960	14.93	%	68.3	%	20,713,227		26.96
777 Tower	1,024,835	13.60	%	83.4	%	19,739,760		23.08
	7,535,397	100.00	%	82.0	%	$	143,528,186	$	23.22

__________

(1)

Annualized rent represents the annualized monthly contractual rent under existing leases as of September 30, 2014. This amount reflects total base rent before any rent abatements as of September 30, 2014 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 September 30, 2014 for the twelve months ending September 30, 2015 are approximately $11.8 million, or $1.91 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 September 30, 2014, plus currently available space for the remainder of 2014, each of the nine calendar years beginning January 1, 2015 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)

2014	44,218	0.7	%	$	911,609	0.6	%	$	20.62	$	20.62
2015	402,390	6.5	%	9,209,685		6.4	%	22.89		22.91
2016	387,943	6.3	%	8,392,919		5.8	%	21.63		22.59
2017	631,131	10.2	%	15,720,207		11.0	%	24.91		26.55
2018	769,260	12.4	%	17,400,561		12.1	%	22.62		24.20
2019	478,140	7.7	%	12,438,385		8.7	%	26.01		30.83
2020	313,613	5.1	%	7,549,657		5.3	%	24.07		29.39
2021	147,797	2.4	%	3,058,773		2.1	%	20.70		24.47
2022	806,252	13.0	%	19,502,293		13.6	%	24.19		30.73
2023	658,942	10.7	%	15,113,346		10.5	%	22.94		30.66
Thereafter	1,542,587	25.0	%	34,230,751		23.9	%	22.19		30.10
Total expiring leases	6,182,273	100.0	%	$	143,528,186	100.0	%	$	23.22	$	28.02
Currently available	1,353,124
Total rentable square feet	7,535,397

__________

(1)


(2)	Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date.


(3)	Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Rental Rates and Leasing Activity. Average asking rental rates in the LACBD were essentially flat during the nine months ended September 30, 2014. Management believes that on average the current in‑place rents are generally close to market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the nine months ended September 30, 2014:



	Leasing Activity		Percentage Leased

Leased square feet as of December 31, 2013	6,289,262		83.5	%
Expirations	(463,146	)	(6.2	)%
New leases	283,187		3.7	%
Renewals	72,970		1.0	%
Leased square feet as of September 30, 2014	6,182,273		82.0	%

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Collectability of rent from our tenants. Brookfield DTLA’s rental income depends on collecting rent from its tenants, and in particular from its major tenants. In the event of tenant defaults, Brookfield DTLA may experience delays in enforcing its rights as landlord and may incur substantial costs in pursuing legal possession of the tenant’s space and recovery of any amounts due from the tenant. This is particularly true in the case of the bankruptcy or insolvency of a major tenant or where the Federal Deposit Insurance Corporation is acting as receiver.

Contributions from Brookfield DTLA Holdings—

During the nine months ended September 30, 2014, Brookfield DTLA received no contributions from Brookfield DTLA Holdings. To the extent that future contributions are needed, Brookfield DTLA Holdings has agreed to fund up to $260 million to the Company, for which it will be entitled to receive a preferred return.

Potential Uses of Liquidity—

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

Property Operations—

The Predecessor Entities have generated sufficient cash from operations to fund their operating activities. In the future, should the cash generated by Brookfield DTLA’s properties, including the properties acquired from MPG, not be sufficient to fund their operations, such cash would be provided by Brookfield DTLA Holdings.

Capital Expenditures—

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

Brookfield DTLA expects that leasing activities at its properties, including the properties acquired from MPG, will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending between $70 million and $75 million over the next ten years, with the majority ($60 million to $65 million) over the next five years. The expected expenditures include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as new fire alarm systems, elevator repairs and modernizations, facade work, roof replacement and new turbines.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Payments in Connection with Loans—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the existing mortgage loans on Wells Fargo Center–North Tower and Gas Company Tower on or about their scheduled maturity with new debt with a target leverage ratio of approximately 60% to 65%. As the leverage ratio for these loans is significantly above such targeted leverage ratio, Brookfield DTLA anticipates the need for additional cash of approximately $273 million to complete these refinancings, all of which will occur prior to 2017. There can be no assurance that any of these refinancings can be accomplished, what terms will be available in the market for these type of financings at the time of any refinancing, or that these refinancings will generate net cash proceeds.

Distributions to Brookfield DTLA Holdings—

Indebtedness

As of September 30, 2014, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of September 30, 2014 is as follows (in millions, except percentage and year amounts):



	Principal Amount		Percent of Total Debt		Effective Interest Rate		Weighted Average Term to Maturity
Fixed-rate	$	1,408.0	66.49	%	5.04	%	4 years
Variable-rate swapped to fixed-rate	185.0		8.73	%	3.93	%	6 years
Variable-rate	525.0		24.78	%	1.95	%	3 years
	$	2,118.0	100.00	%	4.17	%	4 years

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain information with respect to our indebtedness as of September 30, 2014 is as follows (in thousands, except percentage amounts):



	Interest Rate		Contractual Maturity Date	Principal Amount (1)			Annual Debt Service
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–South Tower (2)	1.96	%	12/1/2016	$	290,000		$	5,763
777 Tower (3)	1.86	%	11/1/2018	200,000			3,772
Figueroa at 7th (4)	2.40	%	9/10/2017	35,000			853
Total variable-rate loans				525,000			10,388

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (5)	3.93	%	11/27/2020	185,000			7,368
Total floating-rate debt				710,000			17,756

Fixed-Rate Debt
Wells Fargo Center–North Tower	5.70	%	4/6/2017	550,000			31,769
Gas Company Tower	5.10	%	8/11/2016	458,000			23,692
BOA Plaza	4.05	%	9/1/2024	400,000			16,425
Total fixed-rate rate debt				1,408,000			71,886
Total debt				2,118,000			$	89,642
Debt discounts				(8,513		)
Total debt, net				$	2,109,487

__________


(1)	Assuming no payment has been made in advance of its due date.


(2)	This loan bears interest at LIBOR plus 1.80%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 4.75%.


(3)	This loan bears interest at LIBOR plus 1.70%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%.


(4)	This loan bears interest at LIBOR plus 2.25%.


(5)	This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap.

Secured Debt Financing

On September 10, 2014, Brookfield DTLA completed a $35.0 million mortgage loan secured by the Figueroa at 7th retail property and received net proceeds totaling $34.6 million, which will be used for general corporate purposes, including the repayment of the Company’s $25.0 million intercompany loan with BOP Management Inc. See “Related Party Transactions—Intercompany 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)

Refinancing of BOA Plaza Mortgage Loans

Funding of Wells Fargo Center–North Tower Collateral Reserve

Non-Recourse Carve Out Guarantees

Debt Reporting

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

Comparison of the Three Months Ended September 30, 2014 to September 30, 2013

Condensed Consolidated and Combined Statements of Operations Information

(In millions, except percentage amounts)



	For the Three Months Ended					Increase/ (Decrease)			% Change
	9/30/2014			9/30/2013		Increase/ (Decrease)			% Change
Revenue:
Rental income	$	38.2		$	13.4	$	24.8		184	%
Tenant reimbursements	25.1			7.5		17.6			234	%
Parking	8.8			2.9		5.9			204	%
Interest and other	3.6			1.4		2.2			157	%
Total revenue	75.7			25.2		50.5			200	%

Expenses:
Rental property operating and maintenance	25.8			8.9		16.9			189	%
Real estate taxes	9.7			2.3		7.4			327	%
Parking	1.9			0.6		1.3			205	%
Other expense	1.3			0.6		0.7			117	%
Depreciation and amortization	28.4			7.4		21.0			285	%
Interest	23.5			4.4		19.1			434	%
Total expenses	90.6			24.2		66.4			274	%
Net (loss) income	$	(14.9	)	$	1.0	$	(15.9	)

Rental Income

Rental income increased $24.8 million, or 184%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, largely due to the acquisition of MPG which contributed $24.3 million to rental income in the third quarter of 2014.

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $17.6 million, or 234%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $15.5 million to tenant reimbursements revenue in the third quarter of 2014.

Parking Revenue

Parking revenue increased $5.9 million, or 204%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $5.5 million to parking revenue in the third quarter of 2014.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue increased $2.2 million, or 157%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $2.7 million to interest and other revenue in the third quarter of 2014.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $16.9 million, or 189%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $16.3 million to rental property operating and maintenance expense in the third quarter of 2014.

Real Estate Taxes Expense

Real estate taxes expense increased $7.4 million, or 327%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, largely as a result of the acquisition of MPG which contributed $6.6 million to real estate taxes expense in the third quarter of 2014, combined with increases in 2014 property taxes at BOA Plaza and EY Plaza.

Parking Expense

Parking expense increased $1.3 million, or 205%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 due to the acquisition of MPG which contributed $1.0 million to parking expense in the third quarter of 2014.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $21.0 million, or 285%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 due to the acquisition of MPG which contributed $20.7 million to depreciation and amortization expense in the third quarter of 2014.

Interest Expense

Interest expense increased $19.1 million, or 434%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, largely as a result of the acquisition of MPG which contributed $17.6 million to interest expense in the third quarter of 2014, combined with payments on the EY Plaza interest rate swap agreement that was entered into in November 2013.

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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 Nine Months Ended September 30, 2014 to September 30, 2013

Condensed Consolidated and Combined Statements of Operations Information

(In millions, except percentage amounts)



	For the Nine Months Ended					Increase/ (Decrease)			% Change
	9/30/2014			9/30/2013		Increase/ (Decrease)			% Change
Revenue:
Rental income	$	114.0		$	40.0	$	74.0		185	%
Tenant reimbursements	70.7			22.9		47.8			209	%
Parking	25.4			8.6		16.8			196	%
Interest and other	8.6			2.8		5.8			207	%
Total revenue	218.7			74.3		144.4			194	%

Expenses:
Rental property operating and maintenance	73.4			25.7		47.7			186	%
Real estate taxes	28.6			7.7		20.9			272	%
Parking	5.4			2.1		3.3			155	%
Other expense	2.2			1.8		0.4			22	%
Depreciation and amortization	82.5			21.7		60.8			281	%
Interest	68.2			13.1		55.1			421	%
Total expenses	260.3			72.1		188.2			261	%
Net (loss) income	$	(41.6	)	$	2.2	$	(43.8	)

Rental Income

Rental income increased $74.0 million, or 185%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, primarily due to the acquisition of MPG which contributed $72.9 million to rental income during the nine months ended September 30, 2014.

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $47.8 million, or 209%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $43.7 million to tenant reimbursements revenue during the nine months ended September 30, 2014.

Parking Revenue

Parking revenue increased $16.8 million, or 196%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $16.1 million to parking revenue during the nine months ended September 30, 2014.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue increased $5.8 million, or 207%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $6.2 million to interest and other revenue during the nine months ended September 30, 2014.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $47.7 million, or 186%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $46.3 million to rental property operating and maintenance expense during the nine months ended September 30, 2014.

Real Estate Taxes Expense

Real estate taxes expense increased $20.9 million, or 272%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, largely as a result of the acquisition of MPG which contributed $19.5 million to real estate taxes expense during the nine months ended September 30, 2014, combined with increases in 2014 property taxes at BOA Plaza and EY Plaza.

Parking Expense

Parking expense increased $3.3 million, or 155%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 as a result of the acquisition of MPG which contributed $2.8 million to parking expense during the nine months ended September 30, 2014.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $60.8 million, or 281%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, mainly due to the acquisition of MPG which contributed $60.1 million to depreciation and amortization expense during the nine months ended September 30, 2014.

Interest Expense

Interest expense increased $55.1 million, or 421%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, largely as a result of the acquisition of MPG which contributed $52.4 million to interest expense during the nine months ended September 30, 2014, combined with payments on the EY Plaza interest rate swap agreement that was entered into in November 2013.

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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 Flow

The following summary discussion of Brookfield DTLA’s cash flow is based on the condensed consolidated and combined 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 Nine Months Ended						Increase/ (Decrease)
	Sept. 30, 2014			Sept. 30, 2013			Increase/ (Decrease)
	(In thousands)
Net cash provided by operating activities	$	40,074		$	17,460		$	22,614
Net cash used in investing activities	(42,332		)	(15,649		)	26,683
Net cash (used in) provided by financing activities	(25,800		)	143			(25,943		)

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 nine months ended September 30, 2014 totaled $40.1 million, compared to net cash provided by operating activities of $17.5 million during the nine months ended September 30, 2013. The $22.6 million increase is primarily related to cash generated by the operations of the MPG properties during 2014.

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 $42.3 million during the nine months ended September 30, 2014, compared to net cash used in investing activities of $15.6 million during the nine months ended September 30, 2013, as a result of increased expenditures for improvements to its properties during 2014, including the properties acquired from MPG in 2013 and deposits to restricted cash.

Financing Activities

Brookfield DTLA’s cash flow from financing activities is generally impacted by our loan activity, less any dividends and distributions paid to stockholders and distributions to affiliated companies, if any. Net cash used in financing activities totaled $25.8 million during the nine months ended September 30, 2014, compared to net cash provided by financing activities of $0.1 million during the nine months ended September 30, 2013. Distributions totaling $220.0 million made to Brookfield DTLA Holdings related to the senior participating preferred interest during the nine months ended September 30, 2014 and the repayment of the $25.0 million intercompany loan, partially offset by proceeds from the refinancing of BOA Plaza and the financing of Figueroa at 7th, were the primary drivers of the change.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet arrangements as of September 30, 2014 and December 31, 2013, respectively.

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of September 30, 2014, including any guaranteed or minimum commitments under contractual obligations (in thousands):



	2014		2015		2016		2017		2018		Thereafter		Total

Principal payments on mortgage loans	$	—	$	311	$	751,831	$	589,026	$	204,232	$	572,600	$	2,118,000
Interest payments –
Fixed-rate debt (1)	18,120		71,886		62,866		24,781		16,425		93,195		287,273
Variable-rate swapped to fixed-rate debt	3,674		7,368		7,306		7,130		6,985		13,102		45,565
Variable-rate debt (2)	2,619		10,388		9,942		4,363		3,152		—		30,464
Tenant-related commitments (3)	56,162		4,495		2,750		8,108		—		7,851		79,366
	$	80,575	$	94,448	$	834,695	$	633,408	$	230,794	$	686,748	$	2,560,668

__________


(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 September 30, 2014 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 September 30, 2014.

Related Party Transactions

Intercompany Loan

The Company was indebted to BOP Management Inc. under a $25.0 million promissory note dated October 11, 2013 that bore interest at 3.25%. For the three and nine months ended September 30, 2014, the Company accrued $0.2 million and $0.6 million, respectively, of interest expense related to this note.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Management Agreements

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2014		Sept. 30, 2013		Sept. 30, 2014		Sept. 30, 2013
Property management fee expense	$	2,173	$	737	$	6,190	$	2,093
Asset management fee expense	1,540		—		4,569		—
General, administrative and reimbursable expenses	586		297		1,896		867
Leasing and construction management fees	274		162		1,959		659

Insurance Agreements

Insurance premiums for Brookfield DTLA are paid by an affiliate company under common control through BPO. Brookfield DTLA reimburses the affiliate company for the actual cost of such premiums.

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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 Brookfield DTLA and the Predecessor Entities under this arrangement is as follows (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2014		Sept. 30, 2013		Sept. 30, 2014		Sept. 30, 2013
Insurance expense	$	2,485	$	1,234	$	6,252	$	3,655

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 April 8, 2014, as amended on April 29, 2014, 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 September 30, 2014.

Recent Accounting Pronouncements

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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 April 8, 2014, as amended on April 29, 2014, for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2013.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Paul Schulman, our principal executive officer, and Bryan K. Davis, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2014.

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 September 30, 2014 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

General

Merger-Related Litigation

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

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Item 1A.	Risk Factors.

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

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

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

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


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


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


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


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


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

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


•	Uncertainties of real estate development or redevelopment;


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


•	Risks relating to Brookfield DTLA’s insurance coverage;


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


•	Potential environmental liabilities;


•	Dependence on management personnel;


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


•	Operational and reputational risks;


•	Catastrophic events, such as earthquakes and hurricanes; and


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


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


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


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


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

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

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Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on April 8, 2014, as amended on April 29, 2014. 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 October 31, 2014, the cumulative amount of unpaid dividends totals $111.3 million.


Item 4.	Mine Safety Disclosures.

Not applicable.


Item 5.	Other Information.

None.

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Item 6.	Exhibits.



Exhibit No.		Exhibit Description
31.1*		Certification of Principal Executive Officer dated November 14, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer dated November 14, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer and Principal Financial Officer dated November 14, 2014 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 November 14, 2014



	BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
	Registrant

	By:	/s/ PAUL SCHULMAN
		Paul Schulman
		President and Chief Operating Officer,
		U.S. Commercial Operations
		(Principal executive officer)

	By:	/s/ BRYAN K. DAVIS
		Bryan K. Davis
		Chief Financial Officer
		(Principal financial officer)

Attached files

Brookfield DTLA Fund Office Trust Investor Inc. Reports

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