Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 | |||
or | ||||
o | 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 | 10281 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (212) 417-7000
________________________
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None ________________________ | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
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(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the registrant’s common equity held by non-affiliates as of June 30, 2016 was $0.
As of March 17, 2017, 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.
DOCUMENTS INCORPORATED BY REFERENCE
None.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
Page | |||
Item 16. | |||
PART I
Item 1. | Business. |
Our Company
As used in this Annual Report on Form 10-K, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.
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 partially-owned subsidiary of Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”).
Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property located in the Los Angeles Central Business District (the “LACBD”).
Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.
Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.
Corporate Strategy
Brookfield DTLA’s current strategy is to own and invest in commercial properties primarily in the LACBD that are of a high-quality, determined by management’s view of the certainty of receiving rental payments generated by the tenants of those assets.
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Competition
Brookfield DTLA competes in the leasing of office space with a number of other real estate companies.
Principal factors of competition in our primary business of owning and operating office properties are: the quality of properties, leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided, and reputation as an owner and operator of quality office properties in the LACBD. Additionally, our ability to compete depends upon, among other factors, trends in the national and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.
Segment, Geographical and Tenant Concentration Information
Segment Information—
Brookfield DTLA operates in a single reportable segment referred to as its office segment, which includes the operation and management of commercial office properties. Each of Brookfield DTLA’s operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s operating properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s operating properties are aggregated into a single reportable segment.
Geographical Information—
All of Brookfield DTLA’s business is conducted in the United States, and it does not derive any revenue from foreign sources.
Tenant Concentration Information—
Brookfield DTLA’s properties are typically leased to high credit-rated tenants for terms ranging from five to ten years, although we also enter into some short-term as well as longer-term leases. As our entire portfolio is located in the LACBD, any specific economic changes within that location could affect our tenant base, and by extension, our profitability.
A significant portion of Brookfield DTLA’s rental income and tenant reimbursements revenue is generated by a small number of tenants. No tenant accounted for more than 10% of our consolidated rental income and tenant reimbursements revenue during the year ended December 31, 2016.
During the year ended December 31, 2016, EY Plaza, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated revenue. The revenue generated by these six properties totaled 100% of Brookfield DTLA’s consolidated revenue during the year ended December 31, 2016.
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Government and Environmental Regulations
Brookfield DTLA’s office properties are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties has the necessary permits and approvals to operate its business.
Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA, and we continue to make capital expenditures to address the requirements of the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we continue to assess our properties and to make alterations as appropriate in this respect.
Some of our properties contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Also, some of our properties contain asbestos-containing building materials (“ACBM”). Environmental laws require that ACBM be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. We can make no assurance that costs of future environmental compliance will not affect our ability to make distributions to our stockholders or that such costs or other remedial measures will not have a material adverse effect on our business, financial condition or results of operations. None of our recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.
From time to time, the U.S. Environmental Protection Agency (“EPA”) designates certain sites affected by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Superfund sites can cover large areas, affecting many different parcels of land. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which Glendale Center (a property that was disposed of by MPG during 2012) is located lies within a large Superfund site. The site was designated as a Superfund site because the groundwater beneath the site is contaminated. We have not been named, and do not expect to be named, as a potentially responsible party for the site. If we were named, we would likely be required to enter into a de minimis settlement with the EPA and pay nominal damages.
Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties in our portfolio. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.
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Insurance
Brookfield DTLA’s properties are covered under insurance policies entered into by BPO that provide, among other things, all risk property and business interruption coverage for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $370.0 million of earthquake, flood and weather catastrophe 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.
To the extent an act or acts of terrorism produce losses in excess of the limits in place, the resulting loss could have a material adverse effect on Brookfield DTLA’s consolidated financial statements. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. See Item 1A. “Risk Factors—Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations.”
Employees
As of December 31, 2016, Brookfield DTLA had no employees. The operations of Brookfield DTLA are managed by employees of BPO.
Corporate Offices
BPO owns the building in which Brookfield DTLA’s operations are managed: 250 Vesey Street, New York, NY 10281, telephone number 212-417-7000. Brookfield DTLA believes that BPO’s current facilities are adequate for Brookfield DTLA’s present needs.
Available Information
Brookfield DTLA files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements (if any), Information Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the U.S. Securities and Exchange Commission (the “SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy details and other information regarding issuers that file electronically with the SEC at www.sec.gov. We have included the web address of the SEC as an inactive textual reference only. Except as specifically incorporated by reference into this document, information on this website is not part of this document. Stockholders may also obtain a copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8-K, Proxy Statements (if any), Information Statements and amendments to those reports by sending a written request to that effect to the attention of Michelle L. Campbell, Senior Vice President, Secretary, and Director, Brookfield DTLA Fund Office Trust Investor Inc., 250 Vesey Street, 15th Floor, New York, NY 10281.
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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 Annual Report on Form 10-K 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 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; |
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• | The use of debt to finance Brookfield DTLA’s business or that of its subsidiaries; |
• | The behavior of financial markets, including fluctuations in interest rates; |
• | Uncertainties of real estate development or redevelopment; |
• | Global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; |
• | Risks relating to Brookfield DTLA’s insurance coverage; |
• | The possible impact of international conflicts and other developments, including terrorist acts; |
• | Potential environmental liabilities; |
• | Dependence on management personnel; |
• | The ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom; |
• | Operational and reputational risks; |
• | Catastrophic events, such as earthquakes and hurricanes; and |
• | The impact of legislative, regulatory and competitive changes and other risk factors relating to the real estate industry, as detailed from time to time in the reports of Brookfield DTLA filed with the SEC. |
Brookfield DTLA cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on Brookfield DTLA’s forward-looking statements or information, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, Brookfield DTLA undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.
The following is a discussion of the risk factors that Brookfield DTLA’s management believes are material to Brookfield DTLA at this time. These risks and uncertainties are not the only ones facing Brookfield DTLA and there may be additional matters that Brookfield DTLA is unaware of or that Brookfield DTLA currently considers immaterial. In addition to the other information included in this Annual Report on Form 10-K, including the matters addressed above, you should carefully consider the following risk factors. If any of these risks occur, our business, financial condition and operating results could be harmed, the market value of the Series A preferred stock issued in connection with the MPG acquisition could decline and stockholders could lose part or all of their investment.
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As used in this section, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA together with its direct and indirect subsidiaries, and the term “stockholders” means the holders of the Series A preferred stock issued in connection with the MPG acquisition.
RISKS RELATED TO THE OWNERSHIP OF BROOKFIELD DTLA SERIES A PREFERRED STOCK
Brookfield DTLA is dependent upon the assets and operations of its direct and indirect subsidiaries. Brookfield DTLA is a holding company and does not own any material assets other than the equity interests of its subsidiaries, which conduct all of the Company’s operations. As a result, distributions or advances from the Company’s subsidiaries will be the primary source of funds available to meet the obligations of the Company, including any obligation to pay dividends, if declared, or other distributions in respect of the Brookfield DTLA Series A preferred stock. Our current and future obligations and liabilities may limit, and the terms of certain of the equity interests issued in connection with the transactions immediately following the consummation of the merger will limit, the amount of funds available to Brookfield DTLA for any purpose, including for dividends or distributions to holders of its capital stock, including the Series A preferred stock.
Brookfield DTLA’s subsidiaries have issued, and may in the future issue, equity securities that are senior to the equity interests of such subsidiary that are owned, directly or indirectly, by the Company. The respective organizational documents of Brookfield DTLA and its subsidiaries generally do not restrict the issuance of debt or equity by any of Brookfield DTLA’s subsidiaries, and any such issuance may adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. As part of the transactions immediately following the consummation of the merger with MPG, subsidiaries of the Company issued equity interests that rank senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA, and as a result, effectively rank senior to the Series A preferred stock. Additionally, at the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), for which it will be entitled to receive a preferred return, if and when called by New OP. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding.
The Series B preferred interest in New OP held by Brookfield DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in New OP may limit the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.
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In addition, the amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in a “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover our operating costs or to repay our indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by board of directors of Brookfield DTLA without the approval of the holders of the Series A preferred stock.
The Series A preferred stock effectively ranks junior to any indebtedness of Brookfield DTLA and its subsidiaries. The Series A preferred stock effectively ranks junior to the indebtedness of Brookfield DTLA or any of its direct or indirect subsidiaries. Holders of the Series A preferred stock do not have the right to prevent us from incurring additional indebtedness. As a result, we could become more leveraged, which may increase debt service costs and could adversely affect our cash flows, results of operations and financial condition and the availability of funds for dividends or distributions to holders of Brookfield DTLA’s capital stock, including the Series A preferred stock.
The Series A preferred stock has no stated maturity date, Brookfield DTLA is not obligated to declare and pay dividends on the Series A preferred stock, and Brookfield DTLA may never again declare dividends on the Series A preferred stock. The Series A preferred stock has no stated maturity, and accordingly, could remain outstanding indefinitely. In addition, while the Series A preferred stock will accumulate dividends at the stated rate (whether or not authorized by the board of directors of Brookfield DTLA and declared by the Company), there is no requirement that Brookfield DTLA declare and pay dividends on the Series A preferred stock, and except for a one time dividend of $2.25 per share of Series A preferred stock that was paid in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097, Brookfield DTLA has not, and may not in the future, declare and pay dividends on the Series A preferred stock. See Item 3 “Legal Proceedings—Merger‑Related Litigation.” Furthermore, because of the projected cash needs of the Company, arising in significant part from the funds needed to complete the refinancing of the existing mortgage loan on Wells Fargo Center–North Tower, the Company currently anticipates that it will receive no substantial distributions from New OP for a period of at least five years, unless the Company or DTLA OP changes its current plans and determines to sell one or more of its real property assets prior to such time. The Company’s refinancing and operating plans and this estimate are subject to change based on many factors, including market conditions in applicable debt, equity and leasing markets. See “—Factors That May Affect Future Results” above.
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Brookfield DTLA’s ability to pay dividends is limited by the requirements of Maryland law. Brookfield DTLA’s ability to pay dividends on the Series A preferred stock is limited by the laws of the State of Maryland. Under the Maryland General Corporation Law (“MGCL”), a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus all prior liquidation preferences (unless the charter of the corporation provides otherwise). Accordingly, with limited exception, Brookfield DTLA may not make a distribution (including a dividend payment or redemption) on the Series A preferred stock if, after giving effect to the distribution, Brookfield DTLA may not be able to pay its debts as they become due in the usual course of business or total assets would be less than the sum of Brookfield DTLA’s total liabilities plus prior liquidation preferences, if any. Due to the foregoing limitations, there can be no assurance that, if Brookfield DTLA desires to declare and pay dividends in the future, that it would be legally permissible for it to do so.
There was no established trading market for shares of the Series A preferred stock at the time of issuance and the shares may be delisted and deregistered in the future. The Series A preferred stock was issued in connection with the consummation of the transactions contemplated by the Merger Agreement and there was no established trading market for the shares of Series A preferred stock.
Although the Series A preferred stock is currently registered under the Exchange Act and listed on the New York Stock Exchange, we expect that Brookfield DTLA may apply for delisting of the Series A preferred stock in the future provided the requirements for delisting are met. If the Series A preferred stock is delisted, the market for the shares of Series A preferred stock could be adversely affected, though price quotations for the shares of Series A preferred stock might still be available from other sources. Subject to compliance with applicable securities laws, the registration may be terminated if the shares are not listed on a national securities exchange and there are fewer than 300 holders. The extent of the public market for the Series A preferred stock and availability of such quotations would depend upon such factors as the number of holders and/or the aggregate market value of the publicly held shares of Series A preferred stock at such time, the interest in maintaining a market in the Series A preferred stock on the part of securities firms, the possible termination of registration of the Series A preferred stock under the Exchange Act and other factors. Termination of registration would substantially reduce the information required to be furnished to holders of Series A preferred stock.
Brookfield DTLA’s charter contains provisions that may delay, defer or prevent transactions that may be beneficial to the holders of the Company Series A preferred stock. Brookfield DTLA’s charter contains provisions that are intended to, among other purposes, assist it in qualifying as a REIT. The charter provides that subject to certain exceptions, including exemptions that may be granted by the board of directors of Brookfield DTLA under certain circumstances, no person or entity may beneficially own or constructively own more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of Brookfield DTLA’s common stock or Series A preferred stock. Any attempt to own or transfer shares of Brookfield DTLA’s common stock or Series A preferred stock in excess of the applicable ownership limit without the consent of the board of directors of Brookfield DTLA either will result in the shares being transferred by operation of the charter to a charitable trust, and the person who attempted to acquire such shares
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will not have any rights in such shares, or in the transfer being void. These restrictions on transferability and ownership will not apply if the board of directors of Brookfield DTLA determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT or if the board of directors of Brookfield DTLA determines that such restrictions are no longer necessary to maintain REIT status. The ownership limit may delay or impede a transaction or a change in control that might be in the best interests of the Brookfield DTLA’s stockholders, including the holders of the Series A preferred stock.
Brookfield DTLA may authorize and issue capital stock without the approval of holders of the Series A preferred stock. While Brookfield DTLA may not, without a vote of the holders of the Series A preferred stock, authorize, create, issue or increase the authorized or issued amount of any class of capital stock ranking senior to the Series A preferred stock with respect to payment of dividends or the distribution of assets upon the liquidation, dissolution or winding up of the affairs of Brookfield DTLA, its charter authorizes the board of directors of Brookfield DTLA, without any action by its stockholders, to (i) amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Brookfield DTLA has the authority to issue, (ii) issue authorized but unissued shares of common stock or Series A preferred stock, and (iii) classify or reclassify any unissued shares of common stock or Series A preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. There can be no assurance that the board of directors of Brookfield DTLA will not establish additional classes and/or series of capital stock that would delay, defer or prevent a transaction that may be in the best interests of its stockholders, including the holders of the Series A preferred stock.
Holders of Series A preferred stock have limited voting rights. Brookfield DTLA Holdings owns 100% of the outstanding shares of the common stock and controls 100% of the aggregate voting power of its capital stock, except that holders of the Series A preferred stock have voting rights, under certain circumstances, (1) to elect two preferred directors to the board of directors of Brookfield DTLA (referred to as preferred directors) and (2) with respect to (i) the creation of additional classes or series of preferred stock that are senior to the Series A preferred stock and (ii) an amendment of its charter (whether by merger, consolidation, transfer or conveyance of all or substantially all of our assets or otherwise) that would materially adversely affect the rights of holders of Series A preferred stock. By virtue of their limited voting rights, holders of Series A preferred stock have limited control over the outcome of any corporate transaction or other matters that Brookfield DTLA confronts.
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Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could be in the best interests of Brookfield DTLA’s stockholders, including: (1) “business combination” provisions that, subject to limitations, prohibit certain business combinations between Brookfield DTLA and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the outstanding voting stock of Brookfield DTLA or any affiliate or associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of Brookfield DTLA) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and supermajority stockholder voting requirements on these combinations; and (2) “control share” provisions that provide that a holder of “control shares” of Brookfield DTLA (defined as shares that, when aggregated with other shares controlled by the stockholder except solely by virtue of a revocable proxy, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) has no voting rights with respect to such shares except to the extent approved by Brookfield DTLA’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. Brookfield DTLA has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of the board of directors of Brookfield DTLA, and in the case of the control share provisions of the MGCL pursuant to a provision in its bylaws. However, the board of directors of Brookfield DTLA may by resolution elect to opt in to the business combination provisions of the MGCL and Brookfield DTLA may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future. In addition, provided that Brookfield DTLA has a class of equity securities registered under the Exchange Act and at least three independent directors, Subtitle 8 of Title 3 of the MGCL permits Brookfield DTLA to elect to be subject, by provision in its charter or bylaws or a resolution of the board of directors of Brookfield DTLA and notwithstanding any contrary provision in the charter or bylaws, to certain provisions, including, among other provisions, a classified board of directors and a requirement that a vacancy on the board of directors be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred. Brookfield DTLA’s charter and bylaws and the MGCL also contain other provisions that may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of its stockholders, including the holders of the Series A preferred stock.
BPO controls the management and operation of Brookfield DTLA. Brookfield DTLA is managed by BPO through a direct wholly-owned subsidiary of BPO formed for such purpose (“BPO Manager”). BPO, through its ownership interest in BPO Manager and Brookfield DTLA, controls Brookfield DTLA, including the power to vote to elect all members of the board of directors (other than the preferred directors). By virtue of BPO’s control of and substantial ownership in Brookfield DTLA, BPO has significant influence over the outcome of any corporate transaction or other matters that Brookfield DTLA confronts. Subject to any limitations contained in Brookfield DTLA’s charter, bylaws or as may be required by applicable law, holders of the Series A preferred stock will be unable to block any such matter in their capacity as stockholders or through their representation under certain circumstances, if any, by up to two directors on the board of directors (which directors are not a majority of the members comprising the board of directors).
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There may be conflicts of interest in Brookfield DTLA’s relationship with BPO and its affiliates. Brookfield DTLA and its subsidiaries and DTLA OP have entered into agreements with affiliates of BPO pursuant to which such affiliates serve as service providers with respect to the properties that these companies own. These services include property management and various other services. In consideration for the services provided under these agreements, BPO’s affiliates are paid fees by Brookfield DTLA and its subsidiaries and DTLA OP. In addition, affiliates of BPO may enter into additional agreements, including additional service agreements, with Brookfield DTLA and its subsidiaries and DTLA OP. There can be no assurance that these agreements will be made on terms that will be at least as favorable to Brookfield DTLA and its subsidiaries and DTLA OP as those that could have been obtained in an arm’s length transaction between parties that are not affiliated. Accordingly, these agreements may involve conflicts between the interest of BPO’s affiliate, on the one hand, and Brookfield DTLA and its subsidiaries and DTLA OP, on the other hand.
Members of Brookfield DTLA’s management team have competing duties to other entities. Brookfield DTLA’s executive officers do not spend all of their time managing its activities and real estate portfolio. Many of Brookfield DTLA’s executive officers allocate most of their time to other businesses and activities. For example, each of Brookfield DTLA’s executive officers is also an employee of BPO or one of its affiliates. None of these individuals is required to devote a specific amount of time to Brookfield DTLA’s affairs. Accordingly, Brookfield DTLA competes with BPO, its affiliates and possibly other entities for the time and attention of these officers.
COMPANY AND REAL ESTATE INDUSTRY RISKS
Brookfield DTLA’s current strategy is to own and invest in commercial properties primarily in the LACBD that are of a high-quality, determined by management’s view of the certainty of receiving rental payments generated by the tenants of those assets. However, Brookfield DTLA is subject to various risks specific to its portfolio, the geographies in which it operates and where its properties are located and those inherent in the commercial property business generally. In evaluating Brookfield DTLA and its business, the following challenges, uncertainties and risks should be considered in addition to the other information contained in this Annual Report on Form 10-K:
Brookfield DTLA’s economic performance and the value of its real estate assets are subject to the risks incidental to the ownership and operation of real estate properties. Brookfield DTLA’s economic performance, the value of its real estate assets and, therefore, the value of the Series A preferred stock, is subject to the risks normally associated with the ownership and operation of real estate properties, including but not limited to: downturns and trends in the national, regional and local economic conditions where our properties are located; global economic conditions; the cyclical nature of the real estate industry; adverse economic or real estate developments in Southern California, particularly in the LACBD; local real estate market conditions such as an oversupply of office properties, including space available by sublease, or a reduction in demand for such properties; our liquidity situation, including our failure to obtain additional capital or extend or refinance debt maturities on favorable terms or at all; changes in interest rates and the availability of financing; competition from other properties; changes in market rental rates and our ability to rent space on favorable terms; the bankruptcy, insolvency, credit deterioration or other default of our tenants; the need to periodically renovate, repair and re-lease space and the costs thereof; our failure to qualify as and to maintain our status as a REIT or the status of certain of our subsidiaries as REITs; increases in maintenance, insurance and operating costs; civil disturbances, earthquakes and other natural
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disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; a decrease in the attractiveness of our properties to tenants; a decrease in the underlying value of our properties; and certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges that must be made regardless of whether or not a property is producing sufficient income to service these expenses.
The results of our business and our financial condition are significantly dependent on the economic conditions and demand for office space in southern California. All of Brookfield DTLA’s properties are located in Los Angeles County, California in the LACBD, which may expose us to greater economic risks than if most of our properties were located in a different geographic region or more geographic regions. Moreover, because our portfolio of properties consists primarily of office buildings, a decrease in the demand for office space (especially Class A office space), particularly in the LACBD, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are susceptible to adverse developments in the markets for office space, particularly in Southern California. Such adverse developments could include oversupply of or reduced demand for office space; declines in property values; business layoffs, downsizings, relocations or industry slowdowns affecting tenants of our properties; changing demographics; increased telecommuting; terrorist targeting of or acts of war against high-rise structures; infrastructure quality; California state budgetary constraints and priorities; increases in real estate and other taxes; costs of complying with state, local and federal government regulations or increased regulation and other factors. In addition, the State of California is generally regarded as more litigious and more highly regulated and taxed than many other U.S. states, which may adversely impact the market, including the demand for, office space in California. There can be no assurance as to the growth of the southern California or the national economy or our future growth rate.
U.S. economic conditions are uncertain. In particular, volatility in the U.S. and international capital markets and the condition of the California economy may adversely affect our liquidity and financial condition, as well as the liquidity and financial condition of tenants in our properties.
Brookfield DTLA’s inability to enter into renewal or new leases on favorable terms for all or a substantial portion of space that will be subject to expiring leases would adversely affect our cash flows, operating results and financial condition. Our income-producing properties generate revenue through rental payments made by tenants of the properties. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any lease renewal or extension, or of any new lease for such space may be less favorable to us than the existing lease, and may be less favorable to us than prevailing market terms for similar leases in the relevant market. We would be adversely affected, in particular, if any significant tenant ceases to be a tenant and cannot be replaced on similar or better terms or at all.
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Competition may adversely affect Brookfield DTLA’s ability to lease available space in its properties. Other developers, managers and owners of office properties compete with us in seeking tenants. Some of the properties of our competitors may be newer, better located or better capitalized than the properties we own. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties, particularly if there is an oversupply of space available in the market. Competition for tenants could have an adverse effect on our ability to lease our properties and on the rents that we may charge or concessions that we may grant. If our competitors adversely impact our ability to lease our properties, our cash flows, operating results and financial condition may suffer.
Our ability to realize our strategies and capitalize on our competitive strengths will depend on our ability to effectively operate our properties, maintain good relationships with tenants and remain well capitalized, and our failure to do any of the foregoing could adversely affect our ability to compete effectively in the markets in which we do business.
Reliance on significant tenants could adversely affect Brookfield DTLA’s operating results and financial condition. Many of our properties are occupied by one or more significant tenants and our revenues from those properties are materially dependent on the creditworthiness and financial stability of those tenants. Our business would be adversely affected if any of those tenants failed to renew certain of their significant leases, became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all. In the event of a default by one or more of our significant tenants, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing the property. If a lease with a significant tenant is terminated, it may be difficult, costly and time consuming to attract new tenants and lease the property for the rent and on terms as favorable as the previous lease or at all.
Brookfield DTLA could be adversely impacted by tenant defaults, bankruptcies or insolvencies. A tenant of our properties may experience a downturn in its business, which could cause the loss of that tenant or weaken its financial condition and result in the tenant’s inability to make rental payments when due or, for retail tenants, a reduction in percentage rent payable. If a tenant defaults, we may experience delays and incur costs in enforcing our rights as landlord and protecting our investments. If any tenant becomes a debtor in a case under the U.S. Bankruptcy Code, we cannot evict a tenant solely because of its bankruptcy. In addition, the bankruptcy court may authorize a tenant to reject and terminate its lease. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In any event, it is unlikely that a bankrupt or insolvent tenant will pay in full the amounts it owes under a lease. The loss of rental payments from tenants and costs of re-leasing would adversely affect our cash flows, operating results and financial condition. In the event of a significant number of lease defaults and/or tenant bankruptcies, our cash flow may not be sufficient to meet all of our obligations and liabilities or to make distributions to Brookfield DTLA stockholders, including holders of the Series A preferred stock.
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There are numerous risks associated with the use of debt to finance our business, including refinancing risk. Brookfield DTLA incurs debt in the ordinary course of its business and therefore is subject to the risks associated with debt financing. These risks, including the following, may adversely impact our operating results and financial condition: our cash flow may be insufficient to meet required payments of principal and interest; payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses; we may not be able to refinance indebtedness on our properties at maturity due to business and market factors (including: disruptions and volatility in the capital and credit markets, the estimated cash flow of our properties, and the value (or appraised value) of our properties); financial, competitive, business and other factors, including factors beyond our control; and if refinanced, the terms of a refinancing may not be as favorable to us as the original terms of the related indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to dispose of one or more of our properties on disadvantageous terms. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest expense, and if we mortgage property to secure payment of indebtedness and are unable to make mortgage payments, the mortgagee could foreclose upon such property or appoint a receiver to receive an assignment of our rents and leases.
If we are unable to manage our interest rate risk efficiently, our cash flows and operating results may suffer. Some of our indebtedness bears interest at a variable rate and we may in the future incur additional variable-rate indebtedness. In addition, we may be required to refinance our debt at higher rates. There can be no assurance that the benchmarks on which our variable-rate indebtedness is based will not increase or that interest rates available for any refinancing in the future will not be higher than the debt being refinanced. Increases in such rates will increase our interest expense and could have an adverse impact on our cash flows and operating results. In addition, though we will attempt to manage interest rate risk, there can be no assurance that we will hedge such exposure effectively or at all in the future. Accordingly, increases in interest rates above what we anticipate based upon historical trends would adversely affect our cash flows and operating results.
Our substantial indebtedness may adversely affect our operating results and financial condition, and may limit our flexibility to operate our business. Brookfield DTLA currently has aggregate consolidated indebtedness totaling $2.1 billion. After payments of principal and interest on our indebtedness, we may not have sufficient cash resources to operate our properties or meet all of our other obligations. Certain of our indebtedness include lockbox and other cash management provisions, which, under certain circumstances, could limit our ability to utilize available cash flow from the relevant properties. There can be no assurance that terms of debt we incur in the future or modifications to existing debt will not significantly limit our operating and financial flexibility, which may in turn limit our ability to efficiently respond and adapt to changes or competition in our business.
If we are unable to extend, refinance or repay mortgage debt on our properties at maturity, we could default on such debt, which may permit the lenders to foreclose on the applicable property. Proceeds from any disposition of a foreclosed property may not be sufficient to repay the full amount of the underlying debt. If we are unable to extend, refinance or repay our debt as it comes due, our business, financial condition and operating results may be materially and adversely affected. If we are unable to refinance our debt as it matures on acceptable terms, or at all, we may need to dispose of one or more of our properties on disadvantageous terms. Furthermore, even if we are able to obtain extensions on or refinance our existing debt, such extensions or new loans may include operational and financial covenants significantly more restrictive than our current debt covenants and may limit the operation or growth of our business.
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Restrictive covenants in indebtedness may limit management’s discretion with respect to certain business matters. Instruments governing our indebtedness may contain restrictive covenants limiting our discretion with respect to certain business matters. These covenants could place significant restrictions on our ability to, among other things, create liens or other encumbrances, pay dividends or make distributions on Brookfield DTLA’s capital stock (including the Series A preferred stock), make certain other payments, investments, loans and guarantees and sell or otherwise dispose of assets and merge or consolidate with another entity. These covenants could also require us to meet certain financial ratios and financial condition tests. Failure to comply with any such covenants could result in a default which, if not cured or waived, could result in acceleration of the relevant indebtedness.
Brookfield DTLA is subject to obligations under certain “non-recourse carve out” guarantees that may be triggered in the future. All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against Brookfield DTLA Holdings or one of its subsidiaries, if certain triggering events occur. Although these events differ from loan to loan, some of the common events include: the special purpose property-owning subsidiary of Brookfield DTLA Holdings or Brookfield DTLA Holdings filing a voluntary petition for bankruptcy; the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to maintain its status as a special purpose entity; subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and, subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in many cases, indirect transfers in connection with a change in control of Brookfield DTLA Holdings or Brookfield DTLA. In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.
Increasing utility costs in California may have an adverse effect on our operating results and occupancy levels. The State of California continues to experience issues related to the supply of electricity, water and natural gas. In recent years, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State of California is not able to effectively manage its utility needs may reduce demand for leased space in California office properties. A significant reduction in demand for office space could adversely affect our financial condition and results of operations.
Because real estate investments are illiquid, we may not be able to sell properties when appropriate or desired. Large and high quality office properties like the ones that we own can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the market in which we operate in times of illiquidity. These restrictions could reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.
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Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations. We maintain insurance on our properties in amounts and with deductibles that we believe are in line with coverage maintained by owners of similar types of properties; however, the insurance we maintain may not cover all potential losses we might experience. There also are certain types of risks (such as war or acts of terrorism, or environmental contamination, such as toxic mold) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more of our properties, and would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Any of these events could adversely impact our business, financial condition and results of operations.
We are subject to possible environmental liabilities and other possible liabilities. As an owner and manager of real property, we are subject to various laws relating to environmental matters. These laws could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes present in our buildings, released or deposited on or in our properties or disposed of at other locations. These costs could be significant and would reduce cash available for our business. The failure to remove or remediate such substances could adversely affect our ability to sell our properties or our ability to borrow using real estate as collateral, and could potentially result in claims or other proceedings against us.
Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of ACBM in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (“PCBs”) and underground storage tanks are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. We could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from our properties.
If excessive moisture accumulates in our buildings or on our building materials, it may trigger mold growth. Mold may emit airborne toxins or irritants. Inadequate ventilation, chemical contamination and other biological contaminants (including pollen, viruses and bacteria) could also impair indoor air quality at our buildings. Impaired indoor air quality may cause a variety of adverse health effects, such as allergic reactions. If mold or other airborne contaminants exist or appear at our properties, we may have to undertake a costly remediation program to contain or remove the contaminants or increase indoor ventilation. If indoor air quality were impaired, we may have to temporarily relocate some or all of a property’s tenants and could be liable to our tenants, their employees or others for property damage and/or personal injury.
Some of the properties that we own contain ACBM and we could be liable for such fines or penalties. We cannot assure our stockholders, including holders of the Series A preferred stock, that costs of future environmental compliance will not affect our ability to make distributions to our stockholders, including distributions or dividends on the Series A preferred stock, or such that costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.
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In addition, some of the properties that we own contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain, underground storage tanks for the storage of petroleum products or other hazardous or toxic substances. If hazardous or toxic substances were released from these tanks, we could incur significant costs or be liable to third parties with respect to the releases. From time to time, the EPA designates certain sites affected by hazardous substances as “Superfund” sites pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act. The EPA identifies parties who are considered to be potentially responsible for the hazardous substances at Superfund sites and makes them liable for the costs of responding to the hazardous substances. The parcel of land on which Glendale Center (a property that was disposed of by MPG during 2012) is located within a large Superfund site and Brookfield DTLA could be named as a potentially responsible party with respect to that site.
Environmental laws and regulations can change rapidly and we may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on our business, financial condition or results of operations.
Regulations under building codes and human rights codes generally require that public buildings, including office buildings, be made accessible to disabled persons. Non-compliance could result in the imposition of fines by the government or the award of damages to private litigants. If we are required to make substantial alterations and capital expenditures in one or more of our properties to comply with these codes, it could adversely affect our financial condition and results of operations.
We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state, provincial and local regulatory requirements, such as state, and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. Existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could affect our cash flow and results from operations.
Existing conditions at some of our properties may expose us to liability related to environmental matters, which may exceed our environmental insurance coverage limits. Independent environmental consultants have conducted Phase I or other environmental site assessments on all of the properties that we own. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey, and the assessments may fail to reveal all environmental conditions, liabilities or compliance concerns.
In connection with its due diligence of MPG prior to entering into the Merger Agreement, BPO conducted initial environmental tests at certain of MPG’s Downtown Los Angeles properties and found that a widely used commercial building material used in certain of MPG’s Downtown Los Angeles properties contained ACBM. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future and future laws, ordinances or regulations may impose material additional environmental liability.
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Losses resulting from the breach of our loan document representations related to environmental issues or hazardous substances will generally be recourse to Brookfield DTLA or one of its subsidiaries pursuant to “non-recourse carve out” guarantees and therefore present a risk to Brookfield DTLA should a special purpose property-owning subsidiary of Brookfield DTLA Holdings be unable to cover such a loss. We cannot assure our stockholders that costs of future environmental compliance will not affect our ability to pay dividends or distributions to our stockholders, including on the Series A preferred stock, or such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.
We may suffer a significant loss resulting from fraud, other illegal acts or inadequate or failed internal processes or systems. We may suffer a significant loss resulting from fraud or other illegal acts or inadequate or failed internal processes or systems. We rely on our employees to follow our policies and processes as well as applicable laws in their activities. Risk of illegal acts or failed systems are managed through our infrastructure, controls, systems, policies and people, complemented by central groups focusing on enterprise-wide management of specific operational risks such as fraud, trading, outsourcing, and business disruption, as well as people and systems risks. Failure to manage these risks can result in direct or indirect financial loss, reputational impact, regulatory censure or failure in the management of other risks such as credit or market risk.
We may be subject to litigation. In the ordinary course of our business, we expect that we may be subject to litigation from time to time. The outcome of any such proceedings may materially adversely affect us and may continue without resolution for long periods of time. Any litigation may consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources to litigation may, at times, be disproportionate to the amounts at stake in the litigation. The acquisition, ownership and disposition of real property will expose us to certain litigation risks which could result in losses, some of which may be material. Litigation may be commenced with respect to a property we have acquired in relation to activities that took place prior to our acquisition of such property. In addition, at the time of disposition of an individual property, a potential buyer who is passed over in favor of another buyer as part of our efforts to maximize sale proceeds may claim that it should have been afforded the opportunity to purchase the asset or alternatively that such buyer should be awarded due diligence expenses incurred or statutory damages for misrepresentation relating to disclosures made. Similarly, successful buyers may later sue us for losses associated with latent defects or other problems not uncovered in due diligence. We may also be exposed to litigation resulting from the activities of our tenants or their customers.
Our future results may suffer if we are unable to effectively manage our real estate portfolio. Our future success will depend, in part, upon our ability to manage and successfully monitor our operations, costs, regulatory compliance and service quality, and maintain other necessary internal controls.
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Future terrorist attacks in the United States could harm the demand for and the value of our properties. Future terrorist attacks in the U.S., such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of terrorism or war could harm the demand for and the value of our properties. Certain of the properties we own are well-known landmarks and may be perceived as more likely terrorist targets than similar, less recognizable properties, which could potentially reduce the demand for and value of these properties. A decrease in demand or value could make it difficult for us to renew leases or re-lease space at lease rates equal to or above historical rates or then-prevailing market rates or to refinance indebtedness related to our properties. Terrorist attacks also could directly impact the value of our properties through damage, destruction, loss or increased security costs, and the availability of insurance for such acts may be limited or more costly. Five of Brookfield DTLA’s properties are located within the Bunker Hill area of Downtown Los Angeles. Because these properties are located so closely together, a terrorist attack on any one of these properties, or in the Downtown Los Angeles or Bunker Hill areas generally, could materially damage, destroy or impair the use by tenants of one or more of these properties. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases with us could be adversely affected. Additionally, certain tenants will have termination rights or purchase options in respect of certain casualties.
Climate change may adversely impact our operations and markets. There is significant concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of climate stress events. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in intense precipitation and extreme heat events, as well as tropical and non-tropical storms. The occurrence of one or more natural disasters, such as hurricanes, fires, floods and earthquakes (whether or not caused by climate change), could cause considerable damage to our properties, disrupt our operations and negatively impact our financial performance. To the extent these events result in significant damage to or closure of one or more of our buildings, our operations and financial performance could be adversely affected through lost tenants and an inability to lease or re-lease the space. In addition, these events could result in significant expenses to restore or remediate a property, increases in fuel (or other energy) prices or a fuel shortage and increases in the costs of insurance if they result in significant loss of property or other insurable damage.
If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations could be adversely affected. Our business may be vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations could be adversely affected. We may also incur additional costs to remedy damages caused by such disruptions.
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TAX RISKS
Failure to maintain our status as a REIT could have significant adverse consequences to us, our ability to make distributions and the value of our stock, including the Series A preferred stock. To qualify as a REIT, Brookfield DTLA must satisfy a number of asset, income, organizational, operational, dividend distribution, stock ownership and other requirements on an ongoing basis. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT qualification. Our qualification as a REIT depends on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.
Our ability to qualify as a REIT will depend on the ability of certain of our subsidiaries that own our commercial property assets to individually satisfy the asset, income, organizational, distribution, stockholder ownership and other requirements discussed above on a continuing basis. Whether these subsidiaries will be able to qualify for taxation as REITs, and therefore whether we will be able to qualify, is a question of fact.
Brookfield DTLA has elected to be taxed as a REIT pursuant to Sections 856 through 860 of the Code, commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT.
Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially applicable with retroactive effect, could make it more difficult or impossible for us 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. Any such corporate tax liability could be substantial and would reduce the amount of cash available for investment, debt service and distribution to holders of our stock, which in turn could have an adverse effect on the value of our stock. Distributions to our stockholders if we fail to qualify as a REIT will not be deductible by us, nor will they be required to be made (unless required by the terms of our governing documents). In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as dividends (whether or not attributable to capital gains of the Company). Subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. Dividends paid to non-corporate U.S. holders that constitute qualified dividend income will be eligible for taxation at the preferential rates applicable to long-term capital gains, provided certain conditions are met. As a result of all these factors, our failure to qualify as a REIT could impair our business and operating strategies and adversely affect the value of our stock and our ability to make distributions on our stock, including, in each case, the Series A preferred stock.
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We may incur other tax liabilities that could reduce our cash flows. We may be subject to certain federal, state and local taxes on our income and assets including, but not limited to, taxes on any undistributed income and property and transfer taxes. In order to avoid federal corporate income tax on our earnings, each year we must distribute to holders of our stock, including holders of the Series A preferred stock, at least 90% of our REIT taxable income, determined before the deductions for dividends paid and excluding any net capital gain. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income and net capital gain, we will be subject to federal corporate income tax on our undistributed REIT taxable income and net capital gain. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to holders of our stock, including holders of the Series A preferred stock, in a calendar year is less than a minimum amount specified under the Code. Any of these taxes would decrease cash available for distributions to holders of our stock, including holders of the Series A preferred stock, and lower distributions of cash could adversely affect the value of the Series A preferred stock.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. Certain dividends known as qualified dividends currently are subject to the same tax rates as long-term capital gains, which are lower than rates for ordinary income. Dividends payable by REITs, however, generally are not eligible for such reduced rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of our stock, including the Series A preferred stock.
You may be deemed to receive a taxable distribution without the receipt of any cash or property. Under Section 305(c) of the Code, holders of Brookfield DTLA Series A preferred stock may be treated for U.S. federal income tax purposes as receiving constructive distributions if the “issue price” of the Series A preferred stock is lower than the redemption price of such Series A preferred stock. If the redemption price exceeds the issue price and, based on all the facts and circumstances as of the date of issuance, redemption pursuant to Brookfield DTLA’s right to redeem is more likely than not to occur, then a holder of Series A preferred stock will be deemed to receive a series of constructive distributions of stock in the total amount of such excess, so long as the amount by which the redemption price exceeds the issue price is not de minimis. These constructive distributions will be deemed to be made to such holders in increasing amounts (on a constant-yield basis) during the period from the date of issuance to the date on which it is most likely that the Series A preferred stock will be redeemed, based on all of the facts and circumstances as of the issue date. In addition, constructive distributions could arise in other circumstances as well. In the event a holder of Series A preferred stock receives a constructive distribution, such holder may incur U.S. federal income tax liability with respect to such constructive distribution without receiving any corresponding distribution of cash with which to pay such taxes.
Applicable REIT laws may restrict certain business activities. As a REIT, we are subject to various restrictions on the types of income we can earn, assets we can own and activities in which we can engage. Business activities that could be impacted by applicable REIT laws include, but are not limited to, activities such as developing alternative uses of real estate, including the development and/or sale of properties. To qualify as a REIT for federal income tax purposes, we must satisfy certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, our compliance with the REIT requirements may hinder our business and operating strategies, financial condition and results of operations.
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We will participate in transactions and make tax calculations for which the ultimate tax determination may be uncertain. We will participate in many transactions and make tax calculations during the course of our business for which the ultimate tax determination will be uncertain. While we believe we maintain provisions for uncertain tax positions that appropriately reflect our risk, these provisions are made using estimates of the amounts expected to be paid based on a qualitative assessment of several factors. It is possible that liabilities associated with one or more transactions may exceed our provisions due to audits by, or litigation with, relevant taxing authorities which may materially affect our financial condition and results of operations.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Item 2. | Properties. |
Lease Terms
Brookfield DTLA’s properties are typically leased to high credit-rated tenants for terms ranging from five to ten years, although we also enter into some short-term as well as some longer-term leases. Our leases usually require the purchase of a minimum number of monthly parking spaces at the property and in many cases contain provisions permitting tenants to renew expiring leases at prevailing market rates. Most of our leases are either triple net or modified gross leases. Triple net and modified gross leases are those in which tenants pay not only base rent but also some or all real estate taxes and operating expenses of the leased property. Tenants typically reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for a certain number of parking spaces. We are generally responsible for structural repairs.
Historical Percentage Leased and Rental Rates
The following table sets forth, as of the dates indicated, the percentage leased, annualized rent and annualized rent per square foot of Brookfield DTLA’s properties:
Percentage Leased | Annualized Rent (1) | Annualized Rent per Square Foot (2) | ||||||||
December 31, 2016 | 87.9 | % | $ | 160,894,418 | $ | 24.31 | ||||
December 31, 2015 | 85.6 | % | 153,585,893 | 23.83 | ||||||
December 31, 2014 | 83.0 | % | 145,156,547 | 23.23 | ||||||
__________
(1) | Annualized rent represents the annualized monthly contractual rent under existing leases as of the date indicated. This amount reflects total base rent before any rent abatements as of the date indicated 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 December 31, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 per leased square foot. Total abatements for leases in effect as of December 31, 2015 for the twelve months ended December 31, 2016 were approximately $14.9 million, or $2.32 per leased square foot. Total abatements for leases in effect as of December 31, 2014 for the twelve months ended December 31, 2015 were approximately $13.3 million, or $2.14 per leased square foot. |
(2) | Annualized rent per square foot represents annualized rent as computed above, divided by leased square feet as of the same date. |
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Leasing Activity
The following table summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2016:
Leasing Activity | Percentage Leased | ||||
Leased square feet as of December 31, 2015 | 6,443,905 | 85.6 | % | ||
Expirations | (579,225 | ) | (7.7 | )% | |
New leases | 422,942 | 5.6 | % | ||
Renewals | 331,394 | 4.4 | % | ||
Leased square feet as of December 31, 2016 | 6,619,016 | 87.9 | % | ||
Property Statistics
The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2016:
Square Feet | Leased % and In-Place Rents | ||||||||||||||||||||||||
Number of Buildings | Number of Tenants | Year Acquired | Net Building Rentable | % of Net Rentable | % Leased | Total Annualized Rent (1) | Annualized Rent $/RSF (2) | ||||||||||||||||||
BOA Plaza | 1 | 31 | 2006 | 1,405,428 | 18.67 | % | 94.6 | % | $ | 32,291,703 | $ | 24.28 | |||||||||||||
Wells Fargo Center–North Tower | 2 | 45 | 2013 | 1,400,639 | 18.61 | % | 88.5 | % | 31,463,199 | 25.38 | |||||||||||||||
Gas Company Tower | 1 | 24 | 2013 | 1,345,163 | 17.87 | % | 85.6 | % | 26,976,389 | 23.44 | |||||||||||||||
EY Plaza | 1 | 85 | 2006 | 1,224,967 | 16.28 | % | 90.8 | % | 26,527,864 | 23.84 | |||||||||||||||
Wells Fargo Center–South Tower | 1 | 21 | 2013 | 1,124,960 | 14.95 | % | 80.0 | % | 22,493,136 | 25.00 | |||||||||||||||
777 Tower | 1 | 50 | 2013 | 1,024,835 | 13.62 | % | 86.5 | % | 21,142,127 | 23.86 | |||||||||||||||
7 | 256 | 7,525,992 | 100.00 | % | 87.9 | % | $ | 160,894,418 | $ | 24.31 | |||||||||||||||
__________
(1) | Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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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Tenant Information
As of December 31, 2016, Brookfield DTLA’s properties were leased to 256 tenants. The following table sets forth the annualized rent and leased rentable square feet of our 20 largest tenants as of December 31, 2016:
Tenant | Annualized Rent (1) | % of Total Annualized Rent | Leased RSF | % of Total Leased RSF | Year of Expiry | ||||||||||||
1 | Southern California Gas Company | $ | 9,918,042 | 6.2 | % | 461,862 | 7.0 | % | Various | ||||||||
2 | The Capital Group Companies | 8,771,981 | 5.4 | % | 386,454 | 5.8 | % | Various | |||||||||
3 | Latham & Watkins LLP | 10,996,129 | 6.8 | % | 358,801 | 5.4 | % | Various | |||||||||
4 | Wells Fargo Bank National Association | 7,333,292 | 4.5 | % | 326,565 | 4.9 | % | Various | |||||||||
5 | Gibson, Dunn & Crutcher LLP | 6,975,834 | 4.3 | % | 269,173 | 4.1 | % | 2022 | |||||||||
6 | Oaktree Capital Management, L.P. | 5,542,727 | 3.4 | % | 231,047 | 3.5 | % | Various | |||||||||
7 | Shepard, Mullin, Richter | 4,447,467 | 2.8 | % | 173,959 | 2.6 | % | 2025 | |||||||||
8 | Sidley Austin (CA) LLP | 3,809,806 | 2.4 | % | 163,038 | 2.5 | % | 2024 | |||||||||
9 | Munger, Tolles & Olsen LLP | 4,017,050 | 2.5 | % | 160,682 | 2.4 | % | 2017 | |||||||||
10 | Bank of America N.A. | 4,293,099 | 2.7 | % | 155,269 | 2.4 | % | 2022 | |||||||||
11 | Marsh USA, Inc. | 3,484,580 | 2.2 | % | 150,803 | 2.3 | % | 2018 | |||||||||
12 | Ernst & Young U.S. LLP | 3,057,441 | 1.9 | % | 120,822 | 1.8 | % | 2022 | |||||||||
13 | Deloitte LLP | 2,632,658 | 1.6 | % | 112,028 | 1.7 | % | 2031 | |||||||||
14 | Kirkland & Ellis | 2,479,162 | 1.5 | % | 100,665 | 1.5 | % | 2020 | |||||||||
15 | Target Corporation | 604,008 | 0.4 | % | 97,465 | 1.5 | % | 2033 | |||||||||
16 | WeWork | 2,497,311 | 1.6 | % | 92,493 | 1.4 | % | 2033 | |||||||||
17 | Winston & Strawn LLP | 2,656,513 | 1.7 | % | 91,170 | 1.4 | % | Various | |||||||||
18 | United States of America | 2,004,950 | 1.2 | % | 89,800 | 1.4 | % | 2025 | |||||||||
19 | Bingham McCutchen, LLP | 2,195,748 | 1.4 | % | 81,324 | 1.2 | % | 2023 | |||||||||
20 | Alston & Bird LLP | 1,917,668 | 1.2 | % | 80,190 | 1.2 | % | 2024 | |||||||||
$ | 89,635,466 | 55.7 | % | 3,703,610 | 56.0 | % | |||||||||||
(1) | Annualized rent is calculated as contractual base rent under existing leases as of December 31, 2016. For those leases where rent has not yet commenced, the first month in which rent is to be received is used to determine annualized rent. |
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The following table sets forth information regarding the lease expirations of our 20 largest tenants as of December 31, 2016 (in thousands):
Rentable Leased Square Feet as of December 31, 2016 | |||||||||||||||||||||||||
Tenant | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | Beyond | Year of Final Expiry | |||||||||||||||||
1 | Southern California Gas Company | — | 28 | 56 | — | — | — | 378 | 2026 | ||||||||||||||||
2 | The Capital Group Companies | 9 | — | — | — | — | 53 | 324 | 2033 | ||||||||||||||||
3 | Latham & Watkins LLP | — | — | — | — | 93 | — | 266 | 2025 | ||||||||||||||||
4 | Wells Fargo Bank National Association | — | 57 | — | — | — | — | 270 | 2023 | ||||||||||||||||
5 | Gibson, Dunn & Crutcher LLP | — | — | — | — | — | 269 | — | 2022 | ||||||||||||||||
6 | Oaktree Capital Management, L.P. | — | 23 | — | — | — | — | 208 | 2030 | ||||||||||||||||
7 | Shepard, Mullin, Richter | — | — | — | — | — | — | 174 | 2025 | ||||||||||||||||
8 | Sidley Austin (CA) LLP | — | — | — | — | — | — | 163 | 2024 | ||||||||||||||||
9 | Munger, Tolles & Olsen LLP | 161 | — | — | — | — | — | — | 2017 | ||||||||||||||||
10 | Bank of America N.A. | — | — | — | — | — | 155 | — | 2022 | ||||||||||||||||
11 | Marsh USA, Inc. | — | 151 | — | — | — | — | — | 2018 | ||||||||||||||||
12 | Ernst & Young U.S. LLP | — | — | — | — | — | 121 | — | 2022 | ||||||||||||||||
13 | Deloitte LLP | — | — | — | — | — | — | 112 | 2031 | ||||||||||||||||
14 | Kirkland & Ellis | — | — | — | 101 | — | — | — | 2020 | ||||||||||||||||
15 | Target Corporation | — | — | — | — | — | — | 97 | 2033 | ||||||||||||||||
16 | WeWork | — | — | — | — | — | — | 93 | 2033 | ||||||||||||||||
17 | Winston & Strawn LLP | 38 | — | — | — | — | — | 53 | 2034 | ||||||||||||||||
18 | United States of America | — | — | — | — | — | — | 90 | 2025 | ||||||||||||||||
19 | Bingham McCutchen, LLP | — | — | — | — | — | — | 81 | 2023 | ||||||||||||||||
20 | Alston & Bird LLP | — | — | — | — | — | — | 80 | 2024 | ||||||||||||||||
Leased square feet expiring by year | 208 | 259 | 56 | 101 | 93 | 598 | 2,389 | ||||||||||||||||||
Percentage of leased square feet expiring by year | 3.1 | % | 3.9 | % | 0.9 | % | 1.5 | % | 1.4 | % | 9.1 | % | 36.1 | % | |||||||||||
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Lease Expirations
The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at December 31, 2016, plus currently available space, for each of the ten calendar years beginning January 1, 2017 and thereafter. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.
Year | Total Area in Square Feet Covered by Expiring Leases | Percentage of Leased Square Feet | Annualized Rent (1) | Percentage of Annualized Rent | Current Rent per Leased Square Foot (2) | Rent per Leased Square Foot at Expiration (3) | |||||||||||||||
2017 | 433,870 | 6.6 | % | $ | 10,698,818 | 6.6 | % | $ | 24.66 | $ | 24.80 | ||||||||||
2018 | 658,479 | 9.9 | % | 12,395,091 | 7.7 | % | 18.82 | 19.40 | |||||||||||||
2019 | 474,463 | 7.2 | % | 13,206,527 | 8.2 | % | 27.83 | 30.55 | |||||||||||||
2020 | 295,002 | 4.5 | % | 7,440,671 | 4.6 | % | 25.22 | 28.41 | |||||||||||||
2021 | 456,392 | 6.9 | % | 11,525,158 | 7.2 | % | 25.25 | 29.04 | |||||||||||||
2022 | 861,855 | 13.0 | % | 21,737,968 | 13.5 | % | 25.22 | 30.00 | |||||||||||||
2023 | 729,154 | 11.0 | % | 17,820,513 | 11.1 | % | 24.44 | 29.80 | |||||||||||||
2024 | 407,786 | 6.2 | % | 10,133,393 | 6.3 | % | 24.85 | 31.00 | |||||||||||||
2025 | 696,051 | 10.5 | % | 18,798,967 | 11.7 | % | 27.01 | 33.07 | |||||||||||||
2026 | 464,992 | 7.0 | % | 9,857,789 | 6.1 | % | 21.20 | 27.64 | |||||||||||||
Thereafter | 1,140,972 | 17.2 | % | 27,279,523 | 17.0 | % | 23.91 | 37.31 | |||||||||||||
Total expiring leases | 6,619,016 | 100.0 | % | $ | 160,894,418 | 100.0 | % | $ | 24.31 | $ | 29.96 | ||||||||||
Currently available | 906,976 | ||||||||||||||||||||
Total rentable square feet | 7,525,992 | ||||||||||||||||||||
__________
(1) | Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 per leased square foot. |
(2) | Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date. |
(3) | Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration. |
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Indebtedness
As of December 31, 2016, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of December 31, 2016 is as follows (in millions, except percentage and year amounts):
Principal Amount | Percent of Total Debt | Effective Interest Rate | Weighted Average Term to Maturity | ||||||||
Fixed-rate | $ | 1,400.0 | 67.12 | % | 4.79 | % | 4 years | ||||
Variable-rate swapped to fixed-rate | 180.9 | 8.67 | % | 3.93 | % | 4 years | |||||
Variable-rate | 505.0 | 24.21 | % | 3.57 | % | 2 years | |||||
$ | 2,085.9 | 100.00 | % | 4.42 | % | 3 years | |||||
See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and Part II, Item 8. “Financial Statements and Supplementary Data—Note 4 to Consolidated Financial Statements.”
Item 3. | Legal Proceedings. |
General
Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on the Company’s business, financial condition or consolidated financial statements as a whole.
Merger-Related Litigation
Following the announcement of the execution of the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), seven putative class actions were filed against Brookfield Office Properties Inc. (“BPO”), Brookfield DTLA, Brookfield DTLA Holdings LLC, Brookfield DTLA Fund Office Trust Inc., Brookfield DTLA Fund Properties (collectively, the “Brookfield Parties”), MPG Office Trust, Inc., MPG Office, L.P., and the members of MPG Office Trust, Inc.’s board of directors. Five of these lawsuits were filed on behalf of MPG Office Trust, Inc.’s common stockholders: (i) two lawsuits, captioned Coyne v. MPG Office Trust, Inc., et al., No. BC507342 (the “Coyne Action”), and Masih v. MPG Office Trust, Inc., et al., No. BC507962 (the “Masih Action”), were filed in the Superior Court of the State of California in Los Angeles County (the “California State Court”) on April 29, 2013 and May 3, 2013, respectively; and (ii) three lawsuits, captioned Kim v. MPG Office Trust, Inc. et al., No. 24‑C-13-002600 (the “Kim Action”), Perkins v. MPG Office Trust, Inc., et al., No. 24-C-13-002778 (the “Perkins Action”) and Dell’Osso v. MPG Office Trust, Inc., et al., No. 24‑C-13-003283 (the “Dell’Osso Action”) were filed in the Circuit Court for Baltimore City, Maryland on May 1, 2013, May 8, 2013 and May 22, 2013, respectively (collectively, the “Common Stock Actions”). Two lawsuits, captioned Cohen v. MPG Office Trust, Inc. et al., No. 24-C-13-004097 (the “Cohen Action”) and Donlan v. Weinstein, et al., No. 24‑C-13-004293 (the “Donlan Action”), were filed on behalf of MPG Office Trust, Inc.’s preferred stockholders in the Circuit Court for Baltimore City, Maryland on June 20, 2013 and July 2, 2013, respectively (collectively, the “Preferred Stock Actions”).
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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.
In each of the Preferred Stock Actions, which were brought on behalf of MPG Office Trust, Inc.’s preferred stockholders, the plaintiffs allege, among other things, that, by entering into the Merger Agreement and tender offer, MPG Office Trust, Inc. breached the Articles Supplementary, which governs the issuance of the MPG preferred shares, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties by agreeing to a merger agreement that violated the preferred stockholders’ contractual rights and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of contract and fiduciary duty. On July 15, 2013, the plaintiffs in the Preferred Stock Actions filed a joint amended complaint in the Circuit Court for Baltimore City, Maryland that further alleged that MPG Office Trust, Inc.’s board of directors failed to disclose material information regarding BPO’s extension of the tender offer.
The plaintiffs in the seven lawsuits sought an injunction against the merger, rescission or rescissory damages in the event the merger was consummated, an award of fees and costs, including attorneys’ and experts’ fees, and other relief.
On July 10, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Brookfield Parties and the other named defendants in the Common Stock Actions signed a memorandum of understanding, regarding a proposed settlement of all claims asserted therein. The parties subsequently entered into a stipulation of settlement dated November 21, 2013 providing for the release of all asserted claims, additional disclosures by MPG concerning the merger made prior to the merger’s approval, and the payment, by the defendants, of an award of attorneys’ fees and expenses in an amount not to exceed $475,000. After a hearing on June 4, 2014, the California State Court granted plaintiffs’ motion for final approval of the settlement, and entered a Final Order and Judgment, awarding the plaintiffs’ counsel’s attorneys’ fees and expenses in the amount of $475,000, which was paid by MPG Office LLC on June 18, 2014.
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In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied the plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. At a hearing on June 18, 2014, the Maryland State Court heard oral arguments on the defendants’ motion to dismiss and reserved judgment on the decision. On October 21, 2014, the parties sent a joint letter to the Maryland State Court stating that since the June 18 meeting the parties have commenced discussions towards a possible resolution of the lawsuit, requesting that the court temporarily refrain from deciding the pending motion to dismiss to facilitate the discussions.
On March 30, 2015, the plaintiff in the Cohen Action and the defendants entered into a memorandum of understanding setting forth an agreement in principle to settle the Preferred Stock Actions on a class-wide basis and dismiss the case with prejudice in exchange for the payment of $2.25 per share of Series A preferred stock of accumulated and unpaid dividends (the “Dividend Payment”) to holders of record on a record date to be set after final approval of the settlement by the Maryland State Court, plus any attorneys’ fees awarded by the Maryland State Court to the plaintiff’s counsel. The dividend would reduce the amount of accumulated and unpaid dividends on the Series A preferred stock, and the terms of the Series A preferred stock would otherwise remain unchanged.
On August 18, 2015, the Maryland State Court entered an order preliminarily approving the settlement and scheduling a final fairness hearing for October 27, 2015. On September 28, 2015, the plaintiff filed a motion for final certification of the settlement class, final approval of the class action settlement and approval of attorneys’ fees and reimbursement of expenses, seeking a total fee and expense award of $5,250,000. The defendants submitted their opposition to the plaintiff’s fee application on October 13, 2015.
On October 16, 2015, the plaintiff filed a motion seeking discovery related to the valuation of the Dividend Payment in connection with its fee application and served related discovery requests on the defendants. On October 23, 2015, the defendants filed their opposition to that motion, as well as a motion for a protective order precluding discovery. On October 27, 2015, the Maryland State Court held a hearing to decide whether to grant final approval of the settlement and to rule on the parties’ discovery motions. At the hearing, the Court ordered limited discovery to occur prior to ruling on the fee application.
On October 28, 2015, the Maryland State Court issued an order granting final approval of the settlement. The time to appeal the order expired on November 30, 2015 without any appeals having been filed. On December 4, 2015, in accordance with the final approval order and the terms of the parties’ settlement agreement, the board of directors declared a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015. On January 4, 2016, Brookfield DTLA paid the Dividend Payment totaling $21.9 million using cash on hand.
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On December 16, 2015, after taking certain limited discovery permitted by the Maryland State Court during the October 27 hearing, the plaintiff served the defendants with its reply memorandum of law in support of its motion for attorneys’ fees and expenses. That same day, the plaintiff requested that the Court permit it to file the reply memorandum and an exhibit thereto under seal given the confidential nature of the information contained therein. On December 17, 2015, the plaintiff provided the Court with plaintiff’s counsel’s time records for the Court’s in camera review. On January 15, 2016, the defendants filed a surreply to the plaintiff’s reply memorandum after obtaining the Court’s permission to do so. After a hearing on April 6, 2016, the Maryland State Court issued an order on April 18, 2016 granting an award of attorneys’ fees and expenses to the plaintiffs totaling $2,212,688. On April 21, 2016, the Company paid the awarded amount to the plaintiffs’ counsel.
On July 13, 2016, BPO and the Company entered into a settlement agreement with the insurance carrier under the MPG directors and officers liability insurance policy that was in effect at the time of the merger. On August 17, 2016, the Company received a settlement payment from the insurance carrier totaling $1,106,344, which partially reimbursed the Company for amounts paid to settle both the Common Stock Actions and the Preferred Stock Actions.
Item 4. | Mine Safety Disclosures. |
Not applicable.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters | |||
and Issuer Purchases of Equity Securities. | ||||
There is no established public trading market for the registrant’s common stock. All of the registrant’s issued and outstanding common stock is held by Brookfield DTLA Holdings LLC.
The registrant has not paid any cash dividends on its common stock 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.
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Item 6. | Selected Financial Data. |
The following tables set forth selected consolidated operating and financial data for Brookfield DTLA (for the years ended December 31, 2016, 2015 and 2014) and selected combined operating and financial data for BOA Plaza and EY Plaza (for the years ended December 31, 2013 and 2012):
For the Year Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 (1) | 2012 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Operating Results | |||||||||||||||||||
Total revenue | $ | 310,692 | $ | 299,090 | $ | 294,161 | $ | 138,722 | $ | 92,917 | |||||||||
Total expenses | 348,859 | 339,444 | 347,153 | 153,996 | 92,669 | ||||||||||||||
Net (loss) income | (38,167 | ) | (40,354 | ) | (52,992 | ) | (15,274 | ) | 248 | ||||||||||
Net income attributable to TRZ Holdings IV LLC | — | — | — | 2,335 | 248 | ||||||||||||||
Net loss attributable to noncontrolling interests: | |||||||||||||||||||
Series A-1 preferred interest – current dividends | 17,213 | 17,213 | 17,213 | — | — | ||||||||||||||
Series A-1 preferred interest – cumulative dividends | — | — | — | 3,586 | — | ||||||||||||||
Series A-1 preferred interest – redemption measurement adjustment | — | — | — | 76,305 | — | ||||||||||||||
Senior participating preferred interest – current dividends | — | 2,321 | 10,044 | — | — | ||||||||||||||
Senior participating preferred interest – cumulative dividends | — | — | — | 3,500 | — | ||||||||||||||
Senior participating preferred interest – redemption measurement adjustment | 2,428 | 6,625 | 2,256 | — | — | ||||||||||||||
Series B preferred interest – current dividends | 2,084 | — | — | — | — | ||||||||||||||
Series B common interest – allocation of net loss | (41,055 | ) | (44,521 | ) | (52,891 | ) | (97,934 | ) | — | ||||||||||
Net loss attributable to Brookfield DTLA | (18,837 | ) | (21,992 | ) | (29,614 | ) | (3,066 | ) | — | ||||||||||
Series A preferred stock – current dividends | 18,548 | 18,548 | 18,548 | — | — | ||||||||||||||
Series A preferred stock – cumulative dividends | — | — | — | 3,864 | — | ||||||||||||||
Series A preferred stock – redemption measurement adjustment | — | — | — | 82,247 | — | ||||||||||||||
Net loss available to common interest holders of Brookfield DTLA | $ | (37,385 | ) | $ | (40,540 | ) | $ | (48,162 | ) | $ | (89,177 | ) | $ | — | |||||
Other Information | |||||||||||||||||||
Cash flows provided by (used in) operating activities | $ | 35,828 | $ | 29,991 | $ | 22,962 | $ | (2,208 | ) | $ | 15,159 | ||||||||
Cash flows used in investing activities | (63,604 | ) | (64,773 | ) | (68,050 | ) | (39,868 | ) | (40,989 | ) | |||||||||
Cash flows provided by (used in) financing activities | 4,341 | (36,486 | ) | (25,979 | ) | 232,440 | 24,025 | ||||||||||||
__________
(1) | On October 15, 2013, Brookfield DTLA completed the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. pursuant to the terms of the Agreement and Plan of Merger dated as of April 24, 2013, as amended. |
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As of December 31, | |||||||||||||||||||
2016 | 2015 | 2014 (1) | 2013 (1) | 2012 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Financial Position | |||||||||||||||||||
Investments in real estate, net | $ | 2,411,624 | $ | 2,419,119 | $ | 2,430,314 | $ | 2,436,253 | $ | 756,072 | |||||||||
Total assets | 2,769,959 | 2,798,010 | 2,873,808 | 2,941,930 | 859,766 | ||||||||||||||
Mortgage loans, net | 2,076,804 | 2,111,405 | 2,107,007 | 1,881,339 | 319,678 | ||||||||||||||
Total liabilities | 2,198,862 | 2,255,952 | 2,232,606 | 2,022,392 | 351,063 | ||||||||||||||
Mezzanine equity | 829,532 | 726,595 | 739,600 | 911,539 | — | ||||||||||||||
Stockholders’ (deficit) equity | (258,435 | ) | (184,537 | ) | (98,398 | ) | 7,999 | — | |||||||||||
TRZ Holdings IV LLC’s interest | — | — | — | — | 508,703 | ||||||||||||||
__________
(1) | In December 2015, Brookfield DTLA adopted the guidance in Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We have retroactively restated the 2014 and 2013 consolidated balance sheets by reclassifying unamortized debt issuance costs of $4,128 and $4,266, respectively, from total assets to mortgage loans, net in accordance with this guidance. We have also reduced total liabilities by $4,128 and $4,266 in the 2014 and 2013 consolidated balance sheets, respectively. There were no unamortized debt issuance costs to reclassify in the 2012 combined balance sheet. |
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Item 7. | 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 consolidated financial statements and related notes. See Item 8. “Financial Statements and Supplementary Data.”
Overview and Background
Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, and an indirect partially-owned subsidiary of Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”).
Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property located in the Los Angeles Central Business District (the “LACBD”).
Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.
Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
General
Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “—Potential Uses of Liquidity—Property Operations” below.
Sources and Uses of Liquidity
Brookfield DTLA’s potential liquidity sources and uses are, among others, as follows:
Sources | Uses | ||||
• | Cash on hand; | • | Property operations; | ||
• | Cash generated from operations; | • | Capital expenditures; | ||
• | Contributions from Brookfield DTLA Holdings; and | • | Payments in connection with loans; | ||
• | Proceeds from additional secured or unsecured debt financings. | • | Distributions to Brookfield DTLA Holdings; and | ||
• | Dividend payment in connection with legal settlement. | ||||
Potential Sources of Liquidity—
Cash on Hand—
As of December 31, 2016 and 2015, Brookfield DTLA had cash and cash equivalents totaling $30.3 million and $53.7 million, respectively.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cash Generated from Operations—
Brookfield DTLA’s cash generated from operations is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to its tenants. Net cash generated from operations is tied to the level of operating expenses, described below under “—Potential Uses of Liquidity.”
Occupancy levels. The following table presents leasing information for Brookfield DTLA for leases in place as of December 31, 2016:
Square Feet | Leased % and In-Place Rents | ||||||||||||||||
Property | Net Building Rentable | % of Net Rentable | % Leased | Total Annualized Rents (1) | Annualized Rent $/RSF (2) | ||||||||||||
BOA Plaza | 1,405,428 | 18.67 | % | 94.6 | % | $ | 32,291,703 | $ | 24.28 | ||||||||
Wells Fargo Center–North Tower | 1,400,639 | 18.61 | % | 88.5 | % | 31,463,199 | 25.38 | ||||||||||
Gas Company Tower | 1,345,163 | 17.87 | % | 85.6 | % | 26,976,389 | 23.44 | ||||||||||
EY Plaza | 1,224,967 | 16.28 | % | 90.8 | % | 26,527,864 | 23.84 | ||||||||||
Wells Fargo Center–South Tower | 1,124,960 | 14.95 | % | 80.0 | % | 22,493,136 | 25.00 | ||||||||||
777 Tower | 1,024,835 | 13.62 | % | 86.5 | % | 21,142,127 | 23.86 | ||||||||||
7,525,992 | 100.00 | % | 87.9 | % | $ | 160,894,418 | $ | 24.31 | |||||||||
__________
(1) | Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 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 December 31, 2016, plus currently available space, for each of the ten calendar years beginning January 1, 2017 and thereafter. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.
Year | Total Area in Square Feet Covered by Expiring Leases | Percentage of Leased Square Feet | Annualized Rent (1) | Percentage of Annualized Rent | Current Rent per Leased Square Foot (2) | Rent per Leased Square Foot at Expiration (3) | |||||||||||||||
2017 | 433,870 | 6.6 | % | $ | 10,698,818 | 6.6 | % | $ | 24.66 | $ | 24.80 | ||||||||||
2018 | 658,479 | 9.9 | % | 12,395,091 | 7.7 | % | 18.82 | 19.40 | |||||||||||||
2019 | 474,463 | 7.2 | % | 13,206,527 | 8.2 | % | 27.83 | 30.55 | |||||||||||||
2020 | 295,002 | 4.5 | % | 7,440,671 | 4.6 | % | 25.22 | 28.41 | |||||||||||||
2021 | 456,392 | 6.9 | % | 11,525,158 | 7.2 | % | 25.25 | 29.04 | |||||||||||||
2022 | 861,855 | 13.0 | % | 21,737,968 | 13.5 | % | 25.22 | 30.00 | |||||||||||||
2023 | 729,154 | 11.0 | % | 17,820,513 | 11.1 | % | 24.44 | 29.80 | |||||||||||||
2024 | 407,786 | 6.2 | % | 10,133,393 | 6.3 | % | 24.85 | 31.00 | |||||||||||||
2025 | 696,051 | 10.5 | % | 18,798,967 | 11.7 | % | 27.01 | 33.07 | |||||||||||||
2026 | 464,992 | 7.0 | % | 9,857,789 | 6.1 | % | 21.20 | 27.64 | |||||||||||||
Thereafter | 1,140,972 | 17.2 | % | 27,279,523 | 17.0 | % | 23.91 | 37.31 | |||||||||||||
Total expiring leases | 6,619,016 | 100.0 | % | $ | 160,894,418 | 100.0 | % | $ | 24.31 | $ | 29.96 | ||||||||||
Currently available | 906,976 | ||||||||||||||||||||
Total rentable square feet | 7,525,992 | ||||||||||||||||||||
__________
(1) | Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2016. This amount reflects total base rent before any rent abatements as of December 31, 2016 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of December 31, 2016 for the twelve months ending December 31, 2017 are approximately $11.5 million, or $1.73 per leased square foot. |
(2) | Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date. |
(3) | Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration. |
Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the year ended December 31, 2016. Management believes that on average our current in‑place rents are generally close to market in the LACBD.
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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 summarizes leasing activity at Brookfield DTLA for the year ended December 31, 2016:
Leasing Activity | Percentage Leased | ||||
Leased square feet as of December 31, 2015 | 6,443,905 | 85.6 | % | ||
Expirations | (579,225 | ) | (7.7 | )% | |
New leases | 422,942 | 5.6 | % | ||
Renewals | 331,394 | 4.4 | % | ||
Leased square feet as of December 31, 2016 | 6,619,016 | 87.9 | % | ||
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—
Drawdowns under Capital Commitment—
At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a preferred return, if and when called by New OP. During the years ended December 31, 2015 and 2014, Brookfield DTLA received no contributions from Brookfield DTLA Holdings under this commitment.
During the year ended December 31, 2016, the Company received cash contributions totaling $63.3 million from Brookfield DTLA Holdings under this commitment, which is entitled to a preferred return of 9.0%. The Company used these funds to pay for costs associated with refinancing the Wells Fargo Center–South Tower and Gas Company Tower mortgage loans, and for general corporate purposes. As of December 31, 2016, $196.7 million was available to the Company under this commitment for future funding.
Subsequent to December 31, 2016, the Company received $30.0 million in cash contributions from Brookfield DTLA Holdings under this commitment, which is entitled to a preferred return of 9.0%. The Company intends to use these funds for general corporate purposes. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding. See “Subsequent Event.”
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other Contribution—
In addition to amounts received under the commitment described above, on April 21, 2016, Brookfield DTLA received a $2.5 million capital contribution from Brookfield DTLA Holdings, which was used for general corporate purposes.
Proceeds from Additional Secured or Unsecured Debt Financings—
On September 1, 2016, Brookfield DTLA modified the mortgage loan secured by 777 Tower, which increased the loan amount from $200.0 million to $220.0 million. As a result of the modification, the Company received net proceeds of $19.7 million, which was used for general corporate purposes.
Potential Uses of Liquidity—
The following are the projected uses, and some of the potential uses, of cash in the near term.
Property Operations—
BOA Plaza and EY Plaza have historically generated sufficient cash from operations to fund their operating activities. In the future, should the cash generated by Brookfield DTLA’s properties, including the properties acquired from MPG, not be sufficient to fund their operations, such cash would be provided by Brookfield DTLA Holdings or another source of funds available to the Company or, if such cash were not made available, the Company might not have sufficient cash to fund its operations.
At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, for up to $260.0 million of its future cash needs, for which it will be entitled to receive a preferred return, if and when called by New OP. As of March 20, 2017, $166.7 million is available to the Company under this commitment for future funding. See “Subsequent Event.”
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.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Brookfield DTLA expects that leasing activities at its properties, including the properties acquired from MPG, will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending approximately $135 million over the next ten years, with the majority (approximately $116 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 lobby renovations, upgrades to fire alarm, security and HVAC systems, and roof replacements.
Payments in Connection with Loans—
Debt Refinanced—
On July 11, 2016, Brookfield DTLA refinanced the $458.0 million mortgage loan secured by Gas Company Tower. In connection with the refinancing, the Company repaid $8.0 million of principal and was required to fund various loan reserves, including a $20.7 million tenant improvement and leasing commission reserve, a $4.5 million rent concession reserve, and a $3.0 million tax reserve at closing. During July 2016, the Company received $37.0 million in cash contributions from Brookfield DTLA Holdings, of which $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower.
On December 2, 2016, Brookfield DLTA refinanced the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, the Company repaid $40.0 million of principal and was required to fund various loan reserves, including a $6.1 million tenant improvement and leasing commission reserve and a $1.1 million tax reserve at closing. During November 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings that, along with cash on hand, was used to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.
Debt Maturities—
As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the existing mortgage loan on Wells Fargo Center–North Tower on or about its scheduled maturity (April 2017) with new debt with a lower leverage ratio. As of December 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $90 million to complete the refinancing of the Wells Fargo Center–North Tower mortgage loan. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Distributions to Brookfield DTLA Holdings—
During the year ended December 31, 2016, the Company made distributions totaling $0.6 million to Brookfield DTLA Holdings as returns of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.
During the year ended December 31, 2015, the Company made a distribution totaling $35.8 million to Brookfield DTLA Holdings comprised of $3.0 million of dividends and a return of investment of $32.8 million related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.
During the year ended December 31, 2014, the Company made distributions totaling $220.0 million to Brookfield DTLA Holdings comprised of dividends totaling $12.8 million and returns of investment totaling $207.2 million related to the senior participating preferred interest using proceeds from the refinancing of EY Plaza and BOA Plaza.
Dividend Payment in Connection with Legal Settlement—
On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24-C-13-004097. See Part I, Item 3. “Legal Proceedings—Merger‑Related Litigation” for additional information regarding the dividend payment.
Indebtedness
As of December 31, 2016, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of December 31, 2016 is as follows (in millions, except percentage and year amounts):
Principal Amount | Percent of Total Debt | Effective Interest Rate | Weighted Average Term to Maturity | ||||||||
Fixed-rate | $ | 1,400.0 | 67.12 | % | 4.79 | % | 4 years | ||||
Variable-rate swapped to fixed-rate | 180.9 | 8.67 | % | 3.93 | % | 4 years | |||||
Variable-rate | 505.0 | 24.21 | % | 3.57 | % | 2 years | |||||
$ | 2,085.9 | 100.00 | % | 4.42 | % | 3 years | |||||
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Certain information with respect to our indebtedness as of December 31, 2016 is as follows (in thousands, except percentage amounts):
Interest Rate | Contractual Maturity Date | Principal Amount (1) | Annual Debt Service | |||||||||
Floating-Rate Debt | ||||||||||||
Variable-Rate Loans: | ||||||||||||
Wells Fargo Center–South Tower (2) | 4.34 | % | 12/6/2018 | $ | 250,000 | $ | 11,001 | |||||
777 Tower (3) | 2.80 | % | 11/1/2018 | 220,000 | 6,246 | |||||||
Figueroa at 7th (4) | 2.91 | % | 9/10/2017 | 35,000 | 1,034 | |||||||
Total variable-rate loans | 505,000 | 18,281 | ||||||||||
Variable-Rate Swapped to Fixed-Rate Loan: | ||||||||||||
EY Plaza (5) | 3.93 | % | 11/27/2020 | 180,859 | 7,203 | |||||||
Total floating-rate debt | 685,859 | 25,484 | ||||||||||
Fixed-Rate Debt | ||||||||||||
Wells Fargo Center–North Tower | 5.70 | % | 4/6/2017 | 550,000 | 31,769 | |||||||
BOA Plaza | 4.05 | % | 9/1/2024 | 400,000 | 16,425 | |||||||
Gas Company Tower | 3.47 | % | 8/6/2021 | 319,000 | 11,232 | |||||||
Gas Company Tower | 6.50 | % | 8/6/2021 | 131,000 | 8,633 | |||||||
Total fixed-rate rate debt | 1,400,000 | 68,059 | ||||||||||
Total debt | 2,085,859 | $ | 93,543 | |||||||||
Less: unamortized discounts and debt issuance costs | 9,055 | |||||||||||
Total debt, net | $ | 2,076,804 | ||||||||||
__________
(1) | Assuming no payment has been made in advance of its due date. |
(2) | This loan bears interest at LIBOR plus 3.69%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(3) | This loan bears interest at LIBOR plus 2.18%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(4) | This loan bears interest at LIBOR plus 2.25%. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(5) | This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap. |
43
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Debt Refinanced
Gas Company Tower—
On July 11, 2016, Brookfield DTLA refinanced the $458.0 million mortgage loan secured by Gas Company Tower. In connection with the refinancing, the Company repaid $8.0 million of principal and was required to fund various loan reserves, including a $20.7 million tenant improvement and leasing commission reserve, a $4.5 million rent concession reserve, and a $3.0 million property tax reserve at closing. During July 2016, the Company received $37.0 million in cash contributions from Brookfield DTLA Holdings, of which $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower.
The new $450.0 million mortgage loan is comprised of a $319.0 million senior loan and a $131.0 million mezzanine loan, which bear interest at fixed rates equal to 3.4727% and 6.50%, respectively, mature on August 6, 2021, and require the payment of interest-only until maturity. The senior loan is locked out from prepayment until September 6, 2017, after which it can be prepaid, in whole or in part, with prepayment penalties (as defined in the underlying loan agreement) until April 6, 2021 after which the loan can be repaid without penalty. The mezzanine loan is locked out from prepayment until September 6, 2017, after which the loan can be repaid, in whole or in part, without penalty.
Wells Fargo Center–South Tower—
On December 2, 2016, Brookfield DLTA refinanced the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, the Company repaid $40.0 million of principal and was required to fund various loan reserves, including a $6.1 million tenant improvement and leasing commission reserve and a $1.1 million property tax reserve at closing. During November 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings that, along with cash on hand, was used to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.
The new $270.0 million mortgage loan is comprised of an initial advance amount of $250.0 million and a remaining maximum future advance amount of $20.0 million that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. The loan bears interest at a variable rate of LIBOR plus 3.69%, matures on December 6, 2018, and requires the payment of interest-only until maturity. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%.
The loan can, at Brookfield DTLA’s option, be prepaid with penalties until June 6, 2018, after which the loan can be repaid without penalty. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Debt Modification
On September 1, 2016, Brookfield DTLA modified the mortgage loan secured by 777 Tower, which increased the loan amount from $200.0 million to $220.0 million. As a result of the modification, the Company received net proceeds of $19.7 million, which was used for general corporate purposes.
The terms of the modified loan increased the interest rate by 48 basis points to LIBOR plus 2.18%, effective September 1, 2016. No other terms or conditions of the original loan were changed as part of the modification.
Debt Maturities
Wells Fargo Center–North Tower—
Brookfield DTLA currently intends to refinance the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower on or about its April 6, 2017 maturity date with new debt with a lower leverage ratio. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.
This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As of December 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $90 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders. There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.
Figueroa at 7th—
Brookfield DTLA intends to extend or refinance the $35.0 million mortgage loan secured by Figueroa at 7th on or about its September 10, 2017 maturity date. 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). As of December 31, 2016, we meet the criteria specified in the loan agreement to extend the maturity date of this 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)
Non-Recourse Carve Out Guarantees
All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against Brookfield DTLA Holdings or one of its subsidiaries, if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:
• | The special purpose property-owning subsidiary of Brookfield DTLA Holdings or Brookfield DTLA Holdings filing a voluntary petition for bankruptcy; |
• | The special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to maintain its status as a special purpose entity; |
• | Subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and |
• | Subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of Brookfield DTLA Holdings or Brookfield DTLA. |
In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.
The maximum amount Brookfield DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $2.1 billion as of December 31, 2016 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to Brookfield DTLA Holdings pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary of Brookfield DTLA Holdings, the amount due to the lender from Brookfield DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Debt 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 December 31, 2016 and were in compliance with the amounts required by the loan agreements.
Pursuant to the terms of the 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.
47
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 Year Ended December 31, 2016 to December 31, 2015
Consolidated Statements of Operations Information
(In millions, except percentage amounts)
For the Year Ended | Increase/ (Decrease) | % Change | ||||||||||||
12/31/2016 | 12/31/2015 | |||||||||||||
Revenue: | ||||||||||||||
Rental income | $ | 164.8 | $ | 160.7 | $ | 4.1 | 3 | % | ||||||
Tenant reimbursements | 95.6 | 88.6 | 7.0 | 8 | % | |||||||||
Parking | 36.6 | 34.4 | 2.2 | 6 | % | |||||||||
Interest and other | 13.7 | 15.4 | (1.7 | ) | (11 | )% | ||||||||
Total revenue | 310.7 | 299.1 | 11.6 | 4 | % | |||||||||
Expenses: | ||||||||||||||
Rental property operating and maintenance | 99.1 | 96.8 | 2.3 | 2 | % | |||||||||
Real estate taxes | 37.4 | 35.7 | 1.7 | 5 | % | |||||||||
Parking | 8.4 | 8.1 | 0.3 | 4 | % | |||||||||
Other expense | 4.9 | 5.4 | (0.5 | ) | (9 | )% | ||||||||
Depreciation and amortization | 104.0 | 98.2 | 5.8 | 6 | % | |||||||||
Interest | 95.1 | 95.4 | (0.3 | ) | — | % | ||||||||
Total expenses | 348.9 | 339.6 | 9.3 | 3 | % | |||||||||
Net loss | $ | (38.2 | ) | $ | (40.5 | ) | $ | 2.3 | ||||||
Rental Income
Rental income increased $4.1 million, or 3%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily as a result of a 2.3% increase in occupancy.
Tenant Reimbursements Revenue
Tenant reimbursements revenue increased $7.0 million, or 8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily as a result of an increase in real estate taxes and operating expenses passed through to tenants.
Parking Revenue
Parking revenue increased $2.2 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015 due to increased usage of our parking facilities.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Real Estate Taxes
Real estate taxes increased $1.7 million, or 5%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015 due to prior year tax reductions that were recorded during 2015 related to the MPG properties for which there was no comparable activity during 2016.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $5.8 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, largely as a result of an acceleration of depreciation and amortization expense related to lease termination activity.
Comparison of the Year Ended December 31, 2015 to December 31, 2014
Consolidated Statements of Operations Information
(In millions, except percentage amounts)
For the Year Ended | Increase/ (Decrease) | % Change | ||||||||||||
12/31/2015 | 12/31/2014 | |||||||||||||
Revenue: | ||||||||||||||
Rental income | $ | 160.7 | $ | 152.4 | $ | 8.3 | 5 | % | ||||||
Tenant reimbursements | 88.6 | 95.9 | (7.3 | ) | (8 | )% | ||||||||
Parking | 34.4 | 33.8 | 0.6 | 2 | % | |||||||||
Interest and other | 15.4 | 12.1 | 3.3 | 27 | % | |||||||||
Total revenue | 299.1 | 294.2 | 4.9 | 2 | % | |||||||||
Expenses: | ||||||||||||||
Rental property operating and maintenance | 96.8 | 100.3 | (3.5 | ) | (3 | )% | ||||||||
Real estate taxes | 35.7 | 38.3 | (2.6 | ) | (7 | )% | ||||||||
Parking | 8.1 | 7.4 | 0.7 | 9 | % | |||||||||
Other expense | 5.4 | 3.3 | 2.1 | 64 | % | |||||||||
Depreciation and amortization | 98.2 | 105.1 | (6.9 | ) | (7 | )% | ||||||||
Interest | 95.4 | 92.8 | 2.6 | 3 | % | |||||||||
Total expenses | 339.6 | 347.2 | (7.6 | ) | (2 | )% | ||||||||
Net loss | $ | (40.5 | ) | $ | (53.0 | ) | $ | 12.5 | ||||||
Rental Income
Rental income increased $8.3 million, or 5%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily as a result of higher lease rates as well as an increase in occupancy from 83.0% to 85.6%.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Tenant Reimbursements Revenue
Tenant reimbursements revenue decreased $7.3 million, or 8%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily as a result of a decrease in real estate tax, and rental property operating and maintenance expenses passed through to tenants.
Interest and Other Revenue
Interest and other revenue increased $3.3 million, or 27%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, mainly as a result of a $3.5 million recovery received related to a property disposed of by MPG prior to the merger.
Rental Property Operating and Maintenance Expense
Rental property operating and maintenance expense decreased $3.5 million, or 3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014 as a result of lower utility and insurance costs.
Real Estate Taxes Expense
Real estate taxes expense decreased $2.6 million, or 7%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to adjusted property tax assessments that were received during 2015 related to the MPG properties acquired in 2013.
Other Expense
Other expense increased $2.1 million, or 64%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, mainly due to a $1.9 million accrual for legal expenses related to the MPG stockholder litigation.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $6.9 million, or 7%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, largely as a result of a decrease in amortization of acquired in-place and tenant relationship intangible assets.
Interest Expense
Interest expense increased $2.6 million, or 3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to the refinancing of BOA Plaza in August 2014 combined with higher interest rates on variable-rate debt in the fourth quarter of 2015.
50
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cash Flow
Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover Brookfield DTLA’s operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “Liquidity and Capital Resources—Potential Uses of Liquidity—Property Operations” above.
The following summary discussion of Brookfield DTLA’s cash flow is based on the consolidated statements of cash flows in Item 8. “Financial Statements and Supplementary Data” and is not meant to be an all‑inclusive discussion of the changes in its cash flow for the periods presented below.
For the Year Ended December 31, | Increase/ (Decrease) | ||||||||||
2016 | 2015 | ||||||||||
(In thousands) | |||||||||||
Net cash provided by operating activities | $ | 35,828 | $ | 29,991 | $ | 5,837 | |||||
Net cash used in investing activities | (63,604 | ) | (64,773 | ) | (1,169 | ) | |||||
Net cash provided by (used in) financing activities | 4,341 | (36,486 | ) | 40,827 | |||||||
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 for the year ended December 31, 2016 totaled $35.8 million compared to net cash provided by operating activities of $30.0 million for the year ended December 31, 2015. The $5.8 million increase in cash provided by operating activities was primarily the result of increases in net rental and tenant reimbursements revenue, partially offset by changes in other working capital amounts.
Investing Activities
Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $63.6 million for the year ended December 31, 2016, compared to net cash used in investing activities of $64.8 million during the year ended December 31, 2015. The $1.2 million decrease in cash used in investing activities was primarily a result of reduced expenditures for real estate improvements during 2016.
51
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Financing Activities
Brookfield DTLA’s cash flow from financing activities is generally impacted by its loan activity, less any dividends and distributions paid to stockholders and distributions to affiliated companies, if any. Net cash provided by financing activities totaled $4.3 million for the year ended December 31, 2016, compared to net cash used in financing activities of $36.5 million during the year ended December 31, 2015. Contributions from the Series B preferred interest and Brookfield DTLA Holdings totaling $65.8 million, partially offset by net cash used in debt activity totaling $38.9 million and payment of $21.9 million in dividends on the Series A preferred stock, were the drivers of the cash provided by financing activities during 2016. Distributions and dividends totaling $35.8 million paid to Brookfield DTLA Holdings related to the senior participating preferred interest were the drivers of the cash used in financing activities during 2015.
Off-Balance Sheet Arrangements
Brookfield DTLA did not have any off-balance sheet arrangements as of December 31, 2016 and 2015, respectively.
Contractual Obligations
The following table provides information with respect to Brookfield DTLA’s commitments as of December 31, 2016, including any guaranteed or minimum commitments under contractual obligations (in thousands):
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||
Principal payments on mortgage loans | $ | 589,026 | $ | 474,233 | $ | 4,449 | $ | 168,151 | $ | 450,000 | $ | 400,000 | $ | 2,085,859 | |||||||||||||
Interest payments – | |||||||||||||||||||||||||||
Fixed-rate debt (1) | 44,646 | 36,290 | 36,290 | 36,390 | 28,289 | 43,875 | 225,780 | ||||||||||||||||||||
Variable-rate swapped to fixed-rate debt | 7,130 | 6,982 | 6,785 | 6,363 | — | — | 27,260 | ||||||||||||||||||||
Variable-rate debt (2) | 17,964 | 15,436 | — | — | — | — | 33,400 | ||||||||||||||||||||
Tenant-related commitments (3) | 71,253 | 11,949 | 11,265 | 2,042 | 1,018 | 3,909 | 101,436 | ||||||||||||||||||||
$ | 730,019 | $ | 544,890 | $ | 58,789 | $ | 212,946 | $ | 479,307 | $ | 447,784 | $ | 2,473,735 | ||||||||||||||
__________
(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 December 31, 2016 plus the contractual spread per the loan agreements. |
(3) | Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of December 31, 2016. |
52
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Related Party Transactions
Intercompany Loan
Brookfield DTLA was indebted to BOP Management Inc. (“BOP”), an affiliate of BPO, under a $25.0 million promissory note dated October 11, 2013 that bore interest at 3.25%. For the year ended December 31, 2014, the Company accrued $0.6 million of interest expense related to this note. During September 2014, Brookfield DTLA 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
Brookfield DTLA has entered into arrangements with BOP under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Asset Manager LLC and Brookfield Asset Management Private Institutional Capital Adviser US, LLC an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.
A summary of costs incurred by Brookfield DTLA under these arrangements is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Property management fee expense | $ | 7,964 | $ | 7,445 | $ | 8,135 | |||||
Asset management fee expense | 6,330 | 6,292 | 6,109 | ||||||||
General, administrative and reimbursable expenses | 2,466 | 2,593 | 2,509 | ||||||||
Leasing and construction management fees | 3,049 | 6,396 | 3,626 | ||||||||
Insurance Agreements
Brookfield DTLA’s properties are covered under insurance policies entered into by BPO that provide, among other things, all risk property and business interruption coverage for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $370.0 million of earthquake, flood and weather catastrophe 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. Insurance premiums for Brookfield DTLA’s properties are paid by an affiliate of BPO and Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.
53
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Prior to their expiration, which became effective on April 19, 2014, the MPG properties were covered under an insurance policy that provided all risk property and business interruption coverage 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.
A summary of costs incurred by Brookfield DTLA under this arrangement is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Insurance expense | $ | 7,948 | $ | 8,532 | $ | 8,466 | |||||
Litigation
See Part I, Item 3. “Legal Proceedings.”
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of Brookfield DTLA’s financial condition and results of operations and require management to make difficult, complex or subjective judgments. Brookfield DTLA considers the following to be its critical accounting policies:
Business Combinations
Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, the purchase price of real estate acquired is allocated to acquired tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value. Management may be required to use considerable judgment when allocating the fair value of assets and liabilities acquired.
The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Mortgage loans assumed in an acquisition are analyzed using current market terms for similar debt.
54
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidation
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.
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.
Impairment Evaluation
Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific
business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. The assessment as to whether our investment in real estate is impaired is highly subjective. The calculations involve management’s best estimate of the holding period, market comparables, future occupancy levels, rental rates, capitalization rates, lease‑up periods and capital requirements for each property. A change in any one of more of these factors could materially impact whether a property is impaired as of any given valuation date. Management believes no impairment of Brookfield DTLA’s real estate assets existed at December 31, 2016 and 2015.
55
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Revenue Recognition
Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenants’ sales. Percentage rents are recognized only after the tenant sales thresholds have been achieved. Any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income.
Differences between rental income and the contractual amounts due are recorded as deferred rents receivable. Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the period during which the expenses are incurred.
Allowance for Doubtful Accounts
Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates. Brookfield DTLA also evaluates its deferred rents receivable to consider if an allowance is necessary. The allowance for doubtful accounts totaled $0.2 million and $0.5 million as of December 31, 2016 and 2015, respectively.
Effects of Inflation
Substantially all of Brookfield DTLA’s office leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. Brookfield DTLA believes that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 establishing ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements.
56
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This topic provides guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and requires related footnote disclosures. The guidance in ASU 2014-15 became effective for Brookfield DTLA for year-end December 31, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. The guidance in ASU 2015-02 became effective for Brookfield DTLA beginning January 1, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, as opposed to being presented as assets. Brookfield DTLA elected to early adopt ASU 2015-03 effective as of December 31, 2015. There was no effect on Brookfield DTLA’s consolidated statement of operations for the year ended December 31, 2014 as a result of adopting this pronouncement.
In February 2016, the FASB issued ASU 2016-02 establishing ASC Topic 842, Leases. The guidance in this update supersedes the guidance in ASC Topic 840, Leases. ASU 2016-02 revises GAAP related to accounting for leases by lessees. Under this new guidance, lessees will be required to recognize a lease liability and a right-of-use asset in the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification determining the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of
57
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We do not expect the adoption of this update to have a material impact on Brookfield DTLA’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash to ASC Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption permitted, including adoption in an interim period. Upon adoption, we will retrospectively reconcile the activity in our cash, cash equivalents, restricted cash and restricted cash equivalents during reporting periods.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business by providing a screen to determine when a set of assets and activities acquired is not a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017 including interim periods within those periods. ASU 2017-01 must be applied prospectively on or after the effective date. We are currently evaluating the impact of the adoption of ASU 2017-01 on Brookfield DTLA’s consolidated financial statements.
Subsequent Event
Contributions from Brookfield DTLA Holdings
Subsequent to December 31, 2016, the Company received $30.0 million in cash contributions from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0%. The Company intends to use these funds for general corporate purposes. As of March 20, 2017, $166.7 million is available to the Company under the $260.0 million commitment for future funding.
58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Interest rate fluctuations may impact Brookfield DTLA’s results of operations and cash flow. As of December 31, 2016, $505.0 million, or 24.2%, of Brookfield DTLA’s debt bears interest at variable rates based on one-month LIBOR. Brookfield DTLA does not trade in financial instruments for speculative purposes.
Brookfield DTLA’s interest rate swap and cap agreements outstanding as of December 31, 2016 are as follows (in thousands, except rate and date information):
Notional Value | Strike Rate | Effective Date | Expiration Date | Fair Value | |||||||||||
Interest rate swap | $ | 185,000 | 2.178 | % | 11/27/2013 | 11/2/2020 | $ | (3,373 | ) | ||||||
Interest rate cap | 270,000 | 3.000 | % | 12/2/2016 | 12/6/2018 | 52 | |||||||||
Interest rate cap | 220,000 | 5.750 | % | 9/1/2016 | 10/15/2018 | 1 | |||||||||
$ | (3,320 | ) | |||||||||||||
Interest Rate Sensitivity
The impact of an assumed 50 basis point movement in interest rates would have had the following impact during the year ended December 31, 2016 (in thousands):
Fair Value of | |||||||||||
Interest Expense | Mortgage Loans | Interest Rate Swap | |||||||||
50 basis point increase | $ | 2,525 | $ | (22,181 | ) | $ | 3,135 | ||||
50 basis point decrease | (2,525 | ) | 22,919 | (3,203 | ) | ||||||
The impact of a 50 basis point increase or decrease in interest rates would have an immaterial effect on the fair value of Brookfield DTLA’s interest rate cap agreements as of December 31, 2016.
These amounts were determined considering the impact of hypothetical interest rates on Brookfield DTLA’s financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Furthermore, in the event of a change of the magnitude discussed above, management may take actions to further mitigate Brookfield DTLA’s exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in Brookfield DTLA’s financial structure.
59
Item 8. | Financial Statements and Supplementary Data. |
Index to Consolidated Financial Statements
Page | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Brookfield DTLA Fund Office Trust Investor Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Brookfield DTLA Fund Office Trust Investor Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 17, 2017
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2016 | December 31, 2015 | ||||||
(In thousands, except share amounts) | |||||||
ASSETS | |||||||
Investments in Real Estate: | |||||||
Land | $ | 227,555 | $ | 227,555 | |||
Buildings and improvements | 2,191,676 | 2,167,746 | |||||
Tenant improvements | 321,542 | 279,948 | |||||
2,740,773 | 2,675,249 | ||||||
Less: accumulated depreciation | 329,149 | 256,130 | |||||
Investments in real estate, net | 2,411,624 | 2,419,119 | |||||
Cash and cash equivalents | 30,301 | 53,736 | |||||
Restricted cash | 60,084 | 53,830 | |||||
Rents, deferred rents and other receivables, net | 118,211 | 95,690 | |||||
Intangible assets, net | 75,586 | 99,710 | |||||
Deferred charges, net | 64,967 | 66,791 | |||||
Prepaid and other assets | 9,186 | 9,134 | |||||
Total assets | $ | 2,769,959 | $ | 2,798,010 | |||
LIABILITIES AND DEFICIT | |||||||
Liabilities: | |||||||
Mortgage loans, net | $ | 2,076,804 | $ | 2,111,405 | |||
Accounts payable and other liabilities | 85,504 | 105,004 | |||||
Due to affiliates, net | 14,327 | 9,335 | |||||
Intangible liabilities, net | 22,227 | 30,208 | |||||
Total liabilities | 2,198,862 | 2,255,952 | |||||
Commitments and Contingencies (See Note 13) | |||||||
Mezzanine Equity: | |||||||
7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value, 9,730,370 shares issued and outstanding as of December 31, 2016 and 2015 | 372,852 | 354,304 | |||||
Noncontrolling Interests: | |||||||
Series A-1 preferred interest | 366,297 | 349,084 | |||||
Senior participating preferred interest | 25,019 | 23,207 | |||||
Series B preferred interest | 65,364 | — | |||||
Total mezzanine equity | 829,532 | 726,595 | |||||
Stockholders’ Deficit: | |||||||
Common stock, $0.01 par value, 1,000 shares issued and outstanding as of December 31, 2016 and 2015 | — | — | |||||
Additional paid-in capital | 194,210 | 191,710 | |||||
Accumulated deficit | (215,264 | ) | (177,879 | ) | |||
Accumulated other comprehensive loss | (1,607 | ) | (2,580 | ) | |||
Noncontrolling interest – Series B common interest | (235,774 | ) | (195,788 | ) | |||
Total stockholders’ deficit | (258,435 | ) | (184,537 | ) | |||
Total liabilities and deficit | $ | 2,769,959 | $ | 2,798,010 | |||
See accompanying notes to consolidated financial statements.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(In thousands) | |||||||||||
Revenue: | |||||||||||
Rental income | $ | 164,816 | $ | 160,662 | $ | 152,372 | |||||
Tenant reimbursements | 95,578 | 88,615 | 95,931 | ||||||||
Parking | 36,614 | 34,439 | 33,774 | ||||||||
Interest and other | 13,684 | 15,374 | 12,084 | ||||||||
Total revenue | 310,692 | 299,090 | 294,161 | ||||||||
Expenses: | |||||||||||
Rental property operating and maintenance | 99,074 | 96,757 | 100,264 | ||||||||
Real estate taxes | 37,401 | 35,675 | 38,340 | ||||||||
Parking | 8,430 | 8,080 | 7,411 | ||||||||
Other expense | 4,909 | 5,357 | 3,325 | ||||||||
Depreciation and amortization | 103,970 | 98,160 | 105,058 | ||||||||
Interest | 95,075 | 95,415 | 92,755 | ||||||||
Total expenses | 348,859 | 339,444 | 347,153 | ||||||||
Net loss | (38,167 | ) | (40,354 | ) | (52,992 | ) | |||||
Net loss attributable to noncontrolling interests: | |||||||||||
Series A-1 preferred interest – current dividends | 17,213 | 17,213 | 17,213 | ||||||||
Senior participating preferred interest – current dividends | — | 2,321 | 10,044 | ||||||||
Senior participating preferred interest – redemption measurement adjustment | 2,428 | 6,625 | 2,256 | ||||||||
Series B preferred interest – current dividends | 2,084 | — | — | ||||||||
Series B common interest – allocation of net loss | (41,055 | ) | (44,521 | ) | (52,891 | ) | |||||
Net loss attributable to Brookfield DTLA | (18,837 | ) | (21,992 | ) | (29,614 | ) | |||||
Series A preferred stock – current dividends | 18,548 | 18,548 | 18,548 | ||||||||
Net loss available to common interest holders of Brookfield DTLA | $ | (37,385 | ) | $ | (40,540 | ) | $ | (48,162 | ) | ||
See accompanying notes to consolidated financial statements.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(In thousands) | |||||||||||
Net loss | $ | (38,167 | ) | $ | (40,354 | ) | $ | (52,992 | ) | ||
Other comprehensive loss: | |||||||||||
Derivative transactions: | |||||||||||
Derivative holding gains (losses) | 2,042 | (1,078 | ) | (5,344 | ) | ||||||
Comprehensive loss | (36,125 | ) | (41,432 | ) | (58,336 | ) | |||||
Less: comprehensive loss attributable to noncontrolling interests | (18,261 | ) | (18,926 | ) | (26,176 | ) | |||||
Comprehensive loss available to common interest holders of Brookfield DTLA | $ | (17,864 | ) | $ | (22,506 | ) | $ | (32,160 | ) | ||
See accompanying notes to consolidated financial statements.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Number of Shares | Common Stock | Additional Paid-in Capital | Accumu- lated Deficit | Accumu- lated Other Compre- hensive Income (Loss) | Non- controlling Interest | Total Stock- holders’ Equity (Deficit) | |||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||
(In thousands, except share amounts) | |||||||||||||||||||||||||||
Balance, December 31, 2013 | 1,000 | $ | — | $ | 191,710 | $ | (89,177 | ) | $ | 480 | $ | (95,014 | ) | $ | 7,999 | ||||||||||||
Net loss | (29,614 | ) | (23,378 | ) | (52,992 | ) | |||||||||||||||||||||
Other comprehensive loss | (2,546 | ) | (2,798 | ) | (5,344 | ) | |||||||||||||||||||||
Dividends on Series A Preferred Stock, Series A-1 preferred interest and senior participating preferred interest | (18,548 | ) | (29,513 | ) | (48,061 | ) | |||||||||||||||||||||
Balance, December 31, 2014 | 1,000 | — | 191,710 | (137,339 | ) | (2,066 | ) | (150,703 | ) | (98,398 | ) | ||||||||||||||||
Net loss | (21,992 | ) | (18,362 | ) | (40,354 | ) | |||||||||||||||||||||
Other comprehensive loss | (514 | ) | (564 | ) | (1,078 | ) | |||||||||||||||||||||
Dividends on Series A Preferred Stock, Series A-1 preferred interest and senior participating preferred interest | (18,548 | ) | (26,159 | ) | (44,707 | ) | |||||||||||||||||||||
Balance, December 31, 2015 | 1,000 | — | 191,710 | (177,879 | ) | (2,580 | ) | (195,788 | ) | (184,537 | ) | ||||||||||||||||
Net loss | (18,837 | ) | (19,330 | ) | (38,167 | ) | |||||||||||||||||||||
Other comprehensive income | 973 | 1,069 | 2,042 | ||||||||||||||||||||||||
Contribution from Brookfield DTLA Holdings | 2,500 | 2,500 | |||||||||||||||||||||||||
Dividends on Series A Preferred Stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest | (18,548 | ) | (21,725 | ) | (40,273 | ) | |||||||||||||||||||||
Balance, December 31, 2016 | 1,000 | $ | — | $ | 194,210 | $ | (215,264 | ) | $ | (1,607 | ) | $ | (235,774 | ) | $ | (258,435 | ) | ||||||||||
See accompanying notes to consolidated financial statements.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (38,167 | ) | $ | (40,354 | ) | $ | (52,992 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Gain on sale of land held for investment | — | (28 | ) | — | |||||||
Depreciation and amortization | 103,970 | 98,160 | 105,058 | ||||||||
(Recovery of) provision for doubtful accounts | (271 | ) | 103 | 24 | |||||||
Amortization of below-market leases/ above-market leases | (3,465 | ) | (2,559 | ) | (3,059 | ) | |||||
Straight-line rent amortization | (16,798 | ) | (21,598 | ) | (15,849 | ) | |||||
Amortization of tenant inducements | 3,399 | 2,647 | 1,209 | ||||||||
Amortization of discounts and deferred financing costs | 4,329 | 5,064 | 6,049 | ||||||||
Changes in assets and liabilities: | |||||||||||
Rents, deferred rents and other receivables | (9,122 | ) | (2,479 | ) | (6,409 | ) | |||||
Due to (from) affiliates, net | 4,991 | 6,586 | (13,712 | ) | |||||||
Deferred charges | (9,516 | ) | (17,056 | ) | (12,832 | ) | |||||
Prepaid and other assets | (53 | ) | 2,382 | 6,787 | |||||||
Accounts payable and other liabilities | (3,469 | ) | (877 | ) | 8,688 | ||||||
Net cash provided by operating activities | 35,828 | 29,991 | 22,962 | ||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sale of land held for investment | — | 2,028 | — | ||||||||
Expenditures for improvements to real estate | (57,350 | ) | (60,089 | ) | (43,729 | ) | |||||
Increase in restricted cash | (6,254 | ) | (6,712 | ) | (24,321 | ) | |||||
Net cash used in investing activities | (63,604 | ) | (64,773 | ) | (68,050 | ) | |||||
See accompanying notes to consolidated financial statements.
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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(In thousands) | |||||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from mortgage loans | $ | 720,000 | $ | — | $ | 435,000 | |||||
Principal payments on mortgage loans | (751,518 | ) | (623 | ) | (214,512 | ) | |||||
Dividends paid on Series A preferred stock | (21,893 | ) | — | — | |||||||
Distributions to senior participating preferred interest | (616 | ) | (32,769 | ) | (207,231 | ) | |||||
Dividends paid to senior participating preferred interest | — | (3,051 | ) | (12,769 | ) | ||||||
Contributions from Series B preferred interest | 63,280 | — | — | ||||||||
Contribution from Brookfield DTLA Holdings | 2,500 | — | — | ||||||||
Due to affiliates | — | — | (25,000 | ) | |||||||
Financing fees paid | (7,412 | ) | (43 | ) | (1,467 | ) | |||||
Net cash provided by (used in) financing activities | 4,341 | (36,486 | ) | (25,979 | ) | ||||||
Net change in cash and cash equivalents | (23,435 | ) | (71,268 | ) | (71,067 | ) | |||||
Cash and cash equivalents at beginning of year | 53,736 | 125,004 | 196,071 | ||||||||
Cash and cash equivalents at end of year | $ | 30,301 | $ | 53,736 | $ | 125,004 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Cash paid for interest | $ | 89,630 | $ | 90,093 | $ | 86,990 | |||||
Supplemental disclosure of non-cash activities: | |||||||||||
Accrual for real estate improvements | $ | 24,465 | $ | 16,290 | $ | 18,588 | |||||
Accrual for deferred leasing costs | 2,349 | 4,956 | 2,585 | ||||||||
Dividends declared but not yet paid | — | 21,893 | — | ||||||||
Increase (decrease) in fair value of interest rate swap, net | 2,042 | (1,078 | ) | (5,344 | ) | ||||||
See accompanying notes to consolidated financial statements.
67
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Description of Business
Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company and an indirect partially-owned subsidiary of Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”).
Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property located in the Los Angeles Central Business District (the “LACBD”).
Brookfield DTLA receives its income primarily from rental income (including tenant reimbursements) generated from the operations of its office and retail properties, and to a lesser extent, from its parking garages.
Note 2—Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
As used in these consolidated financial statements and related notes, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated balance sheets as of December 31, 2016 and 2015 include the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. All intercompany transactions have been eliminated in consolidation as of and for the years ended December 31, 2016, 2015 and 2014.
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.
68
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Brookfield DTLA Fund Properties II LLC (“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.
Reclassifications
We had reported $220,000 of distributions to Brookfield DTLA Holdings in the consolidated statement of cash flows for the year ended December 31, 2014. We have reclassified this total to show $207,231 as distributions to senior participating preferred interest and $12,769 as dividends paid to senior participating preferred interest so as to conform to the 2016 and 2015 presentation.
In December 2015, Brookfield DTLA adopted the guidance in Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We have combined the amortization of deferred financing costs ($1,007) and the amortization of debt discounts ($5,042) for the year ended December 31, 2014 and presented a new total ($6,049) in the consolidated statement of cash flows so as to reflect the presentation of such costs in the consolidated balance sheet.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, recoverable amounts of receivables, impairment of long‑lived assets and fair value of debt. Actual results could ultimately differ from such estimates.
69
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09 establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on Brookfield DTLA’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This topic provides guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and requires related footnote disclosures. The guidance in ASU 2014-15 became effective for Brookfield DTLA for year-end December 31, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. The guidance in ASU 2015-02 became effective for Brookfield DTLA beginning January 1, 2016. The implementation of this pronouncement did not have a material impact on Brookfield DTLA’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, as opposed to being presented as assets. Brookfield DTLA elected to early adopt ASU 2015-03 effective as of December 31, 2015. There was no effect on Brookfield DTLA’s consolidated statement of operations for the year ended December 31, 2014 as a result of adopting this pronouncement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In February 2016, the FASB issued ASU 2016-02 establishing ASC Topic 842, Leases. The guidance in this update supersedes the guidance in ASC Topic 840, Leases. ASU 2016-02 revises GAAP related to accounting for leases by lessees. Under this new guidance, lessees will be required to recognize a lease liability and a right-of-use asset in the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification determining the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows. ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We do not expect the adoption of this update to have a material impact on Brookfield DTLA’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash to ASC Topic 230, Statement of Cash Flows. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption permitted, including adoption in an interim period. Upon adoption, we will retrospectively reconcile the activity in our cash, cash equivalents, restricted cash and restricted cash equivalents during reporting periods.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business by providing a screen to determine when a set of assets and activities acquired is not a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017 including interim periods within those periods. ASU 2017-01 must be applied prospectively on or after the effective date. We are currently evaluating the impact of the adoption of ASU 2017-01 on Brookfield DTLA’s consolidated financial statements.
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Significant Accounting Policies
Business Combinations—
Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with FASB ASC Topic 805, Business Combinations, the purchase price of real estate acquired is allocated to acquired tangible assets, consisting primarily of land, building and tenant improvements, and identifiable intangible assets and liabilities, consisting of the value of above- and below-market leases, in-place leases, and tenant relationships, based in each case on their fair value.
The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Mortgage loans assumed in an acquisition are analyzed using current market terms for similar debt.
The value of the acquired above-market and below-market leases are amortized and recorded as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to rental income in the consolidated statement of operations over the remaining term of the associated lease. The value of tenant relationships is amortized over the expected term of the relationship, which includes an estimated probability of lease renewal. The value of in-place leases is amortized as an expense over the remaining life of the leases. Amortization of tenant relationships and in‑place leases is included in depreciation and amortization in the consolidated statement of operations.
Investments in Real Estate—
Land is carried at cost. Buildings are recorded at historical cost and are depreciated on a straight-line basis over the estimated useful life of the building, which is 60 years with an estimated salvage value of 5%. Building improvements are recorded at historical cost and are depreciated on a straight-line basis over their estimated useful lives, which range from 7 years to 25 years. Tenant improvements that are determined to be assets of Brookfield DTLA are recorded at cost; amortization is included in depreciation and amortization expense in the consolidated statement of operations on a straight-line basis over the shorter of the useful life or the applicable lease term.
Depreciation expense related to investments in real estate during the years ended December 31, 2016, 2015 and 2014 was $73.0 million, $67.0 million and $67.5 million, respectively.
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Real estate is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the real estate may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of the property into the foreseeable future on an undiscounted basis to the carrying amount of the real estate. If the undiscounted cash flows expected to be generated by an asset are less than its carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. Brookfield DTLA assesses fair value based on estimated cash flow projections utilizing appropriate discount and capitalization rates and available market information. Projections of future cash flow take into account the specific business plan for the property and management’s best estimate of the most probable set of economic conditions expected to prevail in the market. Management believes no impairment of Brookfield DTLA’s real estate assets existed at December 31, 2016 and 2015.
Cash and Cash Equivalents—
Cash and cash equivalents include all cash and short-term investments with an original maturity of three months or less.
Restricted Cash—
Restricted cash consists primarily of deposits for tenant improvements and leasing commissions, real estate taxes and insurance reserves, debt service reserves and other items as required by our mortgage loan agreements.
Rents, Deferred Rents and Other Receivables, Net—
Differences between rental income and the contractual amounts due are recorded as deferred rents receivable in the consolidated balance sheet. Brookfield DTLA evaluates its deferred rents receivable to consider if an allowance is necessary.
Rents, deferred rents and other receivables, net also includes any amounts paid to a tenant for improvements owned or costs incurred by the tenant are treated as tenant inducements and are presented in the consolidated balance sheet net of accumulated amortization totaling $9.9 million and $6.5 million as of December 31, 2016 and 2015, respectively. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of rental income in the consolidated statement of operations.
Brookfield DTLA periodically evaluates the collectability of amounts due from tenants and maintains an allowance for doubtful accounts in the consolidated balance sheet for estimated losses resulting from the inability of tenants to make required payments under the lease agreements. Management exercises judgment in establishing these allowances and considers payment history and current credit status in developing these estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for doubtful accounts for Brookfield DTLA totaled $0.2 million and $0.5 million as of December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, Brookfield DTLA recorded a $271 thousand recovery of doubtful accounts. For the years ended December 31, 2015 and 2014, Brookfield DTLA recorded provisions for doubtful accounts of $103 thousand and $24 thousand, respectively.
Due to/from Affiliates, Net—
Amounts due to/from affiliates, net consist of related party receivables and payables from affiliates of BPO primarily for fees for property management and other services. These amounts are due on demand and are non‑interest bearing.
Deferred Charges, Net—
Leasing costs are deferred and are presented as deferred charges in the consolidated balance sheet net of accumulated amortization totaling $49.6 million and $38.2 million as of December 31, 2016 and 2015, respectively. Deferred leasing costs are amortized on a straight-line basis over the terms of the related leases as part of depreciation and amortization in the consolidated statement of operations.
Prepaid and Other Assets, Net—
Prepaid and other assets include prepaid insurance, prepaid real estate taxes and other operating costs.
Mortgage Loans, Net—
Mortgage loans are presented in the consolidated balance sheet net of unamortized discounts and debt issuance costs totaling $9.1 million and $6.0 million as of December 31, 2016 and 2015, respectively.
Discounts and debt issuance costs totaling $4.3 million, $5.1 million and $6.0 million were amortized during the years ended December 31, 2016, 2015 and 2014, respectively, over the terms of the related mortgage loans on a basis that approximates the effective interest method and are included as part of interest expense in the consolidated statement of operations.
Revenue Recognition—
Rental income from leases providing for periodic increases in base rent is recognized on a straight-line basis over the noncancelable term of the respective leases. Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenants’ sales. Percentage rents are recognized only after the tenant sales thresholds have been achieved.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recoveries of operating expenses and real estate taxes are recorded as tenant reimbursements in the consolidated statement of operations in the period during which the expenses are incurred.
Income Taxes—
Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.
Qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax on its taxable income at regular corporate tax rates, and it may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may also be subject to certain state or local income taxes, or franchise taxes on its REIT activities.
Brookfield DTLA made no provision for income taxes in its consolidated financial statements for the years ended December 31, 2016, 2015 and 2014. 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 of December 31, 2016 and 2015, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. As of December 31, 2016, Brookfield DTLA’s 2013 tax period and 2014 and 2015 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities. The 2012 tax year as well as the short tax period ended October 15, 2013 for Brookfield DTLA and its subsidiaries remain open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Financial Instruments—
Brookfield DTLA uses interest rate swap and cap contracts to manage risk from fluctuations in interest rates as well as to hedge anticipated future financing transactions. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these agreements are with counterparties who are creditworthy financial institutions.
Brookfield DTLA adheres to the provisions of ASC Subtopic 815-10-15, Derivatives and Hedging (“ASC 815-10-15”). ASC 815-10-15 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s consolidated balance sheet at fair value. Changes in the fair value of derivative instruments that are not designated as hedges, or that do not meet the hedge accounting criteria in ASC 815-10-15, are required to be reported through the statement of operations. Brookfield DTLA has elected to designate its interest rate swap as a cash flow hedge.
Segment Reporting
Brookfield DTLA operates in a single reportable segment referred to as its office segment, which includes the operation and management of commercial office properties. Each of Brookfield DTLA’s operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s operating properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s operating properties are aggregated into a single reportable segment.
Accounting for Conditional Asset Retirement Obligations
Brookfield DTLA has evaluated whether it has any conditional asset retirement obligations, which are a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional upon future events that may or may not be within an entity’s control. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, Brookfield DTLA recognized a liability for a conditional asset retirement obligation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3—Intangible Assets and Liabilities
Brookfield DTLA’s intangible assets and liabilities are summarized as follows (in thousands):
December 31, 2016 | December 31, 2015 | ||||||
Intangible Assets | |||||||
In-place leases | $ | 110,519 | $ | 110,519 | |||
Tenant relationships | 46,248 | 46,248 | |||||
Above-market leases | 39,936 | 39,936 | |||||
196,703 | 196,703 | ||||||
Less: accumulated amortization | 121,117 | 96,993 | |||||
Intangible assets, net | $ | 75,586 | $ | 99,710 | |||
Intangible Liabilities | |||||||
Below-market leases | $ | 76,344 | $ | 76,344 | |||
Less: accumulated amortization | 54,117 | 46,136 | |||||
Intangible liabilities, net | $ | 22,227 | $ | 30,208 | |||
The impact of the amortization of acquired below-market leases, net of acquired above-market leases, on rental income and of acquired in-place leases and tenant relationships on depreciation and amortization expense is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Rental income | $ | 3,465 | $ | 2,559 | $ | 3,059 | |||||
Depreciation and amortization expense | 19,609 | 21,159 | 26,872 | ||||||||
As of December 31, 2016, the estimate of the amortization/accretion of intangible assets and liabilities during the next five years and thereafter is as follows (in thousands):
In-Place Leases | Other Intangible Assets | Intangible Liabilities | |||||||||
2017 | $ | 10,477 | $ | 6,324 | $ | 5,656 | |||||
2018 | 6,754 | 5,146 | 3,812 | ||||||||
2019 | 5,704 | 4,313 | 3,238 | ||||||||
2020 | 5,059 | 3,417 | 3,031 | ||||||||
2021 | 4,821 | 3,381 | 2,906 | ||||||||
Thereafter | 9,619 | 10,571 | 3,584 | ||||||||
$ | 42,434 | $ | 33,152 | $ | 22,227 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4—Mortgage Loans
Brookfield DTLA’s debt is as follows (in thousands, except percentage amounts):
Contractual Maturity Date | Principal Amount as of | |||||||||||
Interest Rate | December 31, 2016 | December 31, 2015 | ||||||||||
Floating-Rate Debt | ||||||||||||
Variable-Rate Loans: | ||||||||||||
Wells Fargo Center–South Tower (1) | 12/6/2018 | 4.34 | % | $ | 250,000 | $ | — | |||||
777 Tower (2) | 11/1/2018 | 2.80 | % | 220,000 | 200,000 | |||||||
Figueroa at 7th (3) | 9/10/2017 | 2.91 | % | 35,000 | 35,000 | |||||||
Total variable-rate loans | 505,000 | 235,000 | ||||||||||
Variable-Rate Swapped to Fixed-Rate Loan: | ||||||||||||
EY Plaza (4) | 11/27/2020 | 3.93 | % | 180,859 | 184,377 | |||||||
Total floating-rate debt | 685,859 | 419,377 | ||||||||||
Fixed-Rate Debt: | ||||||||||||
Wells Fargo Center–North Tower | 4/6/2017 | 5.70 | % | 550,000 | 550,000 | |||||||
BOA Plaza | 9/1/2024 | 4.05 | % | 400,000 | 400,000 | |||||||
Gas Company Tower | 8/6/2021 | 3.47 | % | 319,000 | — | |||||||
Gas Company Tower | 8/6/2021 | 6.50 | % | 131,000 | — | |||||||
Total fixed-rate debt | 1,400,000 | 950,000 | ||||||||||
Debt Refinanced: | ||||||||||||
Gas Company Tower | — | 458,000 | ||||||||||
Wells Fargo Center–South Tower | — | 290,000 | ||||||||||
Total debt refinanced | — | 748,000 | ||||||||||
Total debt | 2,085,859 | 2,117,377 | ||||||||||
Less: unamortized discounts and debt issuance costs | 9,055 | 5,972 | ||||||||||
Total debt, net | $ | 2,076,804 | $ | 2,111,405 | ||||||||
__________
(1) | This loan bears interest at LIBOR plus 3.69%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(2) | This loan bears interest at LIBOR plus 2.18%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(3) | This loan bears interest at LIBOR plus 2.25%. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). |
(4) | This loan bears interest at LIBOR plus 1.75%. As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178%. The effective interest rate of 3.93% includes interest on the swap. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted average interest rate of our debt was 4.42% as of December 31, 2016 and 4.20% as of December 31, 2015.
Debt Refinanced
Gas Company Tower—
On July 11, 2016, Brookfield DTLA refinanced the $458.0 million mortgage loan secured by Gas Company Tower. In connection with the refinancing, the Company repaid $8.0 million of principal and was required to fund various loan reserves, including a $20.7 million tenant improvement and leasing commission reserve, a $4.5 million rent concession reserve, and a $3.0 million property tax reserve at closing. During July 2016, the Company received $37.0 million in cash contributions from Brookfield DTLA Holdings, of which $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower.
The new $450.0 million mortgage loan is comprised of a $319.0 million senior loan and a $131.0 million mezzanine loan, which bear interest at fixed rates equal to 3.4727% and 6.50%, respectively, mature on August 6, 2021, and require the payment of interest-only until maturity. The senior loan is locked out from prepayment until September 6, 2017, after which it can be prepaid, in whole or in part, with prepayment penalties (as defined in the underlying loan agreement) until April 6, 2021 after which the loan can be repaid without penalty. The mezzanine loan is locked out from prepayment until September 6, 2017, after which the loan can be repaid, in whole or in part, without penalty.
Wells Fargo Center–South Tower—
On December 2, 2016, Brookfield DLTA refinanced the $290.0 million mortgage loan secured by Wells Fargo Center–South Tower. In connection with the refinancing, the Company repaid $40.0 million of principal and was required to fund various loan reserves, including a $6.1 million tenant improvement and leasing commission reserve and a $1.1 million property tax reserve at closing. During November 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings that, along with cash on hand, was used to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.
The new $270.0 million mortgage loan is comprised of an initial advance amount of $250.0 million and a remaining maximum future advance amount of $20.0 million that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. The loan bears interest at a variable rate of LIBOR plus 3.69%, matures on December 6, 2018, and requires the payment of interest-only until maturity. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The loan can, at Brookfield DTLA’s option, be prepaid with penalties until June 6, 2018, after which the loan can be repaid without penalty. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
Debt Modification
On September 1, 2016, Brookfield DTLA modified the mortgage loan secured by 777 Tower, which increased the loan amount from $200.0 million to $220.0 million. As a result of the modification, the Company received net proceeds of $19.7 million, which was used for general corporate purposes.
The terms of the modified loan increased the interest rate by 48 basis points to LIBOR plus 2.18%, effective September 1, 2016. No other terms or conditions of the original loan were changed as part of the modification.
Debt Maturities
As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of December 31, 2016, our debt to be repaid during the next five years and thereafter is as follows (in thousands):
2017 | $ | 589,026 | |
2018 | 474,233 | ||
2019 | 4,449 | ||
2020 | 168,151 | ||
2021 | 450,000 | ||
Thereafter | 400,000 | ||
$ | 2,085,859 | ||
As of December 31, 2016, $765.9 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreements), $470.0 million may be prepaid with prepayment penalties, and $450.0 million locked out from prepayment until September 6, 2017.
Wells Fargo Center–North Tower—
Brookfield DTLA currently intends to refinance the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower on or about its April 6, 2017 maturity date with new debt with a lower leverage ratio. We do not have a commitment from the lenders to extend the maturity date of or to refinance this loan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
This loan will most likely require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. As of December 31, 2016, Brookfield DTLA anticipates the need for additional cash of approximately $90 million to complete the refinancing. We may use cash on hand to make any such payments or cash received as a capital contribution from Brookfield DTLA Holdings. If we are unable or unwilling to use cash on hand or do not use cash contributed by Brookfield DTLA Holdings to make such payments, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders.
Figueroa at 7th—
Brookfield DTLA intends to extend or refinance the $35.0 million mortgage loan secured by Figueroa at 7th on or about its September 10, 2017 maturity date. 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). As of December 31, 2016, we meet the criteria specified in the loan agreement to extend the maturity date of this loan.
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 the loan assumption, Brookfield DTLA Holdings agreed to deposit funds into a collateral reserve account held by the lender, of which $2.5 million was funded by Brookfield DTLA in each of the years ended December 31, 2015 and 2014, respectively. The collateral reserve is included as part of restricted cash in the consolidated balance sheet.
MPG Office, L.P. Tax Indemnification Agreements
In connection with tax indemnification agreements entered into with MPG Office, L.P. prior to the acquisition of MPG in 2013 by Brookfield DTLA, Robert F. Maguire III, certain entities owned or controlled by Mr. Maguire, and other contributors to MPG at the time of its initial public offering guaranteed a portion of the Wells Fargo Center–North Tower and Gas Company Tower mortgage loans. As of December 31, 2016, these loans are no longer subject to such guarantees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Non-Recourse Carve Out Guarantees
All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against Brookfield DTLA Holdings or one of its subsidiaries, if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:
• | The special purpose property-owning subsidiary of Brookfield DTLA Holdings or Brookfield DTLA Holdings filing a voluntary petition for bankruptcy; |
• | The special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to maintain its status as a special purpose entity; |
• | Subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and |
• | Subject to certain conditions, the special purpose property-owning subsidiary of Brookfield DTLA Holdings’ failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of Brookfield DTLA Holdings or Brookfield DTLA. |
In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.
The maximum amount Brookfield DTLA Holdings would be required to pay under a “non‑recourse carve out” guarantee is the principal amount of the loan (or a total of $2.1 billion as of December 31, 2016 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to Brookfield DTLA Holdings pursuant to the “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of the loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary of Brookfield DTLA Holdings, the amount due to the lender from Brookfield DTLA Holdings in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 2016 and were in compliance with the amounts required by the loan agreements.
Pursuant to the terms of the 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 5—Mezzanine Equity
Mezzanine equity in the consolidated balance sheet is comprised of the Series A preferred stock, a Series A-1 preferred interest, a senior participating preferred interest and, as of December 31, 2016, a Series B preferred interest (collectively, the “Preferred Interests”). The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are held by a noncontrolling interest holder. The Preferred Interests are classified in mezzanine equity because they are callable, and the holder of the Series A-1 preferred interest, senior participating preferred interest, Series B preferred interest, and some of the Series A preferred stock indirectly controls the ability to elect to redeem such instruments, through its controlling interest in the Company and its subsidiaries. There is no commitment or obligation on the part of Brookfield DTLA or Brookfield DTLA Holdings to redeem the Preferred Interests. See “—Series B Preferred Interest” below for a discussion of the issuance of the Series B preferred interest during the year ended December 31, 2016.
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 December 31, 2016 and 2015. Adjustments to increase the carrying amount to redemption value are recorded in the consolidated statement of operations as a redemption measurement adjustment.
Dividends and Distributions
On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the years ended December 31, 2016, 2015 and 2014, the Company paid distributions and dividends totaling $0.6 million, $35.8 million and $220.0 million, respectively, to Brookfield DTLA Holdings related to the senior participating preferred interest.
Series A Preferred Stock
Brookfield DTLA is authorized to issue up to 10,000,000 shares of Series A preferred stock, $0.01 par value per share, with a liquidation preference of $25.00 per share. As of December 31, 2016 and 2015, 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings.
On January 4, 2016, Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million. The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation, Case No. 24‑C-13-004097. See Note 13 “Commitments and Contingencies—Litigation—Merger-Related Litigation” for additional information regarding the dividend payment.
No dividends were declared on the Series A preferred stock during the years ended December 31, 2016 and 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 December 31, 2016, the cumulative amount of unpaid dividends totals $129.6 million and has been reflected in the carrying amount of the Series A preferred stock.
The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A preferred stock will rank senior to our common stock with respect to the payment of distributions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for cash at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.
As of December 31, 2016, the Series A preferred stock is reported at its redemption value of $372.9 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through December 31, 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Series A-1 Preferred Interest
The Series A-1 preferred interest is held by Brookfield DTLA Holdings or wholly owned subsidiaries of Brookfield DTLA Holdings and has a stated value of $225.7 million.
The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by New OP, which are held by a wholly owned subsidiary of Brookfield DTLA, but only with respect to their respective preferred liquidation preferences, and share pro rata with 48.13% to the Series A-1 preferred interest and 51.87% to the Series A preferred interest based on their current liquidation preferences in accordance with their respective preferred liquidation preferences in distributions from New OP, until their preferred liquidation preferences have been reduced to zero. Thereafter, distributions will be made 47.66% to the common component of the Series A interest and 52.34% to the common component of the Series B interest, which is held by Brookfield DTLA Holdings. The economic terms of the Series A preferred stock mirror those of the New OP Series A preferred interests, including distributions in respect of the preferred liquidation preference.
As of December 31, 2016, the Series A-1 preferred interest is reported at its redemption value of $366.3 million calculated using its liquidation value of $225.7 million plus $140.6 million of accumulated and unpaid dividends on such Series A-1 preferred interest through December 31, 2016.
Senior Participating Preferred Interest
DTLA OP issued a senior participating preferred interest to Brookfield DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest was comprised of $240.0 million in preferred interests with a 7.0% coupon and a 4.0% participating interest in the residual value of DTLA OP.
On March 21, 2014, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $70.0 million, in respect of the senior participating preferred interest held by Brookfield DTLA Holdings, 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 totaling $150.0 million, in respect of the senior participating preferred interest held by Brookfield DTLA Holdings, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On December 16, 2015, Brookfield DTLA made a cash distribution to Brookfield DTLA Holdings totaling $35.8 million, in respect of the senior participating preferred interest held by Brookfield DTLA Holdings, which was comprised of $3.0 million in settlement of preferred dividends on the senior participating preferred interest through December 16, 2015 and a return of investment of $32.8 million using cash on hand. As of December 31, 2015, the 7.0% preferred interest portion of the senior participating preferred interest had been fully repaid to Brookfield DTLA Holdings.
On April 5, 2016, Brookfield DTLA made a $0.3 million distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.
On November 30, 2016, Brookfield DTLA made a $0.3 million distribution to Brookfield DTLA Holdings as a return of investment related to the senior participating preferred interest held by Brookfield DTLA Holdings using cash on hand.
As of December 31, 2016, the senior participating preferred interest is reported at its redemption value of $25.0 million using the value of the participating interest.
Series B Preferred Interest
At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, to fund up to $260.0 million of its future cash needs, for which it will be entitled to receive a preferred return, if and when called by New OP.
On May 16, 2016, New OP issued a Series B preferred interest to Brookfield DTLA Holdings in connection with a $6.0 million cash contribution from Brookfield DTLA Holdings to the Company under this commitment, which is entitled to a preferred return of 9.0%. The Company used these funds for general corporate purposes.
On July 11, 2016 and July 13, 2016, the Company received $30.0 million and $7.0 million, respectively, in cash contributions from Brookfield DTLA Holdings, which are entitled to a preferred return of 9.0% as part of the Series B preferred interest. Of the $37.0 million contributed during July 2016, $19.7 million was used to pay for costs associated with the refinancing of Gas Company Tower, with the remainder used for general corporate purposes.
On November 30, 2016, the Company received $20.3 million in cash contributions from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0% as part of the Series B preferred interest. The Company used these funds to pay for costs associated with the refinancing of Wells Fargo Center–South Tower.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Series B preferred interest in New OP held by Brookfield DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in New OP may limit the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.
As of December 31, 2016, the Series B preferred interest is reported at its redemption value of $65.4 million calculated using its liquidation value of $63.3 million plus $2.1 million of accumulated and unpaid dividends on such Series B preferred interest through December 31, 2016.
Subsequent to December 31, 2016, the Company received $30.0 million in cash contributions from Brookfield DTLA Holdings that increased the liquidation value of the Series B preferred interest and is entitled to a preferred return of 9.0%. The Company intends to use these funds for general corporate purposes. See Note 16 “Subsequent Event.”
Change in Mezzanine Equity
A summary of the change in mezzanine equity is as follows (in thousands, except share amounts):
Number of Shares of Series A Preferred Stock | Series A Preferred Stock | Noncontrolling Interests | Total Mezzanine Equity | ||||||||||||||||||||
Series A-1 Preferred Interest | Senior Participating Preferred Interest | Series B Preferred Interest | |||||||||||||||||||||
Balance, December 31, 2013 | 9,730,370 | $ | 339,101 | $ | 314,658 | $ | 257,780 | $ | — | $ | 911,539 | ||||||||||||
Current dividends | 18,548 | 17,213 | 10,044 | 45,805 | |||||||||||||||||||
Redemption measurement adjustment | 2,256 | 2,256 | |||||||||||||||||||||
Cash distributions | (220,000 | ) | (220,000 | ) | |||||||||||||||||||
Balance, December 31, 2014 | 9,730,370 | 357,649 | 331,871 | 50,080 | — | 739,600 | |||||||||||||||||
Current dividends | 18,548 | 17,213 | 2,321 | 38,082 | |||||||||||||||||||
Redemption measurement adjustment | 6,626 | 6,626 | |||||||||||||||||||||
Dividends declared | (21,893 | ) | (21,893 | ) | |||||||||||||||||||
Cash distributions | (35,820 | ) | (35,820 | ) | |||||||||||||||||||
Balance, December 31, 2015 | 9,730,370 | 354,304 | 349,084 | 23,207 | — | 726,595 | |||||||||||||||||
Issuance of Series B preferred interest | 63,280 | 63,280 | |||||||||||||||||||||
Current dividends | 18,548 | 17,213 | — | 2,084 | 37,845 | ||||||||||||||||||
Cash distributions | (616 | ) | (616 | ) | |||||||||||||||||||
Redemption measurement adjustment | 2,428 | 2,428 | |||||||||||||||||||||
Balance, December 31, 2016 | 9,730,370 | $ | 372,852 | $ | 366,297 | $ | 25,019 | $ | 65,364 | $ | 829,532 | ||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6—Stockholders’ Deficit
Brookfield DTLA is authorized to issue up to 1,000,000 shares of common stock, $0.01 par value per share. As of December 31, 2016 and 2015, 1,000 shares of common stock were issued and outstanding. No dividends were declared on the common stock during the years ended December 31, 2016, 2015 and 2014.
Brookfield DTLA has not paid any cash dividends on its common stock 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.
On April 21, 2016, Brookfield DTLA received a $2.5 million capital contribution from Brookfield DTLA Holdings, which was used for general corporate purposes.
Note 7—Noncontrolling Interests
Mezzanine Equity Component
The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest consist of equity interests of New OP, DTLA OP and New OP, respectively, which are owned directly by Brookfield DTLA Holdings. These noncontrolling interests are presented as mezzanine equity in the consolidated balance sheet. See Note 5 “Mezzanine Equity.”
Stockholders’ Deficit Component
The Series B common interest ranks junior to the Series A preferred stock as to dividends and upon liquidation and is presented in the consolidated balance sheet as noncontrolling interest.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 8—Accumulated Other Comprehensive (Loss) Income
A summary of the change in accumulated other comprehensive (loss) income related to Brookfield DTLA’s cash flow hedges is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Balance at beginning of year | $ | (5,415 | ) | $ | (4,337 | ) | $ | 1,007 | |||
Other comprehensive income (loss) before reclassifications | 2,042 | (1,078 | ) | (5,344 | ) | ||||||
Amounts reclassified from accumulated other comprehensive (loss) income | — | — | — | ||||||||
Net current-year other comprehensive income (loss) | 2,042 | (1,078 | ) | (5,344 | ) | ||||||
Balance at end of year | $ | (3,373 | ) | $ | (5,415 | ) | $ | (4,337 | ) | ||
Note 9—Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).
ASC Topic 820 established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three categories:
• | Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date. |
• | Level 2—Observable prices that are based on inputs not quoted in active markets, but corroborated by market data. |
• | Level 3—Unobservable prices that are used when little or no market data is available. |
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Brookfield DTLA utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as consider counterparty credit risk in its assessment of fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recurring 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: | ||||||||||||||||
December 31, 2016 | $ | (3,373 | ) | $ | — | $ | (3,373 | ) | $ | — | ||||||
December 31, 2015 | (5,415 | ) | — | (5,415 | ) | — | ||||||||||
December 31, 2014 | (4,337 | ) | — | (4,337 | ) | — | ||||||||||
Interest rate caps at: | ||||||||||||||||
December 31, 2016 | $ | 53 | $ | — | $ | 53 | $ | — | ||||||||
December 31, 2015 | 19 | — | 19 | — | ||||||||||||
December 31, 2014 | 190 | — | 190 | — | ||||||||||||
Note 10—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 as of | |||||||
December 31, 2016 | December 31, 2015 | ||||||
Derivatives designated as cash flow hedging instruments: | |||||||
Interest rate swap | $ | (3,373 | ) | $ | (5,415 | ) | |
The interest rate swap liability is included in accounts payable and other liabilities in the consolidated balance sheet.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the effect of derivative financial instruments reported in the consolidated financial statements is as follows (in thousands):
Amount of Gain (Loss) Recognized in AOCL | Amount of Gain (Loss) Reclassified from AOCL to Statement of Operations | ||||||
Derivatives designated as cash flow hedging instruments: | |||||||
Interest rate swap for the year ended: | |||||||
December 31, 2016 | $ | 2,042 | $ | — | |||
December 31, 2015 | (1,078 | ) | — | ||||
December 31, 2014 | (5,344 | ) | — | ||||
Interest Rate Swap—
As of December 31, 2016 and 2015, Brookfield DTLA held an interest rate swap with a notional amount of $185.0 million, which was assigned to the EY Plaza mortgage loan. The swap requires net settlement each month and expires on November 2, 2020.
Interest Rate Caps—
Brookfield DTLA holds interest rate caps pursuant to the terms of certain of its mortgage loan agreements with the following notional amounts (in thousands):
December 31, 2016 | December 31, 2015 | ||||||
Wells Fargo Center–South Tower | $ | 270,000 | $ | 290,000 | |||
777 Tower | 220,000 | 200,000 | |||||
$ | 490,000 | $ | 490,000 | ||||
On September 1, 2016, the Company increased the notional amount of the interest rate cap agreement related to its 777 Tower mortgage loan from $200.0 million to $220.0 million pursuant to the terms of the modified loan agreement.
As required by the loan agreement, on December 2, 2016 the Company entered into an interest rate cap agreement related to its Wells Fargo Center–South Tower mortgage loan with a notional amount of $270.0 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Financial Instruments
Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. Management routinely assesses the financial strength of its tenants and, as a consequence, believes that its accounts receivable credit risk exposure is limited. Brookfield DTLA places its temporary cash investments with federally insured institutions. Cash balances with any one institution may at times be in excess of the federally insured limits.
The estimated fair value and carrying amount of Brookfield DTLA’s mortgage loans are as follows (in thousands):
December 31, 2016 | December 31, 2015 | ||||||
Estimated fair value | $ | 2,059,449 | $ | 2,114,761 | |||
Carrying amount | 2,085,859 | 2,117,377 | |||||
We calculated the estimated fair value of our mortgage loans by discounting the future contractual cash flows of the loans using current risk adjusted rates available to borrowers with similar credit ratings. The estimated fair value of mortgage loans is classified as Level 3.
Note 11—Related Party Transactions
Intercompany Loan
Brookfield DTLA was indebted to BOP Management Inc. (“BOP”), an affiliate of BPO, under a $25.0 million promissory note dated October 11, 2013 that bore interest at 3.25%. For the year ended December 31, 2014, the Company accrued $0.6 million of interest expense related to this note. During September 2014, Brookfield DTLA 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
Brookfield DTLA has entered into arrangements with BOP under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Asset Manager LLC and Brookfield Asset Management Private Institutional Capital Adviser US, LLC an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of costs incurred by Brookfield DTLA under these arrangements, which are included in rental property operating and maintenance expense in the consolidated statement of operations, is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Property management fee expense | $ | 7,964 | $ | 7,445 | $ | 8,135 | |||||
Asset management fee expense | 6,330 | 6,292 | 6,109 | ||||||||
General, administrative and reimbursable expenses | 2,466 | 2,593 | 2,509 | ||||||||
Leasing and construction management fees | 3,049 | 6,396 | 3,626 | ||||||||
Insurance Agreements
Brookfield DTLA’s properties are covered under insurance policies entered into by BPO that provide, among other things, all risk property and business interruption coverage for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $370.0 million of earthquake, flood and weather catastrophe 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. Insurance premiums for Brookfield DTLA’s properties are paid by an affiliate of BPO and Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.
Prior to their expiration, which became effective on April 19, 2014, the MPG properties were covered under an insurance policy that provided all risk property and business interruption coverage 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.
A summary of costs incurred by Brookfield DTLA under this arrangement, which are included in rental property operating and maintenance expense in the consolidated statement of operations, is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Insurance expense | $ | 7,948 | $ | 8,532 | $ | 8,466 | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 12—Rental Income
Brookfield DTLA’s properties are leased to tenants under net operating leases with initial expiration dates ranging from 2017 to 2035. The future minimum base rental income (on a non-straight-line basis) to be received under noncancelable tenant operating leases in effect as of December 31, 2016 is as follows (in thousands):
2017 | $ | 155,308 | |
2018 | 149,122 | ||
2019 | 147,556 | ||
2020 | 139,895 | ||
2021 | 135,787 | ||
Thereafter | 564,642 | ||
$ | 1,292,310 | ||
Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenants’ sales. The amounts shown in the table above do not include percentage rents. The Company recorded percentage rents totaling $2.8 million, $2.8 million and $1.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 13—Commitments and Contingencies
Tenant Concentration
Brookfield DTLA generally does not require collateral or other security from its tenants, other than security deposits or letters of credit. Our credit risk is mitigated by the high quality of our existing tenant base, review of prospective tenants’ risk profiles prior to lease execution, and frequent monitoring of our tenant portfolio to identify problem tenants. However, since we have a significant concentration of rental revenue from certain tenants, the inability of those tenants to make their lease payments could have a material adverse effect on our results of operations, cash flow or financial condition.
A significant portion of Brookfield DTLA’s rental income and tenant reimbursements revenue is generated by a small number of tenants. No tenant accounted for more than 10% of our consolidated rental income and tenant reimbursements revenue during the years ended December 31, 2016, 2015 and 2014.
During the years ended December 31, 2016, 2015 and 2014, EY Plaza, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated revenue. The revenue generated by these six properties totaled 100%, 98% and 100% of Brookfield DTLA’s consolidated revenue during the years ended December 31, 2016, 2015 and 2014, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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”).
In each of the Common Stock Actions, the plaintiffs allege, among other things, that MPG Office Trust, Inc.’s board of directors breached their fiduciary duties in connection with the merger by failing to maximize the value of MPG Office Trust, Inc. and ignoring or failing to protect against conflicts of interest, and that the relevant Brookfield Parties named as defendants aided and abetted those breaches of fiduciary duty. The Kim Action further alleges that MPG Office, L.P. also aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors, and the Dell’Osso Action further alleges that MPG Office Trust, Inc. and MPG Office, L.P. aided and abetted the breaches of fiduciary duty by MPG Office Trust, Inc.’s board of directors. On June 4, 2013, the Kim and Perkins plaintiffs filed identical, amended complaints in the Circuit Court for Baltimore City, Maryland. On June 5, 2013, the Masih plaintiffs also filed an amended complaint in the Superior Court of the State of California in Los Angeles County. The three amended complaints, as well as the Dell’Osso Action complaint, allege that the preliminary proxy statement filed by MPG Office Trust, Inc. with the SEC on May 21, 2013 is false and/or misleading because it fails to include certain details of the process leading up to the merger and fails to provide adequate information concerning MPG Office Trust, Inc.’s financial advisors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 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.
In the Preferred Stock Actions, at a hearing on July 24, 2013, the Maryland State Court denied the plaintiffs’ motion for preliminary injunction seeking to enjoin the tender offer. The plaintiffs filed a second amended complaint on November 22, 2013 that added additional arguments in support of their allegations that the new preferred shares do not have the same rights as the MPG preferred shares. The defendants moved to dismiss the second amended complaint on December 20, 2013, and briefing on the motion concluded on February 28, 2014. At a hearing on June 18, 2014, the Maryland State Court heard oral arguments on the defendants’ motion to dismiss and reserved judgment on the decision. On October 21, 2014, the parties sent a joint letter to the Maryland State Court stating that since the June 18 meeting the parties have commenced discussions towards a possible resolution of the lawsuit, requesting that the court temporarily refrain from deciding the pending motion to dismiss to facilitate the discussions.
On March 30, 2015, the plaintiff in the Cohen Actions and the defendants entered into a memorandum of understanding setting forth an agreement in principle to settle the Preferred Stock Actions on a class-wide basis and dismiss the case with prejudice in exchange for the payment of $2.25 per share of Series A preferred stock of accumulated and unpaid dividends (the “Dividend Payment”) to holders of record on a record date to be set after final approval of the settlement by the Maryland State Court, plus any attorneys’ fees awarded by the Maryland State Court to the plaintiff’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
counsel. The dividend would reduce the amount of accumulated and unpaid dividends on the Series A preferred stock, and the terms of the Series A preferred stock would otherwise remain unchanged.
On August 18, 2015, the Maryland State Court entered an order preliminarily approving the settlement and scheduling a final fairness hearing for October 27, 2015. On September 28, 2015, the plaintiff filed a motion for final certification of the settlement class, final approval of the class action settlement and approval of attorneys’ fees and reimbursement of expenses, seeking a total fee and expense award of $5,250,000. The defendants submitted their opposition to the plaintiff’s fee application on October 13, 2015.
On October 16, 2015, the plaintiff filed a motion seeking discovery related to the valuation of the Dividend Payment in connection with its fee application and served related discovery requests on the defendants. On October 23, 2015, the defendants filed their opposition to that motion, as well as a motion for a protective order precluding discovery. On October 27, 2015, the Maryland State Court held a hearing to decide whether to grant final approval of the settlement and to rule on the parties’ discovery motions. At the hearing, the Court ordered limited discovery to occur prior to ruling on the fee application.
On October 28, 2015, the Maryland State Court issued an order granting final approval of the settlement. The time to appeal the order expired on November 30, 2015 without any appeals having been filed. On December 4, 2015, in accordance with the final approval order and the terms of the parties’ settlement agreement, the board of directors declared a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015. On January 4, 2016, Brookfield DTLA paid the Dividend Payment totaling $21.9 million using cash on hand.
On December 16, 2015, after taking certain limited discovery permitted by the Maryland State Court during the October 27 hearing, the plaintiff served the defendants with its reply memorandum of law in support of its motion for attorneys’ fees and expenses. That same day, the plaintiff requested that the Court permit it to file the reply memorandum and an exhibit thereto under seal given the confidential nature of the information contained therein. On December 17, 2015, the plaintiff provided the Court with plaintiff’s counsel’s time records for the Court’s in camera review. On January 15, 2016, the defendants filed a surreply to the plaintiff’s reply memorandum after obtaining the Court’s permission to do so. After a hearing on April 6, 2016, the Maryland State Court issued an order on April 18, 2016 granting an award of attorneys’ fees and expenses to the plaintiffs totaling $2,212,688. On April 21, 2016, the Company paid the awarded amount to the plaintiffs’ counsel.
On July 13, 2016, BPO and the Company entered into a settlement agreement with the insurance carrier under the MPG directors and officers liability insurance policy that was in effect at the time of the merger. On August 17, 2016, the Company received a settlement payment from the insurance carrier totaling $1,106,344, which partially reimbursed the Company for amounts paid to settle both the Common Stock Actions and the Preferred Stock Actions. The Company included the settlement in interest and other revenue in its consolidated statement of operations for the year ended December 31, 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 14—Quarterly Financial Information (Unaudited)
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
(In thousands) | |||||||||||||||
Year Ended December 31, 2016 | |||||||||||||||
Revenue | $ | 74,813 | $ | 78,968 | $ | 77,408 | $ | 79,503 | |||||||
Expenses | 84,785 | 87,230 | 86,802 | 90,042 | |||||||||||
Net loss | (9,972 | ) | (8,262 | ) | (9,394 | ) | (10,539 | ) | |||||||
Net loss attributable to noncontrolling interests: | |||||||||||||||
Series A-1 preferred interest – current dividends | 4,303 | 4,303 | 4,303 | 4,304 | |||||||||||
Senior participating preferred interest – current dividends | — | — | — | — | |||||||||||
Senior participating preferred interest – redemption measurement adjustment | 656 | 400 | 908 | 464 | |||||||||||
Series B preferred interest – current dividends | — | 68 | 881 | 1,135 | |||||||||||
Series B common interest – allocation of net loss | (10,242 | ) | (9,248 | ) | (10,532 | ) | (11,033 | ) | |||||||
Net loss attributable to Brookfield DTLA | (4,689 | ) | (3,785 | ) | (4,954 | ) | (5,409 | ) | |||||||
Series A preferred stock – current dividends | 4,637 | 4,637 | 4,637 | 4,637 | |||||||||||
Net loss available to common interest holders of Brookfield DTLA | $ | (9,326 | ) | $ | (8,422 | ) | $ | (9,591 | ) | $ | (10,046 | ) | |||
Year Ended December 31, 2015 | |||||||||||||||
Revenue | $ | 73,508 | $ | 77,438 | $ | 74,561 | $ | 73,583 | |||||||
Expenses | 82,569 | 84,166 | 83,908 | 88,801 | |||||||||||
Net loss | (9,061 | ) | (6,728 | ) | (9,347 | ) | (15,218 | ) | |||||||
Net loss attributable to noncontrolling interests: | |||||||||||||||
Series A-1 preferred interest – current dividends | 4,303 | 4,303 | 4,303 | 4,304 | |||||||||||
Senior participating preferred interest – current dividends | 587 | 597 | 608 | 529 | |||||||||||
Senior participating preferred interest – redemption measurement adjustment | 760 | 1,540 | 804 | 3,521 | |||||||||||
Series B preferred interest – current dividends | — | — | — | — | |||||||||||
Series B common interest – allocation of net loss | (10,127 | ) | (9,319 | ) | (10,310 | ) | (14,765 | ) | |||||||
Net loss attributable to Brookfield DTLA | (4,584 | ) | (3,849 | ) | (4,752 | ) | (8,807 | ) | |||||||
Series A preferred stock – current dividends | 4,637 | 4,637 | 4,637 | 4,637 | |||||||||||
Net loss available to common interest holders of Brookfield DTLA | $ | (9,221 | ) | $ | (8,486 | ) | $ | (9,389 | ) | $ | (13,444 | ) | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 15—Investments in Real Estate
A summary of information related to Brookfield DTLA’s investments in real estate as of December 31, 2016 is as follows (in thousands):
Encum- brances | Initial Cost to Company | Costs Capitalized Subsequent to Acquisition | Gross Amount at Which Carried at Close of Period | Accum- ulated Depre- ciation (2) | Year Acquired | |||||||||||||||||||||||||||||||||
Land | Buildings and Improve- ments | Improve- ments | Carrying Costs | Land | Buildings and Improve- ments | Total (1) | ||||||||||||||||||||||||||||||||
Los Angeles, CA | ||||||||||||||||||||||||||||||||||||||
Wells Fargo Center– North Tower 333 S. Grand Avenue | $ | 550,000 | $ | 41,024 | $ | 456,363 | $ | 57,660 | $ | — | $ | 41,024 | $ | 514,023 | $ | 555,047 | $ | 49,817 | 2013 | |||||||||||||||||||
BOA Plaza 333 S. Hope Street | 400,000 | 54,163 | 354,422 | 50,057 | — | 54,163 | 404,479 | 458,642 | 94,712 | 2006 | ||||||||||||||||||||||||||||
Wells Fargo Center– South Tower 355 S. Grand Avenue | 250,000 | 21,231 | 401,149 | 17,633 | — | 21,231 | 418,782 | 440,013 | 35,318 | 2013 | ||||||||||||||||||||||||||||
Gas Company Tower 525-555 W. Fifth Street | 450,000 | 20,742 | 396,159 | 53,569 | — | 20,742 | 449,728 | 470,470 | 30,797 | 2013 | ||||||||||||||||||||||||||||
EY Plaza (3) 725 S. Figueroa Street | 215,859 | 47,385 | 286,982 | 117,372 | — | 47,385 | 404,354 | 451,739 | 86,133 | 2006 | ||||||||||||||||||||||||||||
777 Tower 777 S. Figueroa Street | 220,000 | 38,010 | 303,697 | 17,798 | — | 38,010 | 321,495 | 359,505 | 32,372 | 2013 | ||||||||||||||||||||||||||||
Miscellaneous investments | — | 5,000 | — | 357 | — | 5,000 | 357 | 5,357 | — | |||||||||||||||||||||||||||||
$ | 2,085,859 | $ | 227,555 | $ | 2,198,772 | $ | 314,446 | $ | — | $ | 227,555 | $ | 2,513,218 | $ | 2,740,773 | $ | 329,149 | |||||||||||||||||||||
(1) | The aggregate gross cost of Brookfield DTLA’s investments in real estate for federal income tax purposes approximated $2.7 billion as of December 31, 2016. |
(2) | Depreciation in the consolidated statements of operations is computed on a straight-line basis over the following estimated useful lives: buildings (60 years, with an estimated salvage value of 5%), building improvements (ranging from 7 years to 25 years), and tenant improvements (the shorter of the useful life or the applicable lease term). |
(3) | Includes the mortgage loan encumbering the Figueroa at 7th retail property. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a reconciliation of Brookfield DTLA’s investments in real estate (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Investments in Real Estate | |||||||||||
Balance at beginning of year | $ | 2,675,249 | $ | 2,619,422 | $ | 2,557,865 | |||||
Additions during the year: | |||||||||||
Acquisitions | — | — | — | ||||||||
Improvements | 65,524 | 57,827 | 61,557 | ||||||||
Deductions during the year: | |||||||||||
Dispositions | — | 2,000 | — | ||||||||
Other | — | — | — | ||||||||
Balance at end of year | $ | 2,740,773 | $ | 2,675,249 | $ | 2,619,422 | |||||
The following is a reconciliation of Brookfield DTLA’s accumulated depreciation on its investments in real estate (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Accumulated Depreciation | |||||||||||
Balance at beginning of year | $ | 256,130 | $ | 189,108 | $ | 121,612 | |||||
Additions during the year: | |||||||||||
Depreciation expense | 73,019 | 67,022 | 67,496 | ||||||||
Deductions during the year: | |||||||||||
Other | — | — | — | ||||||||
Balance at end of year | $ | 329,149 | $ | 256,130 | $ | 189,108 | |||||
Note 16—Subsequent Event
Contributions from Brookfield DTLA Holdings
Subsequent to December 31, 2016, the Company received $30.0 million in cash contributions from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0% as part of the Series B preferred interest. The Company intends to use these funds for general corporate purposes.
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Item 9. | Changes in and Disagreements with Accountants on Accounting |
and Financial Disclosure.
None.
Item 9A. | 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 (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Paul L. Schulman, our principal executive officer, and Edward F. Beisner, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2016.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including Messrs. Schulman and Beisner, evaluated the effectiveness of Brookfield DTLA’s internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2016.
Changes in Internal Control over Financial Reporting
There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2016 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information. |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
Executive Officers of the Registrant
Brookfield DTLA Fund Office Trust Investor Inc., a Maryland Corporation (“Brookfield DTLA,” the “Company,” “us,” “we” and “our”), does not directly employ any of the persons responsible for managing its business. Brookfield Office Properties Inc., a corporation incorporated under the Laws of Canada (“BPO”), through Brookfield DTLA Holdings LLC (“Brookfield DTLA Holdings”), a Delaware limited liability company, manages our operations and activities, and it, together with its board of directors and officers, makes decisions on our behalf. Our executive officers are employed by BPO and we do not directly or indirectly pay any compensation to them.
Our current executive officers are as follows:
Name | Age | Position | Executive Officer Since | |||
Edward F. Beisner | 59 | Chief Financial Officer of Brookfield DTLA and Senior Vice President and Controller, U.S. Commercial Operations of BPO | 2015 | |||
Paul L. Schulman | 48 | President of Brookfield DTLA and President and Chief Operating Officer, U.S. Commercial Operations of BPO | 2014 | |||
Edward F. Beisner was appointed Chief Financial Officer of Brookfield DTLA in May 2015. Mr. Beisner serves as Senior Vice President and Controller of BPO’s U.S. Commercial Operations Division since 2013 and has served in various roles, including most recently as Senior Vice President and Controller, U.S. Commercial Operations, of U.S. subsidiaries of BPO since 1996. The board of directors appointed Mr. Beisner as Chief Financial Officer based, among other factors, on his knowledge of the Company and his experience in commercial real estate.
Paul L. Schulman was appointed President of Brookfield DTLA in August 2014. Mr. Schulman serves as President and Chief Operating Officer, U.S. Commercial Operations of BPO since 2014 and Chief Operating Officer, U.S. Commercial Operations of BPO since 2009. Prior to that, he served as Senior Vice President, Regional Head of the Washington, DC Region for BPO. He joined Trizec Properties, Inc. (which was acquired by BPO) in 1998 as Portfolio Manager for the Washington, DC and northern Virginia portfolios. The board of directors appointed Mr. Schulman as President based, among other factors, on his knowledge of the Company, leadership capabilities and his experience in commercial real estate.
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Directors of the Registrant
Our current board of directors is as follows:
Name | Age | Position | Director Since | |||
G. Mark Brown | 52 | Director (also Global Chief Investment Officer of BPO) | 2013 | |||
Michelle L. Campbell | 46 | Director (also Senior Vice President and Secretary of both Brookfield DTLA and BPO) | 2014 | |||
Alan J. Carr | 47 | Director | 2014 | |||
Craig W. Perry | 37 | Director | 2014 | |||
Paul L. Schulman | 48 | Director (also Chairman of the Board and President of Brookfield DTLA, and President and Chief Operating Officer, U.S. Commercial Operations of BPO) | 2013 | |||
Robert L. Stelzl | 72 | Director | 2014 | |||
Ricky Tang | 38 | Director (also Chief Financial Officer of BPO) | 2016 | |||
Messrs. Brown, Schulman and Tang and Ms. Campbell are employed by BPO. BPO is Brookfield DTLA’s ultimate parent and, through Brookfield DTLA Holdings, an affiliate of BPO manages the Company’s operations and activities, and it, together with the board of directors and officers, makes decisions on the Company’s behalf. BOP Management Inc. (“BOP”), an affiliate of BPO, is affiliated with the Company because certain subsidiaries of the Company have entered into arrangements with BOP, pursuant to which BOP provides property management and various other services to the Company.
G. Mark Brown has served on the board of directors since the Company was formed in April 2013. Mr. Brown was appointed Global Chief Investment Officer of BPO in July 2012. Previously he was Head of Global Strategic Initiatives and Finance of BPO, prior to which he was Senior Vice President, Strategic Initiatives and Finance of BPO since 2005. The board of directors nominated Mr. Brown to serve as a director based, among other factors, on his knowledge of the Company and his experience in commercial real estate.
Michelle L. Campbell has served on the board of directors since August 2014. Ms. Campbell has also served as Senior Vice President and Secretary of the Company since March 2016 and as Vice President and Secretary of the Company since it was formed in April 2013. Ms. Campbell has served in her principal occupation as Senior Vice President and Secretary of BPO since March 2016 and was previously Vice President, Counsel of BPO since 2007. The board of directors nominated Ms. Campbell to serve as a director based, among other factors, on her knowledge of the Company and her experience in legal matters and commercial real estate.
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Alan J. Carr has served on the board of directors since October 2014. Mr. Carr is an investment professional with almost 20 years of experience working from the principal and advisor side on complex, process-intensive financial situations and he is the founder of Drivetrain Advisors, a fiduciary services firm that supports the investment community in legally- and process‑intensive investments as a representative, director, or trustee. Prior to founding Drivetrain Advisors in 2013, Mr. Carr was a Managing Director at Strategic Value Partners, LLC (“Strategic Value Partners”), where he led financial restructurings for companies in North America and Europe, working in both the U.S. and Europe over nine years. Prior to joining Strategic Value Partners, Mr. Carr was a corporate attorney at Skadden, Arps, Slate, Meagher & Flom LLP, where he represented clients in various major transactions. Prior to that, he was an attorney at Ravin, Sarasohn, Baumgarten, Fisch & Rosen, P.C. Mr. Carr is also a director and audit and compensation committee member of Midstates Petroleum Company Inc., a company that is traded on the New York Stock Exchange (the “NYSE”). Mr. Carr currently serves on the board of directors of Syncora Holdings Ltd. and Atlas Iron Limited and as a director and chair of the compensation committee of Verso Corporation. He previously served on the board of directors of NewPage Corporation and UCI Holdings Limited. Mr. Carr also serves and has previously served on various boards of private companies in North America, Europe and Asia.
As holders of the Series A preferred stock did not submit any proposals for the election of directors at Brookfield DTLA’s 2016 Annual Meeting of Stockholders (the “2016 Annual Meeting”), Mr. Carr will continue to serve on the board of directors as a preferred director until his successor is duly elected and qualifies or, if earlier, until the full payment (or setting aside for payment) of all dividends on the Series A preferred stock that are in arrears, as well as dividends for the then current period in accordance with Maryland law, Brookfield DTLA’s charter and the Second Amended and Restated Bylaws of the Company, dated August 11, 2014 (the “Amended Bylaws”).
Craig W. Perry has served on the board of directors since October 2014. Mr. Perry is the Chief Executive Officer of TLT Group, a private restaurant holding company with fast-casual tex-mex restaurants operating in Kentucky, Tennessee, Alabama and South Carolina. He is also the founder of Haloroc Holdings Corporation (“Haloroc”), a private holding company with a focus on investing in the real estate, financial and energy markets. Prior to founding Haloroc, Mr. Perry was a Managing Director at Panning Capital from the firm’s inception in October 2012 until June 2014. From 2008 to 2012, Mr. Perry was a founding partner at Sabretooth Capital Partners, an investment management firm, and served as the co-portfolio manager of Sabretooth’s event-driven and macro investment team. Previously, Mr. Perry held positions at Swiss Re Financial Products Corporation and Credit Suisse Group as a portfolio manager with a focus on equities and distressed credit. Mr. Perry is a board member of Cortland Partners, a private multifamily real estate firm, as well as a board member of Nelson Education, a Canadian publisher. Mr. Perry holds a Bachelor of Arts in Economics from Princeton University.
As holders of the Series A preferred stock did not submit any proposals for the election of directors at the 2016 Annual Meeting, Mr. Perry will continue to serve on the board of directors as a preferred director until his successor is duly elected and qualifies or, if earlier, until the full payment (or setting aside for payment) of all dividends on the Series A preferred stock that are in arrears, as well as dividends for the then current period in accordance with Maryland law, Brookfield DTLA’s charter and the Amended Bylaws.
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Paul L. Schulman has served on the board of directors since November 2013 and was elected Chairman of the Board and appointed as President of the Company in August 2014. See “Executive Officers of the Registrant” for Mr. Schulman’s biographical information. The board of directors nominated Mr. Schulman to serve as a director and Chairman based, among other factors, on his knowledge of the Company, leadership capabilities and his experience in commercial real estate.
Robert L. Stelzl has served on the board of directors since January 2014. Mr. Stelzl is a private real estate investor and investment manager. In 2003, he retired from Colony Capital, LLC, a global real estate private equity investor, after 14 years as a principal and member of the Investment Committee. The board of directors nominated Mr. Stelzl to serve as a director based, among other factors, on his experience in commercial real estate.
Ricky Tang has served on the board of directors since March 2016. Mr. Tang has held his principal occupation as Chief Financial Officer of BPO since February 2016. Previously, Mr. Tang was Executive Director, Finance & Asset Management of China Xintiandi from March 2014 to February 2016, Chief Financial Officer of BPO’s Australian Commercial Operations from March 2011 to March 2014, and Vice President and Controller of Brookfield Canada Office Properties from July 2007 to March 2011. The board of directors nominated Mr. Tang to serve as a director based, among other factors, on his knowledge of the Company and his experience in financial matters and commercial real estate.
Board Leadership Structure and Risk Oversight
The Amended Bylaws give the board of directors the flexibility to determine whether the roles of principal executive officer and Chairman of the Board should be held by the same person or by two separate individuals. In connection with the listing of the Series A preferred stock on the NYSE, the board of directors determined that having one person serve as both principal executive officer and Chairman of the Board is in the best interest of the Company’s stockholders. We believe this structure makes the best use of the principal executive officer’s extensive knowledge of the Company and fosters real-time communication between management and the board of directors. Mr. Schulman has served as Chairman of the Board and President of the Company since August 2014 and is considered our principal executive officer.
The board of directors is actively involved in overseeing Brookfield DTLA’s risk management. Under our Corporate Governance Guidelines, the board of directors is responsible for assessing the major risks facing the Company and its business and approving and monitoring appropriate systems to manage those risks. Under its charter, the Audit Committee is responsible for reviewing and approving the Company’s policies with respect to risk assessment and management, particularly financial risk exposure, and discussing with management the steps taken to monitor and control risks.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires that our executive officers and directors, and beneficial owners of more than 10% of a registered class of our equity securities, file reports of ownership and changes in ownership of such securities with the U.S. Securities and Exchange Commission (the “SEC”). Such officers, directors and greater than 10% stockholders are also required to furnish us with copies of all Section 16(a) forms they file.
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Based on our review of the copies of all Section 16(a) forms received by us and other information, we believe that with regard to the fiscal year ended December 31, 2016, all of our executive officers, directors and greater than 10% stockholders complied with all applicable filing requirements, except as follows: due to inadvertence by the Company, Ricky Tang was late in filing a Form 3 with respect to his ownership of Series A preferred stock. The required form was filed on May 13, 2016.
Changes to Nominating Procedures for Use by Security Holders
There were no material changes to the procedures by which stockholders may recommend nominees to the board of directors during the fiscal year ended December 31, 2016.
Board Governance Documents
The board of directors maintains a charter for its Audit Committee, has adopted written policies regarding the Approval of Audit and Non-Audit Services Provided by the External Auditor and has adopted Corporate Governance Guidelines. The board of directors has also adopted the Code of Business Conduct and Ethics and Personal Trading Policy of Brookfield Asset Management Inc. (“BAM”), each applicable to the directors, officers and employees of BAM and its subsidiaries. Brookfield DTLA is an indirect subsidiary of BAM. These documents are available in print to any person who sends a written request to that effect to the attention of Michelle L. Campbell, Senior Vice President, Secretary and Director, Brookfield DTLA Fund Office Trust Investor Inc., 250 Vesey Street, 15th Floor, New York, NY 10281.
Audit Committee
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. Since 2014, Mr. Stelzl has been the Chairman of the Audit Committee and Mr. Perry has been a member of the Audit Committee. Each of Messrs. Stelzl and Perry is an independent director.
The composition of the Audit Committee meets the NYSE requirements for a special purpose entity, including the requirements dealing with financial literacy and financial sophistication. As a special purpose entity under NYSE rules, the board of directors is not required to determine whether any members of the Audit Committee qualify as an “audit committee financial expert” as defined by the SEC. The independent members of the Audit Committee satisfy the enhanced independence standards applicable to audit committees set forth in Rule 10A-3(b)(i) under the Exchange Act and the NYSE listing standards.
Certifications
The Sarbanes-Oxley Act Section 302 certifications of our principal executive officer and principal financial officer are filed with this Annual Report on Form 10-K as Exhibits 31.1 and 31.2, respectively.
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Item 11. Executive Compensation.
Compensation Discussion and Analysis
Brookfield DTLA does not directly employ any of the persons responsible for managing its business. BPO, through Brookfield DTLA Holdings, manages our operations and activities, and it, together with its board of directors and officers, makes decisions on our behalf. Our executive officers are employed by affiliates of BPO and we do not directly or indirectly pay any compensation to them. The compensation of the executive officers is set by their employer and we have no control over the determination of their compensation. Our executive officers participate in employee benefit plans and arrangements sponsored by BPO and its affiliates. We have not established any employee benefit plans or entered into any employment agreements with any of our executive officers.
Affiliates of BPO determines the total compensation paid to our executive officers. In determining this compensation, they consider, among other things, BPO’s business, results of operations and financial condition taken as a whole. For a detailed discussion of the objectives of BPO’s compensation program, the elements of its compensation program and how compensation is determined, please refer to BPO’s most recently filed Annual Information Form, which is available on BPO’s website at www.bpoinvestor.com under the heading “Investors—Reports & Filings—Annual Information Forms” and at the Canadian Securities Administrator’s website SEDAR at www.sedar.com. We have included the web addresses of BPO and SEDAR as inactive textual references only. Except as specifically incorporated by reference into this document, information on these websites are not part of this document.
Compensation of Directors
The following table summarizes the compensation earned by each of our independent directors during the fiscal year ended December 31, 2016:
Name (1) | Fees Earned or Paid in Cash ($) (2) | Total ($) | ||||
(a) | (b) | (g) | ||||
Alan J. Carr | 125,000 | 125,000 | ||||
Craig W. Perry | 130,000 | 130,000 | ||||
Robert L. Stelzl | 130,000 | 130,000 | ||||
__________
(1) | Each non-independent member of our board of directors does not receive any additional compensation from the Company for his or her services as a director. |
(2) | Amounts shown in Column (b) are those earned during the fiscal year ended December 31, 2016 for annual retainer fees, committee fees and/or chair fees. |
Compensation Risk Assessment
Brookfield DTLA believes that the compensation policies and practices of the Company, and of BPO and its affiliates with respect to the executive officers of the Company, appropriately balance risk in connection with the achievement of annual and long-term goals and that they do not encourage unnecessary or excessive risk taking. Brookfield DTLA believes that the compensation policies and practices of the Company, and of BPO with respect to the executive officers of the Company, are not reasonably likely to have a material adverse effect on its financial position or results of operations.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management | |||
and Related Stockholder Matters. | ||||
Principal Stockholders
Common Stock
As of March 17, 2017, Brookfield DTLA Holdings is the holder of all of the issued and outstanding shares of the Company’s common stock.
Series A Preferred Stock
Based on our review of all forms filed by holders of the Series A preferred stock with the SEC with respect to ownership of shares of the Series A preferred stock and other information, as of March 17, 2017, set forth below is a table that shows how much of our Series A preferred stock was beneficially owned on March 17, 2017, by each person known to us to beneficially own more than 5% of our Series A preferred stock. Please note that under U.S. securities laws, the Series A preferred stock is generally not considered voting stock and, therefore, persons beneficially owning more than 5% of our Series A preferred stock have no obligation to notify us or the SEC of their beneficial ownership of such Series A preferred stock. Consequently, there may be other holders of more than 5% of the Series A preferred stock that are not known to us.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class (1) | ||||
(a) | (b) | (c) | ||||
Panning Capital Management, LP (2) 510 Madison Avenue Suite 2400 New York, NY 10022 | 914,375 | 9.40 | % | |||
__________
(1) | Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be beneficially owned by more than one person (if, for example, a person shares the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of Series A preferred stock actually outstanding as of March 17, 2017. |
(2) | Information regarding Panning Capital Management, LP (“Panning”) was obtained from a Schedule 13D, filed with the SEC by Panning on July 24, 2014. Panning reported that, at July 22, 2014, the following entities and natural persons possessed shared power to vote, and shared power to direct the disposition of, the respective amount of shares that follow: Panning–914,375; Panning Holdings GP, LLC–914,375; William M. Kelly–914,375; Kiernan W. Goodwin–914,375; and Franklin S. Edmonds–914,375. |
Security Ownership of our Directors and Executive Officers
None of our directors or executive officers owns any shares of capital stock of the Company.
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Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Policies and Procedures for Related Party Transactions
Under Brookfield DTLA’s Corporate Governance Guidelines, each director is required to inform the board of directors of any potential or actual conflicts, or what might appear to be a conflict of interest he or she may have with the Company. If a director has a personal interest in a matter before the board of directors or a committee, he or she must not participate in any vote on the matter except where the board of directors or the committee has expressly determined that it is appropriate for him or her to do so. Under BAM’s Code of Business Conduct and Ethics, officer and employee conflicts of interest are generally prohibited as a matter of Company policy.
Intercompany Loan
Brookfield DTLA was indebted to BOP under a $25.0 million promissory note dated October 11, 2013 that bore interest at 3.25%. For the year ended December 31, 2014, the Company accrued $0.6 million of interest expense related to this note. During September 2014, Brookfield DTLA 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
Brookfield DTLA has entered into arrangements with BOP under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Asset Manager LLC and Brookfield Asset Management Private Institutional Capital Adviser US, LLC an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.
A summary of costs incurred by Brookfield DTLA under these arrangements is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Property management fee expense | $ | 7,964 | $ | 7,445 | $ | 8,135 | |||||
Asset management fee expense | 6,330 | 6,292 | 6,109 | ||||||||
General, administrative and reimbursable expenses | 2,466 | 2,593 | 2,509 | ||||||||
Leasing and construction management fees | 3,049 | 6,396 | 3,626 | ||||||||
Insurance Agreements
Brookfield DTLA’s properties are covered under insurance policies entered into by BPO that provide, among other things, all risk property and business interruption coverage for BPO’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $370.0 million of earthquake, flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides aggregate coverage of $4.0 billion for
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all of BPO’s U.S. properties. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. Insurance premiums for Brookfield DTLA’s properties are paid by an affiliate of BPO and Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.
Prior to their expiration, which became effective on April 19, 2014, the properties acquired from MPG Office Trust, Inc. and MPG Office, L.P. (together “MPG”) in 2013 were covered under an insurance policy that provided all risk property and business interruption coverage 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.
A summary of costs incurred by Brookfield DTLA under this arrangement is as follows (in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Insurance expense | $ | 7,948 | $ | 8,532 | $ | 8,466 | |||||
Director Independence
Because the Series A preferred stock is the only publicly listed security of the Company, the Company is a special purpose entity as defined by the NYSE rules on corporate governance (the “NYSE Rules”) and has chosen to rely on the NYSE Rules’ “special purpose entity exemption” with respect to certain independence requirements. Of the Company’s seven directors, three are currently independent of management and of Brookfield DTLA Holdings and BPO. The board of directors has adopted independence standards as part of its Corporate Governance Guidelines, which are available in print to any person who sends a written request to that effect to the attention of our Secretary, as provided for above under the heading “—Board Governance Documents.”
The independence standards contained in our Corporate Governance Guidelines incorporate the categories of relationships between a director and a listed company that would make a director ineligible to be independent according to the standards issued by the NYSE.
In accordance with the NYSE Rules and our Corporate Governance Guidelines, on March 16, 2017, the board of directors affirmatively determined that each of the following directors is and was independent within the meaning of both our and the NYSE’s director independence standards, as then in effect:
Alan J. Carr
Craig W. Perry
Robert L. Stelzl
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Item 14. | Principal Accounting Fees and Services. |
The following table summarizes the fees for professional services rendered by Deloitte & Touche LLP:
For the Year Ended December 31, | |||||||
2016 | 2015 | ||||||
Audit fees (1) | $ | 720,300 | $ | 600,500 | |||
Audit-related fees | — | — | |||||
Tax fees (2) | — | 110,000 | |||||
All other fees | — | — | |||||
$ | 720,300 | $ | 710,500 | ||||
(1) | Audit fees consist of fees for professional services provided in connection with the audits of the Company’s annual consolidated financial statements, audits of the Company’s subsidiaries required for statute or otherwise and the performance of interim reviews of the Company’s quarterly unaudited consolidated financial statements. |
(2) | Tax fees for the year ended December 31, 2015 include fees for tax services provided by Deloitte Tax LLP including tax advisory services in connection with post-merger tax compliance services related to the acquisition of MPG in 2013. |
Pre-approval Policies and Procedures
The Company has adopted written policies that provide that the Audit Committee is to pre‑approve all audit services and permitted non-audit services to be performed for Brookfield DTLA by its independent registered public accounting firm in accordance with applicable law. During the fiscal years ended December 31, 2016 and 2015, all audit and non-audit services provided to us by Deloitte & Touche LLP were pre-approved by the Audit Committee.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) | The following documents are filed as part of this Annual Report on Form 10-K: | |||||
1. | Financial Statements | |||||
See Part II, Item 8. “Financial Statements and Supplementary Data.” | ||||||
2. | Financial Statement Schedules for the Years Ended December 31, 2016, 2015 and 2014 | |||||
All financial statement schedules are omitted because they are not applicable, or the | ||||||
required information is included in the consolidated financial statements or | ||||||
notes thereto. See Part II, Item 8 “Financial Statements and Supplementary Data.” | ||||||
3. | Exhibits (listed by number corresponding to Item 601 of Regulation S-K) | |||||
Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
2.1† | Agreement and Plan of Merger by and among MPG Office Trust, Inc., MPG Office, L.P., Brookfield DTLA Holdings L.P., Brookfield DTLA Fund Office Trust Investor Inc., DTLA Fund Office Trust Inc., and Brookfield DTLA Fund Properties LLC dated as of April 24, 2013 | 8-K | 001-31717 | 2.1 | April 25, 2013 | |||||
2.2 | Waiver and First Amendment to Agreement and Plan of Merger, dated as of May 19, 2013, by and among MPG Office Trust, Inc., MPG Office, L.P., Brookfield DTLA Holdings LLC (which was converted from a Delaware limited partnership on May 10, 2013), Brookfield DTLA Fund Office Trust Investor Inc., Brookfield DTLA Fund Office Trust Inc., and Brookfield DTLA Fund Properties LLC | 8-K | 001-31717 | 2.1 | May 20, 2013 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
2.3 | Second Amendment to Agreement and Plan of Merger, dated as of July 10, 2013, by and among MPG Office Trust, Inc., MPG Office, L.P., Brookfield DTLA Holdings LLC (which was converted from a Delaware limited partnership on May 10, 2013), Brookfield DTLA Fund Office Trust Investor Inc., Brookfield DTLA Fund Office Trust Inc., and Brookfield DTLA Fund Properties LLC | 8-K | 001-31717 | 2.1 | July 11, 2013 | |||||
2.4 | Third Amendment to Agreement and Plan of Merger, dated as of August 14, 2013, by and among MPG Office Trust, Inc., MPG Office, L.P., Brookfield DTLA Holdings LLC (which was converted from a Delaware limited partnership on May 10, 2013), Brookfield DTLA Fund Office Trust Investor Inc., Brookfield DTLA Fund Office Trust Inc., and Brookfield DTLA Fund Properties LLC | 8-K | 001-31717 | 2.1 | August 15, 2013 | |||||
3.1 | Articles of Incorporation of Brookfield DTLA Fund Office Trust Investor Inc. | S-4 | 333-189273 | 3.1 | June 12, 2013 | |||||
3.2 | Second Amended and Restated Bylaws of Brookfield DTLA Fund Office Trust Investor Inc. | 8-K | 001-36135 | 3.2 | August 14, 2014 | |||||
3.3 | Articles of Incorporation of Brookfield DTLA Fund Office Trust Inc. | S-4 | 333-189273 | 3.3 | June 12, 2013 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
3.4 | Bylaws of Brookfield DTLA Fund Office Trust Inc. | S-4 | 333-189273 | 3.4 | June 12, 2013 | |||||
3.5 | Articles of Amendment of Brookfield DTLA Fund Office Trust Inc. | S-4/A | 333-189273 | 3.5 | October 9, 2013 | |||||
3.6 | Articles Supplementary of Brookfield DTLA Fund Office Trust Investor Inc. 7.625% Series A Cumulative Redeemable Preferred Stock | S-4/A | 333-189273 | 4.1 | August 27, 2013 | |||||
3.7 | Articles Supplementary of Brookfield DTLA Fund Office Trust Investor Inc. 15% Series B Cumulative Nonvoting Preferred Stock | S-4/A | 333-189273 | 4.2 | August 27, 2013 | |||||
3.8 | Articles Supplementary of Brookfield DTLA Fund Office Trust Inc. 7.625% Series A Cumulative Redeemable Preferred Stock | S-4/A | 333-189273 | 4.3 | August 27, 2013 | |||||
3.9 | Articles Supplementary of Brookfield DTLA Fund Office Trust Inc. 15% Series B Cumulative Nonvoting Preferred Stock | S-4/A | 333-189273 | 4.4 | August 27, 2013 | |||||
4.1 | Form of Certificate of Series A Preferred Stock of Brookfield DTLA Fund Office Trust Investor Inc. | 10-K | 001-36135 | 4.1 | April 7, 2014 | |||||
10.1 | Form of Indemnity Agreement | 8-K | 001-36135 | 10.1 | November 4, 2013 | |||||
10.2†† | Loan Agreement, dated as of April 4, 2007, between North Tower, LLC, as Borrower, and Lehman Ali Inc. and Greenwich Capital Financial Products, Inc., together, as Lender | 10-K | 001-31717 | 10.47 | March 18, 2013 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
10.3 | Assignment and Assumption Agreement, dated as of January 2, 2014, between Wells Fargo Bank, National Association and PNC Bank, National Association | 8-K | 001-36135 | 10.10 | April 7, 2014 | |||||
10.4 | Consent and Acknowledgment Agreement, dated as of October 15, 2013, by and among U.S. Bank National Association, as Trustee, Successor-in- Interest to Bank of America, N.A., as Trustee for the registered holders of GS Mortgage Securities Corporation II, commercial mortgage pass-through certificates, Series 2007-GG10, as Lender, North Tower, LLC, as Borrower, MPG Office, L.P., as Old Guarantor, and Brookfield DTLA Holdings LLC, as New Guarantor | 8-K | 001-36135 | 10.11 | April 7, 2014 | |||||
Loan Agreement dated as of December 2, 2016 between Maguire Properties – 355 South Grand, LLC, as Borrower, and H/2 Financial Funding I LLC, as Lender | ||||||||||
Non-Recourse Carveout Guaranty executed as of December 2, 2016 by Brookfield DTLA Holdings LLC, as Guarantor, in favor of H/2 Financial Funding I LLC, as Lender | ||||||||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
Loan Agreement dated as of July 11, 2016 between Maguire Properties – 555 W. Fifth, LLC and Maguire Properties – 350 S. Figueroa, LLC, collectively, as Borrower, and Deutsche Bank AG, New York Branch and Barclays Bank PLC, collectively, as Lender | ||||||||||
Mezzanine Loan Agreement dated as of July 11, 2016 between Maguire Properties – 555 W. Fifth Mezz I, LLC, as Borrower, and Deutsche Bank AG, New York Branch and Barclays Bank PLC, collectively, as Lender | ||||||||||
Guaranty of Recourse Obligations executed as of July 11, 2016 by Brookfield DTLA Holdings LLC, as Guarantor, for the benefit of Deutsche Bank AG, New York Branch and of Barclays Bank PLC, collectively as Lender | ||||||||||
Mezzanine Guaranty of Recourse Obligations executed as of July 11, 2016 by Brookfield DTLA Holdings LLC, as Guarantor, for the benefit of Deutsche Bank AG, New York Branch and of Barclays Bank PLC, collectively as Lender | ||||||||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
10.11 | Deed of Trust, Security Agreement and Fixture Filing by Maguire Properties – 777 Tower, LLC, as Trustor to Fidelity National Title Insurance Company, as Trustee for the benefit of Metropolitan Life Insurance Company, as Beneficiary, dated October 15, 2013 | 8-K | 001-36135 | 10.2 | April 7, 2014 | |||||
10.12 | Promissory Note, dated as of October 15, 2013, between Maguire Properties – 777 Tower, LLC and Metropolitan Life Insurance Company | 8-K | 001-36135 | 10.3 | April 7, 2014 | |||||
Amended and Restated Promissory Note dated September 1, 2016 by Maguire Properties – 777 Tower, LLC and Metropolitan Life Insurance Company | ||||||||||
10.14 | Loan Agreement, between EYP Realty, LLC, as Borrower and Wells Fargo Bank, National Association, as Administrative Agent, Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner and the financial institutions now or hereafter signatories hereto and their assignees pursuant to Section 13.12, as Lenders, entered into as of November 27, 2013 | 8-K | 001-36135 | 10.6 | April 7, 2014 | |||||
10.15 | Promissory Note, dated as of January 2, 2014, between EYP Realty, LLC and Wells Fargo Bank, National Association | 8-K | 001-36135 | 10.7 | April 7, 2014 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
10.16 | Promissory Note, dated as of January 2, 2014, between EYP Realty, LLC and PNC Bank, National Association | 8-K | 001-36135 | 10.8 | April 7, 2014 | |||||
10.17 | Promissory Note, dated as of December 18, 2013, between EYP Realty, LLC and Aozora Bank, Ltd. | 8-K | 001-36135 | 10.9 | April 7, 2014 | |||||
10.18 | Loan Agreement, effective as of September 10, 2014, by and among BOP Figat7th LLC, as Borrower, and the financial institutions that are or may from time to time become parties hereto, as Lenders, and Compass Bank, as Administrative Agent | 10-K | 001-36135 | 10.20 | March 31, 2015 | |||||
10.19 | Promissory Note, effective as of September 10, 2014, between BOP Figat7th LLC and Compass Bank | 10-K | 001-36135 | 10.21 | March 31, 2015 | |||||
10.20 | Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by BOP Figat7th LLC, as Borrower, and Compass Bank, as Administrative Agent, effective as of September 10, 2014 | 10-K | 001-36135 | 10.22 | March 31, 2015 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
10.21 | Limited Recourse Guaranty, effective as of September 10, 2014, by Brookfield DTLA Holdings LLC, as Guarantor, for the benefit of Compass Bank, as lender, and as Administrative Agent for itself and those other Lenders as defined in the Loan Agreement | 10-K | 001-36135 | 10.23 | March 31, 2015 | |||||
10.22 | Loan Agreement, dated as of August 7, 2014, among 333 South Hope Co. LLC and 333 South Hope Plant LLC collectively, as Borrower, Wells Fargo Bank, National Association, as Lender, and Citigroup Global Markets Realty Corp., as Lender | 10-K | 001-36135 | 10.24 | March 31, 2015 | |||||
10.23 | Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of August 7, 2014, by 333 South Hope Co. LLC and 333 South Hope Plant LLC, collectively, as grantor, to Fidelity National Title Company, as trustee, for the benefit of Wells Fargo Bank, National Association and Citigroup Global Markets Realty Corp., collectively, as beneficiary | 10-K | 001-36135 | 10.25 | March 31, 2015 | |||||
10.24 | Guaranty of Recourse Obligations dated as of August 7, 2014 | 10-K | 001-36135 | 10.26 | March 31, 2015 | |||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
10.25 | Reserve Guaranty dated as of August 7, 2014 | 10-K | 001-36135 | 10.27 | March 31, 2015 | |||||
10.26 | Side Letter regarding Reserve Guaranty dated as of August 7, 2014 | 10-K | 001-36135 | 10.28 | March 31, 2015 | |||||
List of Subsidiaries of the Registrant as of December 31, 2016 | ||||||||||
Certification of Principal Executive Officer dated March 20, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||
Certification of Principal Financial Officer dated March 20, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||
Certification of Principal Executive Officer and Principal Financial Officer dated March 20, 2017 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) | ||||||||||
99.1 | Memorandum of Understanding In Re MPG Office Trust Inc. Preferred Shareholder Litigation entered into as of March 30, 2015 | 10-K | 001-36135 | 99.1 | March 31, 2015 | |||||
101.INS** | XBRL Instance Document | |||||||||
101.SCH** | XBRL Taxonomy Extension Schema Document | |||||||||
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Incorporated by Reference | ||||||||||
Exhibit No. | Exhibit Description | Form | File No. | Exhibit No. | Filing Date | |||||
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 | |||||||||
(b) | Exhibits Required by Item 601 of Regulation S-K | ||||||
See Item 3 above. | |||||||
(c) | Financial Statement Schedules | ||||||
See Item 2 above. | |||||||
_________ | |||||||
* | Filed herewith. | ||||||
** | Furnished herewith. | ||||||
† | Pursuant to Regulation S-K 601(b)(2), we have not filed exhibits and schedules related to this agreement. Copies of such exhibits and schedules will be furnished supplementally to the SEC upon request. | ||||||
‡ | Confidential treatment has been requested with respect to certain portions of this agreement. | ||||||
(1 | ) | This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934. | |||||
Item 16. | Form 10-K Summary. |
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: | March 20, 2017 |
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC. | |||
Registrant | |||
By: | /s/ PAUL L. SCHULMAN | ||
Paul L. Schulman | |||
President and Chief Operating Officer, | |||
U.S. Commercial Operations | |||
(Principal executive officer) | |||
By: | /s/ EDWARD F. BEISNER | ||
Edward F. Beisner | |||
Chief Financial Officer | |||
(Principal financial officer) | |||
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: | March 20, 2017 | By: | /s/ PAUL L. SCHULMAN |
Paul L. Schulman President and Chief Operating Officer, U.S. Commercial Operations, and Chairman of the Board (Principal executive officer) | |||
March 20, 2017 | By: | /s/ EDWARD F. BEISNER | |
Edward F. Beisner Chief Financial Officer (Principal financial and accounting officer) | |||
March 20, 2017 | By: | /s/ G. MARK BROWN | |
G. Mark Brown Global Chief Investment Officer, Brookfield Office Properties, and Director | |||
March 20, 2017 | By: | /s/ MICHELLE L. CAMPBELL | |
Michelle L. Campbell Senior Vice President, Secretary and Director | |||
March 20, 2017 | By: | /s/ ALAN J. CARR | |
Alan J. Carr Director | |||
March 20, 2017 | By: | /s/ CRAIG W. PERRY | |
Craig W. Perry Director | |||
March 20, 2017 | By: | /s/ ROBERT L. STELZL | |
Robert L. Stelzl Director | |||
March 20, 2017 | By: | /s/ RICKY TANG | |
Ricky Tang Director | |||
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