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

Attached files

file	filename
EX-32.1 - SECTION 906 CERTIFICATION OF PEO AND PFO AS OF SEPTEMBER 30, 2017 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2017930ex321.htm
EX-31.2 - CERTIFICATION OF PFO AS OF SEPTEMBER 30, 2017 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2017930ex312cfo.htm
EX-31.1 - CERTIFICATION OF PEO AS OF SEPTEMBER 30, 2017 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2017930ex311ceo.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2017
	or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to __________________

Commission File Number: 001-36135

________________________

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

(Exact name of registrant as specified in its charter)



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

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

(212) 417-7000

(Registrant’s telephone number, including area code)

None

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

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

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

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



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

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

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

As of November 10, 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.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS



			Page
PART I—FINANCIAL INFORMATION

	Item 1.	Financial Statements.
		Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2017 and December 31, 2016	1
		Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016	3
		Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2017 and 2016	4
		Condensed Consolidated Statements of Stockholders’ Deficit (unaudited) for the nine months ended September 30, 2017 and 2016	5
		Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	47
	Item 4.	Controls and Procedures.	47

PART II—OTHER INFORMATION

	Item 1.	Legal Proceedings.	48
	Item 1A.	Risk Factors.	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	50
	Item 3.	Defaults Upon Senior Securities.	50
	Item 4.	Mine Safety Disclosures.	50
	Item 5.	Other Information.	50
	Item 6.	Exhibits.	51
	Signatures		52

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.	Financial Statements.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands)



	September 30, 2017		December 31, 2016

ASSETS
Investments in Real Estate:
Land	$	227,555	$	227,555
Buildings and improvements	2,199,966		2,191,676
Tenant improvements	309,840		321,542
	2,737,361		2,740,773
Less: accumulated depreciation	331,480		329,149
Investments in real estate, net	2,405,881		2,411,624

Cash and cash equivalents	48,122		30,301
Restricted cash	48,393		60,084
Rents, deferred rents and other receivables, net	122,474		118,211
Intangible assets, net	61,811		75,586
Deferred charges, net	62,467		64,967
Prepaid and other assets, net	3,557		9,186
Total assets	$	2,752,705	$	2,769,959

LIABILITIES AND DEFICIT
Liabilities:
Mortgage loans, net	$	1,990,984	$	2,076,804
Accounts payable and other liabilities	84,442		85,504
Due to affiliates, net	3,330		14,327
Intangible liabilities, net	17,622		22,227
Total liabilities	$	2,096,378	$	2,198,862

Commitments and Contingencies (See Note 13)

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited; in thousands, except share amounts)



	September 30, 2017			December 31, 2016

LIABILITIES AND DEFICIT (continued)
Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value, 9,730,370 shares issued and outstanding as of September 30, 2017 and December 31, 2016	$	386,763		$	372,852
Noncontrolling Interests:
Series A-1 preferred interest	379,206			366,297
Senior participating preferred interest	25,519			25,019
Series B preferred interest	186,326			65,364
Total mezzanine equity	977,814			829,532

Stockholders’ Deficit:
Common stock, $0.01 par value, 1,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016	—			—
Additional paid-in capital	194,210			194,210
Accumulated deficit	(245,902		)	(215,264		)
Accumulated other comprehensive loss	(1,020		)	(1,607		)
Noncontrolling interest – Series B common interest	(268,775		)	(235,774		)
Total stockholders’ deficit	(321,487		)	(258,435		)
Total liabilities and deficit	$	2,752,705		$	2,769,959

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands)



	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2017			Sept. 30, 2016			Sept. 30, 2017			Sept. 30, 2016
Revenue:
Rental income	$	40,628		$	40,334		$	120,843		$	124,071
Tenant reimbursements	24,368			23,481			72,138			69,318
Parking	9,216			9,251			27,785			27,772
Interest and other	2,855			4,342			8,286			10,028
Total revenue	77,067			77,408			229,052			231,189

Expenses:
Rental property operating and maintenance	25,422			24,435			73,332			71,509
Real estate taxes	9,886			9,573			28,806			28,413
Parking	2,196			2,213			6,926			6,259
Other expense	1,122			1,428			3,489			3,125
Depreciation and amortization	24,335			25,695			74,020			78,032
Interest	23,243			23,458			70,223			71,479
Total expenses	86,204			86,802			256,796			258,817

Net loss	(9,137		)	(9,394		)	(27,744		)	(27,628		)
Net loss attributable to noncontrolling interests:
Series A-1 preferred interest – current dividends	4,303			4,303			12,909			12,909
Senior participating preferred interest – redemption measurement adjustment	385			908			250			1,964
Series B preferred interest – current dividends	3,965			881			9,470			949
Series B common interest – allocation of net loss	(11,738		)	(10,532		)	(33,646		)	(30,023		)
Net loss attributable to Brookfield DTLA	(6,052		)	(4,954		)	(16,727		)	(13,427		)
Series A preferred stock – current dividends	4,637			4,637			13,911			13,911
Net loss available to common interest holders of Brookfield DTLA	$	(10,689	)	$	(9,591	)	$	(30,638	)	$	(27,338	)

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited; in thousands)



	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2017			Sept. 30, 2016			Sept. 30, 2017			Sept. 30, 2016

Net loss	$	(9,137	)	$	(9,394	)	$	(27,744	)	$	(27,628	)

Other comprehensive loss:
Derivative transactions:
Derivative holding gains (losses)	469			1,832			1,232			(3,290		)

Comprehensive loss	(8,668		)	(7,562		)	(26,512		)	(30,918		)
Less: comprehensive loss attributable to noncontrolling interests	(2,840		)	(3,481		)	(10,372		)	(15,922		)
Comprehensive loss available to common interest holders of Brookfield DTLA	$	(5,828	)	$	(4,081	)	$	(16,140	)	$	(14,996	)

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited; in thousands, except share amounts)



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

Balance, December 31, 2016	1,000	$	—	$	194,210	$	(215,264	)	$	(1,607	)	$	(235,774	)	$	(258,435	)
Net loss						(16,727		)				(11,017		)	(27,744		)
Other comprehensive income									587			645			1,232
Dividends on Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest						(13,911		)				(22,629		)	(36,540		)
Balance, September 30, 2017	1,000	$	—	$	194,210	$	(245,902	)	$	(1,020	)	$	(268,775	)	$	(321,487	)



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

Balance, December 31, 2015	1,000	$	—	$	191,710	$	(177,879	)	$	(2,580	)	$	(195,788	)	$	(184,537	)
Net loss						(13,427		)				(14,201		)	(27,628		)
Other comprehensive loss									(1,568		)	(1,722		)	(3,290		)
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						(13,911		)				(15,822		)	(29,733		)
Balance, September 30, 2016	1,000	$	—	$	194,210	$	(205,217	)	$	(4,148	)	$	(227,533	)	$	(242,688	)

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	For the Nine Months Ended
	September 30, 2017			September 30, 2016
Cash flows from operating activities:
Net loss	$	(27,744	)	$	(27,628	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	74,020			78,032
Recovery of doubtful accounts	(7		)	(239		)
Amortization of below-market leases/ above-market leases	(1,639		)	(2,733		)
Straight-line rent amortization	(6,989		)	(14,574		)
Amortization of tenant inducements	2,808			2,502
Amortization of discounts and deferred financing costs	4,659			3,499
Changes in assets and liabilities:
Rents, deferred rents and other receivables	(83		)	(2,508		)
Deferred charges	(5,600		)	(3,912		)
Prepaid and other assets	5,630			5,585
Accounts payable and other liabilities	5,117			(2,761		)
Due to affiliates, net	(10,997		)	(6,064		)
Net cash provided by operating activities	39,175			29,199
Cash flows from investing activities:
Expenditures for improvements to real estate	(54,308		)	(41,189		)
Decrease (increase) in restricted cash	11,691			(5,832		)
Net cash used in investing activities	(42,617		)	(47,021		)
Cash flows from financing activities:
Proceeds from mortgage loans	470,000			470,000
Principal payments on mortgage loans	(553,001		)	(460,543		)
Dividends paid on Series A preferred stock	—			(21,893		)
Contribution from (distributions to) senior participating preferred interest, net	250			(336		)
Contribution from Brookfield DTLA Holdings	—			2,500
Contributions from Series B preferred interest	111,492			43,000
Financing fees paid	(7,478		)	(3,138		)
Net cash provided by financing activities	21,263			29,590
Net change in cash and cash equivalents	17,821			11,768
Cash and cash equivalents at beginning of period	30,301			53,736
Cash and cash equivalents at end of period	$	48,122		$	65,504

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited; in thousands)



	For the Nine Months Ended
	September 30, 2017		September 30, 2016
Supplemental disclosure of cash flow information:
Cash paid for interest	$	66,809	$	67,901

Supplemental disclosure of non-cash activities:
Accrual for real estate improvements	$	19,526	$	6,758
Accrual for deferred leasing costs	3,204		2,169
Writeoff of fully depreciated buildings and improvements	3,992		—
Writeoff of fully depreciated tenant improvements	48,790		—
Writeoff of fully amortized intangible assets	57,088		—
Writeoff of fully amortized intangible liabilities	16,320		—
Increase (decrease) in fair value of interest rate swap, net	1,232		(3,290		)

See accompanying notes to condensed consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Organization and Description of Business

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

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

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

Note 2—Basis of Presentation

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

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10‑Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal and recurring nature, considered necessary for a fair presentation of the financial position and interim results of Brookfield DTLA as of and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of those that may be expected for a full fiscal year.

The condensed consolidated balance sheet data as of December 31, 2016 has been derived from Brookfield DTLA’s audited financial statements; however, the accompanying notes to the condensed consolidated financial statements do not include all disclosures required by GAAP.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes included in Brookfield DTLA’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 20, 2017.

Use of Estimates

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

Recent Accounting Pronouncements

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

In 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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 is 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.

In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets to ASC Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. ASU 2017-05 clarifies the scope of recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. This update conforms the derecognition guidance on nonfinancial assets with the model for transactions in ASC 606. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We do not expect the adoption of this update to have a material impact on Brookfield DTLA’s consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities to ASC Topic 815, Derivatives and Hedging. ASU 2017-12 introduced amendments intended to make targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. All transition requirements and elections should be applied to hedging relationships existing as of the date of adoption and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption of ASU 2017-01 on Brookfield DTLA’s consolidated financial statements.

Income Taxes

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax 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 provisions for income taxes of $291 thousand and $482 thousand during the three and nine months ended September 30, 2017, respectively. Brookfield DTLA made no provision and a $419 thousand provision for income taxes during the three and nine months ended September 30, 2016, respectively. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA had no unrecognized tax benefits as of September 30, 2017 and December 31, 2016, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. As of September 30, 2017, Brookfield DTLA’s 2013 tax period and 2014, 2015 and 2016 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities. The short tax period ended October 15, 2013 for Brookfield DTLA and its subsidiaries remains open due to the statute of limitations and may be subject to examination by federal, state and local tax authorities.

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

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



	September 30, 2017		December 31, 2016

Allowance for doubtful accounts	$	206	$	213
Accumulated amortization of tenant inducements	12,029		9,924

Brookfield DTLA recorded recoveries of doubtful accounts of $2 thousand and $7 thousand during the three and nine months ended September 30, 2017, respectively. Brookfield DTLA recorded recoveries of doubtful accounts of $311 thousand and $239 thousand during the three and nine months ended September 30, 2016, respectively.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 4—Intangible Assets and Liabilities

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



	September 30, 2017		December 31, 2016
Intangible Assets
In-place leases	$	71,439	$	110,519
Tenant relationships	33,524		46,248
Above-market leases	34,652		39,936
	139,615		196,703
Less: accumulated amortization	77,804		121,117
Intangible assets, net	$	61,811	$	75,586

Intangible Liabilities
Below-market leases	$	60,023	$	76,344
Less: accumulated amortization	42,401		54,117
Intangible liabilities, net	$	17,622	$	22,227

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



	For the Three Months Ended					For the Nine Months Ended
	Sept. 30, 2017		Sept. 30, 2016			Sept. 30, 2017		Sept. 30, 2016

Rental income	$	747	$	(158	)	$	1,639	$	2,733
Depreciation and amortization expense	3,239		4,994			10,809		14,796

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

As of September 30, 2017, the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2017, the next four years and thereafter is as follows (in thousands):



	In-Place Leases		Other Intangible Assets		Intangible Liabilities

2017	$	2,001	$	1,416	$	1,326
2018	6,747		5,116		3,799
2019	5,698		4,310		3,225
2020	5,052		3,417		3,017
2021	4,815		3,381		2,893
Thereafter	9,319		10,539		3,362
	$	33,632	$	28,179	$	17,622

Note 5—Deferred Charges, Net

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



	September 30, 2017		December 31, 2016

Accumulated amortization of deferred leasing costs	$	39,808	$	49,575

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 6—Mortgage Loans

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



	Contractual Maturity Date			Principal Amount as of
	Contractual Maturity Date	Interest Rate		September 30, 2017		December 31, 2016
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (1)	4/9/2019	3.49	%	$	370,000	$	—
Wells Fargo Center–North Tower (2)	4/9/2019	6.49	%	55,000		—
Wells Fargo Center–North Tower (3)	4/9/2019	8.24	%	45,000		—
Wells Fargo Center–South Tower (4)	12/6/2018	4.93	%	250,000		250,000
777 Tower (5)	11/1/2018	3.42	%	220,000		220,000
Figueroa at 7th (6)	12/10/2017	3.41	%	35,000		35,000
Total variable-rate loans				975,000		505,000

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (7)	11/27/2020	3.93	%	177,858		180,859
Total floating-rate debt				1,152,858		685,859

Fixed-Rate Debt:
BOA Plaza	9/1/2024	4.05	%	400,000		400,000
Gas Company Tower	8/6/2021	3.47	%	319,000		319,000
Gas Company Tower	8/6/2021	6.50	%	131,000		131,000
Total fixed-rate debt				850,000		850,000

Debt Refinanced:
Wells Fargo Center–North Tower				—		550,000

Total debt				2,002,858		2,085,859
Less: unamortized discounts and debt issuance costs				11,874		9,055
Total debt, net				$	1,990,984	$	2,076,804

__________

(1)

This loan bears interest at LIBOR plus 2.25%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

(2)

This loan bears interest at LIBOR plus 5.25%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

(3)

This loan bears interest at LIBOR plus 7.00%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 2.75%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

(4)

This loan bears interest at LIBOR plus 3.69%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of September 30, 2017, a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures.


(5)	This loan bears interest at LIBOR plus 2.18%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

(6)

This loan bears interest at LIBOR plus 2.25%. On November 2, 2017, Brookfield DTLA extended the maturity date of this loan until January 8, 2018. After this extension, the Company has two options to extend the maturity date of this loan, the first for a period of eight months and the second for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). See Note 14 “Subsequent Event.”


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

Debt Refinanced

On April 5, 2017, Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower. In connection with the refinancing, the Company repaid $80.0 million of principal and incurred transaction costs totaling $7.4 million. During April 2017, the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings that was used to pay for costs associated with the refinancing of Wells Fargo Center–North Tower.

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.25%, 5.25% and 7.00%, respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.75%.

The mortgage and mezzanine loans mature on April 9, 2019. Brookfield DTLA has three options to extend the maturity date of the loans, each for a period of one year, subject to meeting certain debt yield ratios (as specified in the mortgage and mezzanine loan agreements).

The mortgage and mezzanine loans can be prepaid, in whole or in part, with prepayment penalties (as defined in the underlying loan agreements) until July 9, 2018 after which the loans can be repaid without penalty. A voluntary prepayment of the mortgage or mezzanine loans requires a simultaneous pro-rata prepayment of all loans encumbering this property.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of September 30, 2017, our debt to be repaid during the remainder of 2017, the next four years and thereafter is as follows (in thousands):



2017 (1)	$	36,025
2018	474,233
2019	474,449
2020	168,151
2021	450,000
Thereafter	400,000
	$	2,002,858

__________


(1)	On November 2, 2017, Brookfield DTLA extended the maturity date of the $35.0 million mortgage loan secured by Figueroa at 7th from December 10, 2017 until January 8, 2018. See Note 14 “Subsequent Event.”

As of September 30, 2017, $343.9 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), and $1,259.0 million may be prepaid with prepayment penalties.

Debt Extension—

On August 14, 2017, Brookfield DTLA extended the maturity date of the $35.0 million mortgage loan secured by Figueroa at 7th until December 10, 2017. Then on November 2, 2017, Brookfield DTLA extended the maturity date of this loan until January 8, 2018. After the second extension, the Company has two options to extend the maturity date of this loan, the first for a period of eight months and the second for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). The Company plans to refinance this loan on or prior to January 8, 2018 and does not expect to make a principal paydown when the loan is refinanced. See Note 14 “Subsequent Event.”

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.0 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 (as defined in the loan agreements) occur.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended September 30, 2017 and were in compliance with the amounts required by the loan agreements.

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

Note 7—Mezzanine Equity

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

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of September 30, 2017 and December 31, 2016. Adjustments to increase the carrying amount to redemption value are recorded in the condensed consolidated statement of operations as a redemption measurement adjustment.

Series A Preferred Stock

As of September 30, 2017 and December 31, 2016, 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.

No dividends were declared on the Series A preferred stock during the nine months ended September 30, 2017 and 2016. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of September 30, 2017, the cumulative amount of unpaid dividends totals $143.5 million and has been reflected in the carrying amount of the Series A preferred stock.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 September 30, 2017, the Series A preferred stock is reported at its redemption value of $386.8 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through September 30, 2017.

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.

The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by Brookfield DTLA Fund Properties II LLC (“New OP”), which are held by a wholly owned subsidiary of Brookfield DTLA, but only with respect to their respective preferred liquidation preferences, and share pro rata with 48.13% to the Series A-1 preferred interest and 51.87% to the Series A preferred interest based on their current liquidation preferences in accordance with their respective preferred liquidation preferences in distributions from New OP, until their preferred liquidation preferences have been reduced to zero. Thereafter, distributions will be made 47.66% to the common component of the Series A interest and 52.34% to the common component of the Series B interest, which is held by 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 September 30, 2017, the Series A-1 preferred interest is reported at its redemption value of $379.2 million calculated using its liquidation value of $225.7 million plus $153.5 million of accumulated and unpaid dividends on such Series A-1 preferred interest through September 30, 2017.

Senior Participating Preferred Interest

Brookfield DTLA Fund Properties III LLC (“DTLA OP”) issued a senior participating preferred interest to Brookfield DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest was comprised of $240.0 million in preferred interests with a 7.0% coupon and a 4.0% participating interest in the residual value of DTLA OP.

During the nine months ended September 30, 2017, the Company received a net cash contribution totaling $250 thousand from Brookfield DTLA Holdings, which was used for general corporate purposes.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

As of September 30, 2017, the senior participating preferred interest is reported at its redemption value of $25.5 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.

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.

On February 27, 2017, the Company received a $29.5 million cash contribution 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 for general corporate purposes.

On April 4, 2017, the Company received an $82.0 million cash contribution 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 the Wells Fargo Center–North Tower mortgage loan.

As of September 30, 2017, the Series B preferred interest is reported at its redemption value of $186.3 million calculated using its liquidation value of $174.8 million plus $11.5 million of accumulated and unpaid dividends on such Series B preferred interest through September 30, 2017.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the nine months ended September 30, 2017 is as follows (in thousands, except share amounts):



	Number of Shares of Series A Preferred Stock	Series A Preferred Stock		Noncontrolling Interests						Total Mezzanine Equity
	Number of Shares of Series A Preferred Stock	Series A Preferred Stock		Series A-1 Preferred Interest		Senior Participating Preferred Interest		Series B Preferred Interest		Total Mezzanine Equity

Balance, December 31, 2016	9,730,370	$	372,852	$	366,297	$	25,019	$	65,364	$	829,532
Issuance of Series B preferred interest								111,492		111,492
Current dividends		13,911		12,909		—		9,470		36,290
Contribution from senior participating preferred interest, net						250				250
Redemption measurement adjustment						250				250
Balance, September 30, 2017	9,730,370	$	386,763	$	379,206	$	25,519	$	186,326	$	977,814

Note 8—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 condensed consolidated balance sheet. See Note 7 “Mezzanine Equity.”

Stockholders’ Deficit Component

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9—Accumulated Other Comprehensive Loss

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



	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2017			Sept. 30, 2016			Sept. 30, 2017			Sept. 30, 2016

Balance at beginning of period	$	(2,610	)	$	(10,537	)	$	(3,373	)	$	(5,415	)
Other comprehensive income (loss) before reclassifications	469			1,832			1,232			(3,290		)
Amounts reclassified from accumulated other comprehensive loss	—			—			—			—
Net current-period other comprehensive income (loss)	469			1,832			1,232			(3,290		)
Balance at end of period	$	(2,141	)	$	(8,705	)	$	(2,141	)	$	(8,705	)

Note 10—Fair Value Measurements

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

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



				Fair Value Measurements Using
	Total Fair Value			Quoted Prices in Active Markets for Identical (Liabilities) Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swap at:
September 30, 2017	$	(2,141	)	$	—	$	(2,141	)	$	—
December 31, 2016	(3,373		)	—		(3,373		)	—

Interest rate caps at:
September 30, 2017	$	17		$	—	$	17		$	—
December 31, 2016	53			—		53			—

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 11—Financial Instruments

Derivative Financial Instruments

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



	Fair Value
	September 30, 2017			December 31, 2016
Derivatives designated as cash flow hedging instruments:
Interest rate swap	$	(2,141	)	$	(3,373	)

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



	Amount of Gain (Loss) Recognized in AOCL			Amount of Gain (Loss) Reclassified from AOCL to Statement of Operations
Derivatives designated as cash flow hedging instruments:
Interest rate swap for the nine months ended:
September 30, 2017	$	1,232		$	—
September 30, 2016	(3,290		)	—

Interest Rate Swap—

As of September 30, 2017 and December 31, 2016, Brookfield DTLA held an interest rate swap assigned to the EY Plaza mortgage loan with notional amounts of $177.9 million and $180.9 million, respectively. The swap requires net settlement each month and expires on November 2, 2020.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Interest Rate Caps—

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



	September 30, 2017		December 31, 2016

Wells Fargo Center–North Tower	$	370,000	$	—
Wells Fargo Center–North Tower	55,000		—
Wells Fargo Center–North Tower	45,000		—
Wells Fargo Center–South Tower	270,000		270,000
777 Tower	220,000		220,000
	$	960,000	$	490,000

As required by the Wells Fargo Center–North Tower mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rate to 2.75%.

Other Financial Instruments

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



	September 30, 2017		December 31, 2016

Estimated fair value	$	2,003,116	$	2,059,449
Carrying amount	2,002,858		2,085,859

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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 12—Related Party Transactions

Management Agreements

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

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2017		Sept. 30, 2016		Sept. 30, 2017		Sept. 30, 2016

Property management fee expense	$	2,021	$	1,955	$	6,112	$	5,864
Asset management fee expense	1,583		1,583		4,748		4,748
General, administrative and reimbursable expenses	623		615		1,860		1,857
Leasing and construction management fees	634		410		1,481		1,321

Insurance Agreements

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

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2017		Sept. 30, 2016		Sept. 30, 2017		Sept. 30, 2016

Insurance expense	$	1,948	$	1,950	$	5,828	$	5,873

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 13—Commitments and Contingencies

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

Note 14—Subsequent Event

On November 2, 2017, Brookfield DTLA extended the maturity date of the $35.0 million mortgage loan secured by Figueroa at 7th until January 8, 2018. After this extension, the Company has two options to extend the maturity date of this loan, the first for a period of eight months and the second for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). The Company plans to refinance this loan on or prior to January 8, 2018 and does not expect to make a principal paydown when the loan is refinanced.

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

and Results of Operations.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto that appear in Part I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q.

Overview and Background

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources

General

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

Sources and Uses of Liquidity

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



	Sources		Uses
•	Cash on hand;	•	Property operations;
•	Cash generated from operations;	•	Capital expenditures;
•	Contributions from 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 September 30, 2017 and December 31, 2016, Brookfield DTLA had cash and cash equivalents totaling $48.1 million and $30.3 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 September 30, 2017:



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

BOA Plaza	1,405,428	18.67	%	93.0	%	$	32,739,465	$	25.06
Wells Fargo Center–North Tower	1,400,639	18.61	%	86.0	%	30,700,712		25.48
Gas Company Tower	1,345,163	17.87	%	89.9	%	30,029,055		24.82
EY Plaza	1,224,967	16.28	%	89.0	%	26,549,323		24.36
Wells Fargo Center–South Tower	1,124,960	14.95	%	66.6	%	19,272,575		25.73
777 Tower	1,024,835	13.62	%	81.8	%	20,224,383		24.12
	7,525,992	100.00	%	85.0	%	$	159,515,513	$	24.93

__________

(1)

Annualized rent represents the annualized monthly contractual rent under existing leases as of September 30, 2017. This amount reflects total base rent before any rent abatements as of September 30, 2017 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of September 30, 2017 for the twelve months ending September 30, 2018 are approximately $15.0 million, or $2.34 per leased square foot.


(2)	Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of the same date.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at September 30, 2017, plus currently available space, for the remainder of 2017, each of the nine calendar years beginning January 1, 2018 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	27,982	0.4	%	$	753,032	0.5	%	$	26.91	$	27.17
2018	576,186	9.0	%	11,217,172		7.0	%	19.47		19.65
2019	442,433	6.9	%	12,363,644		7.8	%	27.94		29.89
2020	306,858	4.8	%	7,829,062		4.9	%	25.51		28.19
2021	422,157	6.6	%	11,058,885		6.9	%	26.20		29.44
2022	804,787	12.6	%	21,418,942		13.4	%	26.61		30.67
2023	805,033	12.6	%	19,493,503		12.2	%	24.21		28.66
2024	417,960	6.6	%	10,637,926		6.7	%	25.45		30.93
2025	718,971	11.2	%	19,752,991		12.4	%	27.47		33.10
2026	517,636	8.1	%	11,463,487		7.2	%	22.15		28.74
Thereafter	1,358,811	21.2	%	33,526,869		21.0	%	24.67		37.78
Total expiring leases	6,398,814	100.0	%	$	159,515,513	100.0	%	$	24.93	$	30.80
Currently available	1,127,178
Total rentable square feet	7,525,992

__________

(1)


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


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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the nine months ended September 30, 2017. Management believes that on average our current in‑place rents are generally close to market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the nine months ended September 30, 2017:



	Leasing Activity		Percentage Leased

Leased square feet as of December 31, 2016	6,619,016		87.9	%
Expirations	(715,245	)	(9.5	)%
New leases	185,873		2.5	%
Renewals	309,170		4.1	%
Leased square feet as of September 30, 2017	6,398,814		85.0	%

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.

On February 27, 2017, the Company received a $29.5 million cash contribution from Brookfield DTLA Holdings under this commitment, which is entitled to receive a preferred return of 9.0%. The Company used these funds for general corporate purposes.

On April 4, 2017, the Company received an $82.0 million cash contribution 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 the refinancing of the Wells Fargo Center–North Tower mortgage loan. As of September 30, 2017, $85.2 million is available to the Company under this commitment for future funding.

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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 Contributions—

In addition to amounts received under the commitment described above, during the nine months ended September 30, 2017 the Company received a net cash contribution totaling $250 thousand from Brookfield DTLA Holdings, which was used for general corporate purposes.

Proceeds from Additional Secured or Unsecured Debt Financings—

As of September 30, 2017, a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of November 13, 2017, no funds have been drawn against the future advance amount.

Potential Uses of Liquidity—

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

Property Operations—

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 September 30, 2017, $85.2 million is available to the Company under this commitment for future funding.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Capital Expenditures—

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

Brookfield DTLA expects that leasing activities at its properties will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending approximately $125 million over the next ten years, with the majority (approximately $106 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—

Debt Maturities—

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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 nine months ended September 30, 2016, the Company made a $336 thousand cash distribution to Brookfield DTLA Holdings related to the senior participating preferred interest using cash on hand.

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.

Indebtedness

As of September 30, 2017, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of September 30, 2017 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	$	850.0	42.44	%	4.21	%	5 years
Variable-rate swapped to fixed-rate	177.9		8.88	%	3.93	%	3 years
Variable-rate (1) (2)	975.0		48.68	%	4.23	%	1 year
	$	2,002.9	100.00	%	4.19	%	3 years

__________

(1)


(2)	On November 2, 2017, Brookfield DTLA extended the maturity date of the $35.0 million mortgage loan secured by Figueroa at 7th from December 10, 2017 until January 8, 2018. 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)

Certain information with respect to our indebtedness as of September 30, 2017 is as follows (in thousands, except percentage amounts):



	Interest Rate		Contractual Maturity Date	Principal Amount (1)		Annual Debt Service
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (2)	3.49	%	4/9/2019	$	370,000	$	13,074
Wells Fargo Center–North Tower (3)	6.49	%	4/9/2019	55,000		3,616
Wells Fargo Center–North Tower (4)	8.24	%	4/9/2019	45,000		3,757
Wells Fargo Center–South Tower (5)	4.93	%	12/6/2018	250,000		12,496
777 Tower (6)	3.42	%	11/1/2018	220,000		7,629
Figueroa at 7th (7)	3.41	%	12/10/2017	35,000		1,208
Total variable-rate loans				975,000		41,780

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (8)	3.93	%	11/27/2020	177,858		7,083
Total floating-rate debt				1,152,858		48,863

Fixed-Rate Debt
BOA Plaza	4.05	%	9/1/2024	400,000		16,425
Gas Company Tower	3.47	%	8/6/2021	319,000		11,232
Gas Company Tower	6.50	%	8/6/2021	131,000		8,633
Total fixed-rate rate debt				850,000		36,290
Total debt				2,002,858		$	85,153
Less: unamortized debt issuance costs				11,874
Total debt, net				$	1,990,984

__________


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

(2)

(3)

(4)

(5)

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)


(6)	This loan bears interest at LIBOR plus 2.18%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).

(7)


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

Debt Refinanced

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.250%, 5.250% and 7.000%, respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.75%.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Debt Maturities

Non-Recourse Carve Out Guarantees

Debt Reporting

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

Comparison of the Three Months Ended September 30, 2017 to September 30, 2016

Condensed Consolidated Statements of Operations Information

(In millions, except percentage amounts)



	For the Three Months Ended						Increase/ (Decrease)			% Change
	Sept. 30, 2017			Sept. 30, 2016			Increase/ (Decrease)			% Change
Revenue:
Rental income	$	40.6		$	40.4		$	0.2		—	%
Tenant reimbursements	24.3			23.4			0.9			4	%
Parking	9.2			9.3			(0.1		)	(1	)%
Interest and other	2.9			4.3			(1.4		)	(33	)%
Total revenue	77.0			77.4			(0.4		)	(1	)%

Expenses:
Rental property operating and maintenance	25.4			24.4			1.0			4	%
Real estate taxes	9.9			9.6			0.3			3	%
Parking	2.2			2.2			—			—	%
Other expense	1.1			1.4			(0.3		)	(21	)%
Depreciation and amortization	24.3			25.7			(1.4		)	(5	)%
Interest	23.2			23.5			(0.3		)	(1	)%
Total expenses	86.1			86.8			(0.7		)	(1	)%
Net loss	$	(9.1	)	$	(9.4	)	$	0.3

Interest and Other Revenue

Interest and other revenue decreased $1.4 million, or 33%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, mainly as a result of a $1.1 million settlement received during 2016 from the insurance carrier under the MPG directors and officers liability insurance policy that partially reimbursed the Company for amounts paid to settle the merger litigation with the MPG common and preferred stockholders for which there was no comparable activity during 2017.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $1.0 million, or 4%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 due to higher utility, repair and maintenance costs.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $1.4 million, or 5%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, largely as a result of reduced amortization of acquired in-place lease intangible assets.

Comparison of the Nine Months Ended September 30, 2017 to September 30, 2016

Condensed Consolidated Statements of Operations Information

(In millions, except percentage amounts)



	For the Nine Months Ended						Increase/ (Decrease)			% Change
	Sept. 30, 2017			Sept. 30, 2016			Increase/ (Decrease)			% Change
Revenue:
Rental income	$	120.8		$	124.1		$	(3.3	)	(3	)%
Tenant reimbursements	72.1			69.3			2.8			4	%
Parking	27.8			27.8			—			—	%
Interest and other	8.3			10.0			(1.7		)	(17	)%
Total revenue	229.0			231.2			(2.2		)	(1	)%

Expenses:
Rental property operating and maintenance	73.3			71.5			1.8			3	%
Real estate taxes	28.8			28.4			0.4			1	%
Parking	6.9			6.3			0.6			10	%
Other expense	3.5			3.1			0.4			13	%
Depreciation and amortization	74.0			78.0			(4.0		)	(5	)%
Interest	70.2			71.5			(1.3		)	(2	)%
Total expenses	256.7			258.8			(2.1		)	(1	)%
Net loss	$	(27.7	)	$	(27.6	)	$	(0.1	)

Rental Income

Rental income decreased $3.3 million, or 3%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of lower amortization of intangible assets into rental income.

Tenant Reimbursements Revenue

Tenant reimbursements revenue increased $2.8 million, or 4%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily as a result of an increase in property operating expenses combined with contractual operating expense reimbursements owed to certain tenants during 2016 for which there was no comparable activity during 2017.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue decreased $1.7 million, or 17%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, mainly as a result of a $1.1 million settlement received during 2016 from the insurance carrier under the MPG directors and officers liability insurance policy that partially reimbursed the Company for amounts paid to settle the merger litigation with the MPG common and preferred stockholders for which there was no comparable activity during 2017.

Rental Property Operating and Maintenance Expense

Rental property operating and maintenance expense increased $1.8 million, or 3%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 due to higher utility, repair and maintenance costs.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $4.0 million, or 5%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as a result of decreased amortization of accrued in-place leases, which was partially offset by an acceleration of depreciation and amortization expense related to lease termination activity.

Interest Expense

Interest expense decreased $1.3 million, or 2%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, as a result of principal paydowns on the Wells Fargo Center–North Tower and South Tower mortgage loans and the Gas Company Tower mortgage loan in connection with refinancing activity.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash Flow

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

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



	For the Nine Months Ended						Increase/ (Decrease)
	Sept. 30, 2017			Sept. 30, 2016			Increase/ (Decrease)
	(In thousands)
Net cash provided by operating activities	$	39,175		$	29,199		$	9,976
Net cash used in investing activities	(42,617		)	(47,021		)	(4,404		)
Net cash provided by financing activities	21,263			29,590			(8,327		)

Operating Activities

Brookfield DTLA’s cash flow from operating activities is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to tenants and is also tied to the level of operating expenses. Net cash provided by operating activities during the nine months ended September 30, 2017 totaled $39.2 million, compared to net cash provided by operating activities of $29.2 million during the nine months ended September 30, 2016. The $10.0 million increase is primarily due to an increase in working capital generated by operations year over year combined with a reduction in accounts payable and other liabilities, which were partially offset by an increase in cash paid in settlement of amounts due to affiliates during 2017.

Investing Activities

Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $42.6 million during the nine months ended September 30, 2017, compared to net cash used in investing activities of $47.0 million during the nine months ended September 30, 2016. The $4.4 million change is mainly a result of a decrease in restricted cash, partially offset by an increase in expenditures for improvements to real estate.

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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 our loan activity, less any dividends and distributions paid to stockholders and distributions to affiliated companies, if any. Net cash provided by financing activities totaled $21.3 million during the nine months ended September 30, 2017, compared to net cash provided by financing activities of $29.6 million during the nine months ended September 30, 2016. Contributions from the Series B preferred interest, partially offset by cash used to refinance the Wells Fargo Center–North Tower mortgage loan, were the primary driver of the net cash provided by financing activities during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, contributions from the Series B preferred interest and Brookfield DTLA Holdings combined with proceeds from the 777 Tower loan modification, partially offset by the payment of dividends on the Series A preferred stock and cash used to refinance the Gas Company Tower mortgage loan, comprised the net cash provided by financing activities.

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet arrangements as of September 30, 2017 and December 31, 2016, respectively.

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of September 30, 2017, including any guaranteed or minimum commitments under contractual obligations (in thousands):



	2017		2018		2019		2020		2021		Thereafter		Total

Principal payments on mortgage loans (1)	$	36,025	$	474,233	$	474,449	$	168,151	$	450,000	$	400,000	$	2,002,858
Interest payments –
Fixed-rate debt (2)	9,147		36,290		36,290		36,390		28,289		43,875		190,281
Variable-rate swapped to fixed-rate debt	1,777		6,975		6,789		6,434		—		—		21,975
Variable-rate debt (3)	10,461		38,428		5,490		—		—		—		54,379
Tenant-related commitments (4)	53,042		13,237		12,890		2,135		1,504		4,376		87,184
	$	110,452	$	569,163	$	535,908	$	213,110	$	479,793	$	448,251	$	2,356,677

__________


(1)	On November 2, 2017, Brookfield DTLA extended the maturity date of the $35.0 million mortgage loan secured by Figueroa at 7th from December 10, 2017 until January 8, 2018. See “Subsequent Event.”


(2)	Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.


(3)	Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of September 30, 2017 plus the contractual spread per the loan agreements.


(4)	Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of September 30, 2017.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Related Party Transactions

Management Agreements

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2017		Sept. 30, 2016		Sept. 30, 2017		Sept. 30, 2016

Property management fee expense	$	2,021	$	1,955	$	6,112	$	5,864
Asset management fee expense	1,583		1,583		4,748		4,748
General, administrative and reimbursable expenses	623		615		1,860		1,857
Leasing and construction management fees	634		410		1,481		1,321

Insurance Agreements

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



	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2017		Sept. 30, 2016		Sept. 30, 2017		Sept. 30, 2016

Insurance expense	$	1,948	$	1,950	$	5,828	$	5,873

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Litigation

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

Critical Accounting Policies

Please refer to Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 20, 2017 for a discussion of our critical accounting policies for “Business Combinations,” “Consolidation,” “Impairment Evaluation,” “Revenue Recognition,” and “Allowance for Doubtful Accounts.” There have been no changes to these policies during the three months ended September 30, 2017.

Recent Accounting Pronouncements

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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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Subsequent Event

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

See Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 20, 2017 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2016.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, G. Mark Brown, our principal executive officer, and Edward F. Beisner, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017.

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.


Item 1A.	Risk Factors.

Factors That May Affect Future Results

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

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

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

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


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


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

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


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


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


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


•	Uncertainties of real estate development or redevelopment;


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


•	Risks relating to Brookfield DTLA’s insurance coverage;


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


•	Potential environmental liabilities;


•	Dependence on management personnel;


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


•	Operational and reputational risks;


•	Catastrophic events, such as earthquakes and hurricanes; and


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

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

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Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on March 20, 2017. Those risks are also relevant to our performance and financial condition. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


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

None.


Item 3.	Defaults Upon Senior Securities.

Dividends on the Series A preferred stock are cumulative and therefore will continue to accrue at an annual rate of $1.90625 per share. As of October 31, 2017, the cumulative amount of unpaid dividends totaled $145.0 million.


Item 4.	Mine Safety Disclosures.

Not applicable.


Item 5.	Other Information.

None.

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Item 6.	Exhibits.



Exhibit No.		Exhibit Description
31.1*		Certification of Principal Executive Officer dated November 13, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer dated November 13, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer and Principal Financial Officer dated November 13, 2017 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

__________



*	Filed herewith.
**	Furnished herewith.


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

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SIGNATURES

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



Date:	As of November 13, 2017



	BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
	Registrant

	By:	/s/ G. MARK BROWN
		G. Mark Brown
		Chairman of the Board
		(Principal executive officer)

	By:	/s/ EDWARD F. BEISNER
		Edward F. Beisner
		Chief Financial Officer
		(Principal financial officer)

Brookfield DTLA Fund Office Trust Investor Inc. - FORM 10-Q - November 13, 2017

Attached files

Brookfield DTLA Fund Office Trust Investor Inc. Reports