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 MARCH 31, 2018 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2018331ex321.htm
EX-31.2 - CERTIFICATION OF PFO AS OF MARCH 31, 2018 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2018331ex312cfo.htm
EX-31.1 - CERTIFICATION OF PEO AS OF MARCH 31, 2018 - Brookfield DTLA Fund Office Trust Investor Inc.	dtla2018331ex311ceo.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 March 31, 2018
	or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to __________________

Commission File Number: 001-36135

________________________

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

(Exact name of registrant as specified in its charter)



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

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

(212) 417-7000

(Registrant’s telephone number, including area code)

None

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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 May 11, 2018, 100% of the registrant’s common stock (all of which is privately owned and is not traded on any public market) was held by Brookfield DTLA Holdings LLC.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS



			Page
PART I—FINANCIAL INFORMATION

	Item 1.	Financial Statements.
		Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2018 and December 31, 2017	1
		Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2018 and 2017	3
		Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the three months ended March 31, 2018 and 2017	4
		Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited) for the three months ended March 31, 2018 and 2017	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and 2017	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	29
	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)



	March 31, 2018		December 31, 2017

ASSETS
Investments in Real Estate:
Land	$	227,555	$	227,555
Buildings and improvements	2,209,265		2,208,498
Tenant improvements	328,546		320,269
	2,765,366		2,756,322
Less: accumulated depreciation	361,396		342,465
Investments in real estate, net	2,403,970		2,413,857

Cash and cash equivalents	112,649		31,958
Restricted cash	30,092		35,547
Rents, deferred rents and other receivables, net	149,935		129,482
Intangible assets, net	54,444		58,289
Deferred charges, net	67,522		69,635
Prepaid and other assets, net	16,048		9,047
Total assets	$	2,834,660	$	2,747,815

LIABILITIES AND DEFICIT
Liabilities:
Mortgage loans, net	$	2,103,966	$	1,991,692
Accounts payable and other liabilities	73,936		80,810
Due to affiliates, net	7,800		11,273
Intangible liabilities, net	15,002		16,239
Total liabilities	$	2,200,704	$	2,100,014

Commitments and Contingencies (See Note 15)

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)



	March 31, 2018			December 31, 2017

LIABILITIES AND DEFICIT (continued)
Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock, $0.01 par value, 9,730,370 shares issued and outstanding as of March 31, 2018 and December 31, 2017	$	396,037		$	391,400
Noncontrolling Interests:
Series A-1 preferred interest	387,813			383,510
Senior participating preferred interest	26,162			25,548
Series B preferred interest	190,643			190,291
Total mezzanine equity	1,000,655			990,749

Stockholders’ Deficit:
Common stock, $0.01 par value, 1,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017	—			—
Additional paid-in capital	194,210			194,210
Accumulated deficit	(268,437		)	(256,877		)
Accumulated other comprehensive loss	(33		)	(273		)
Noncontrolling interest – Series B common interest	(292,439		)	(280,008		)
Total stockholders’ deficit	(366,699		)	(342,948		)
Total liabilities and deficit	$	2,834,660		$	2,747,815

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
	March 31, 2018			March 31, 2017
Revenue:
Rental income	$	41,029		$	40,068
Tenant reimbursements	22,105			23,620
Parking	9,137			9,212
Interest and other	2,940			3,015
Total revenue	75,211			75,915

Expenses:
Rental property operating and maintenance	23,326			23,115
Real estate taxes	10,050			9,611
Parking	2,752			2,649
Other expense	654			1,046
Depreciation and amortization	24,426			25,364
Interest	23,782			24,236
Total expenses	84,990			86,021

Net loss	(9,779		)	(10,106		)
Net loss attributable to noncontrolling interests:
Series A-1 preferred interest – current dividends	4,303			4,303
Senior participating preferred interest – redemption measurement adjustment	1,657			56
Series B preferred interest – current dividends	3,879			1,644
Series B common interest – allocation of net loss	(12,695		)	(10,858		)
Net loss attributable to Brookfield DTLA	(6,923		)	(5,251		)
Series A preferred stock – current dividends	4,637			4,637
Net loss available to common interest holders of Brookfield DTLA	$	(11,560	)	$	(9,888	)

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
	March 31, 2018			March 31, 2017

Net loss	$	(9,779	)	$	(10,106	)

Other comprehensive income:
Derivative transactions:
Unrealized derivative holding gains	1,702			880
Reclassification adjustment for realized gains included in net loss	(1,198		)	—
Total other comprehensive income	504			880

Comprehensive loss	(9,275		)	(9,226		)
Less: comprehensive loss attributable to noncontrolling interests	(2,592		)	(4,394		)
Comprehensive loss available to common interest holders of Brookfield DTLA	$	(6,683	)	$	(4,832	)

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, 2017	1,000	$	—	$	194,210	$	(256,877	)	$	(273	)	$	(280,008	)	$	(342,948	)
Net loss						(6,923		)				(2,856		)	(9,779		)
Other comprehensive income									240			264			504
Dividends on Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest						(4,637		)				(9,839		)	(14,476		)
Balance, March 31, 2018	1,000	$	—	$	194,210	$	(268,437	)	$	(33	)	$	(292,439	)	$	(366,699	)



	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						(5,251		)				(4,855		)	(10,106		)
Other comprehensive income									419			461			880
Dividends on Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest						(4,637		)				(6,003		)	(10,640		)
Balance, March 31, 2017	1,000	$	—	$	194,210	$	(225,152	)	$	(1,188	)	$	(246,171	)	$	(278,301	)

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 Three Months Ended
	March 31, 2018			March 31, 2017
Cash flows from operating activities:
Net loss	$	(9,779	)	$	(10,106	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	24,426			25,364
Provision for (recovery of) doubtful accounts	—			(5		)
Amortization of below-market leases/ above-market leases	(205		)	(568		)
Straight-line rent amortization	(5,997		)	(1,046		)
Amortization of tenant inducements	984			890
Amortization of discounts and deferred financing costs	2,496			1,102
Changes in assets and liabilities:
Rents, deferred rents and other receivables, net	(15,440		)	2,113
Deferred charges, net	(943		)	(920		)
Prepaid and other assets, net	(5,803		)	(3,905		)
Accounts payable and other liabilities	1,082			(3,522		)
Due to affiliates, net	(3,473		)	(16,642		)
Net cash used in operating activities	(12,652		)	(7,245		)
Cash flows from investing activities:
Expenditures for improvements to real estate	(17,320		)	(13,447		)
Net cash used in investing activities	(17,320		)	(13,447		)
Cash flows from financing activities:
Proceeds from mortgage loans	323,500			—
Principal payments on mortgage loans	(211,831		)	(988		)
(Distributions to) contributions from noncontrolling interests	(4,570		)	29,892
Financing fees paid	(1,891		)	—
Net cash provided by financing activities	105,208			28,904
Net change in cash, cash equivalents and restricted cash	75,236			8,212
Cash, cash equivalents and restricted cash at beginning of period	67,505			90,385
Cash, cash equivalents and restricted cash at end of period	$	142,741		$	98,597

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 Three Months Ended
	March 31, 2018		March 31, 2017
Supplemental disclosure of cash flow information:
Cash paid for interest	$	21,343	$	23,202

Supplemental disclosure of non-cash activities:
Accrual for real estate improvements	$	17,340	$	17,003
Accrual for deferred leasing costs	2,901		1,323
Increase in fair value of interest rate swaps, net	1,702		880

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, 2017 has been derived from Brookfield DTLA’s audited financial statements; however, the accompanying notes to the condensed consolidated financial statements do not include all disclosures required by GAAP.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes included in Brookfield DTLA’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2018.

Use of Estimates

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

Accounting Pronouncements Adopted in 2018

Effective January 1, 2018, Brookfield DTLA adopted the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-18, Restricted Cash to Accounting Standards Codification (“ASC”) Topic 230, Statement of Cash Flow. ASU 2016-18 requires entities to show the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. We adopted ASU 2016-18 on a retrospective basis. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the Company’s condensed consolidated statement of cash flows for the three months ended March 31, 2018 and 2017. As a result of the adoption of ASU 2016-18, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities in the condensed consolidated statement of cash flows since such balances are now included in total cash at both the beginning and end of the reporting period. As a result, for the three months ended March 31, 2017 the Company had net cash used in investing activities of $13.4 million instead of $10.8 million as previously reported.

Effective January 1, 2018, Brookfield DTLA adopted, on a modified retrospective basis, the guidance in ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services and also requires certain additional disclosures. The adoption of this pronouncement did not have an impact on Brookfield DTLA’s consolidated financial statements.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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

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

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

Accounting Pronouncements Effective After 2018

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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

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

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

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 3—Cash, Cash Equivalents and Restricted Cash

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



	March 31, 2018		December 31, 2017		March 31, 2017		December 31, 2016

Cash and cash equivalents	$	112,649	$	31,958	$	41,142	$	30,301
Restricted cash	30,092		35,547		57,455		60,084
Total cash, cash equivalents and restricted cash	$	142,741	$	67,505	$	98,597	$	90,385

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

Note 4—Rents, Deferred Rents and Other Receivables, Net

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



	March 31, 2018		December 31, 2017

Allowance for doubtful accounts	$	206	$	206
Accumulated amortization of tenant inducements	13,439		12,455

Brookfield DTLA recorded no provision for doubtful accounts during the three months ended March 31, 2018 and a recovery of doubtful accounts of $5 thousand during the three months ended March 31, 2017.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 5—Intangible Assets and Liabilities

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



	March 31, 2018		December 31, 2017
Intangible Assets
In-place leases	$	66,365	$	66,365
Tenant relationships	30,078		30,078
Above-market leases	31,270		31,270
	127,713		127,713
Less: accumulated amortization	73,269		69,424
Intangible assets, net	$	54,444	$	58,289

Intangible Liabilities
Below-market leases	$	59,561	$	59,561
Less: accumulated amortization	44,559		43,322
Intangible liabilities, net	$	15,002	$	16,239

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



	For the Three Months Ended
	March 31, 2018		March 31, 2017

Rental income	$	205	$	568
Depreciation and amortization expense	2,815		4,287

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

As of March 31, 2018, the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2018, the next four years and thereafter is as follows (in thousands):



	In-Place Leases		Other Intangible Assets		Intangible Liabilities

2018	$	4,470	$	3,455	$	2,513
2019	5,617		4,306		3,178
2020	4,972		3,415		2,972
2021	4,734		3,327		2,800
2022	4,022		3,050		2,493
Thereafter	5,533		7,543		1,046
	$	29,348	$	25,096	$	15,002

Note 6—Deferred Charges, Net

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



	March 31, 2018		December 31, 2017

Accumulated amortization of deferred leasing costs	$	42,442	$	39,762

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 7—Mortgage Loans

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



	Contractual Maturity Date			Principal Amount as of
	Contractual Maturity Date	Interest Rate		March 31, 2018		December 31, 2017
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (1)	4/9/2019	4.03	%	$	370,000	$	370,000
Wells Fargo Center–North Tower (2)	4/9/2019	7.03	%	55,000		55,000
Wells Fargo Center–North Tower (3)	4/9/2019	8.78	%	45,000		45,000
Wells Fargo Center–South Tower (4)	12/6/2018	5.39	%	250,000		250,000
777 Tower (5)	11/1/2018	3.85	%	220,000		220,000
EY Plaza (6)	11/27/2020	6.43	%	35,000		—
Total variable-rate loans				975,000		940,000

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (7)	11/27/2020	3.90	%	230,000		—
Total floating-rate debt				1,205,000		940,000

Fixed-Rate Debt:
BOA Plaza	9/1/2024	4.05	%	400,000		400,000
Gas Company Tower	8/6/2021	3.47	%	319,000		319,000
Gas Company Tower	8/6/2021	6.50	%	131,000		131,000
Figueroa at 7th	3/1/2023	3.88	%	58,500		—
Total fixed-rate debt				908,500		850,000

Debt Refinanced:
EY Plaza				—		176,831
Figueroa at 7th				—		35,000
Total debt refinanced				—		211,831

Total debt				2,113,500		2,001,831
Less: unamortized debt issuance costs				9,534		10,139
Total debt, net				$	2,103,966	$	1,991,692

__________


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


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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)


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

(4)

This loan bears interest at LIBOR plus 3.69%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00%. Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of March 31, 2018, a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures.

(5)

This loan bears interest at LIBOR plus 2.18%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75%. Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield amounts and loan to value ratios (as specified in the loan agreement). As of March 31, 2018, we do not meet the criteria specified in the loan agreement to extend this loan on its contractual maturity date.


(6)	This loan bears interest at LIBOR plus 4.55%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.50%.


(7)	This loan bears interest at LIBOR plus 1.65%. As required by the loan agreement, we have entered into interest rate swap agreements to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.25%. The effective interest rate of 3.90% includes interest on the swaps.

Debt Refinanced

Figueroa at 7th—

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

EY Plaza—

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of March 31, 2018, our debt to be repaid during the remainder of 2018, the next four years and thereafter is as follows (in thousands):



2018	$	470,000
2019	470,000
2020	265,000
2021	450,000
2022	—
Thereafter	458,500
	$	2,113,500

As of March 31, 2018, $351.0 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), $1,304.0 million may be prepaid with prepayment penalties, and $58.5 million is locked out from prepayment until March 1, 2020.

777 Tower—

Brookfield DTLA currently intends to extend or refinance the $220.0 million mortgage loan secured by 777 Tower on or about its November 1, 2018 maturity date. As of March 31, 2018, we do not meet the criteria specified in the loan agreement to extend the maturity date of this loan, and we do not have a commitment from the lenders to extend the maturity date of or to refinance this loan. As of March 31, 2018, the Company does not expect to make a principal paydown when the loan is extended or refinanced (based on market conditions as of that date).

Wells Fargo Center–South Tower—

Brookfield DTLA currently intends to extend or refinance the $250.0 million mortgage loan secured by Wells Fargo Center–South Tower on or about its December 6, 2018 maturity date. The Company has three options to extend the maturity date of this loan, each for a period of one year, subject to meeting certain debt yield amounts (as specified in the loan agreement). As of March 31, 2018, we meet the criteria specified in the loan agreement to extend the maturity date of this loan for one year.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.1 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against Brookfield DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended March 31, 2018 and were in compliance with the amounts required by the loan agreements.

Note 8—Mezzanine Equity

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

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of March 31, 2018 and December 31, 2017. Adjustments to increase the carrying amount to redemption value are recorded in the condensed consolidated statement of operations as a redemption measurement adjustment.

Series A Preferred Stock

As of March 31, 2018 and December 31, 2017, 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

No dividends were declared on the Series A preferred stock during the three months ended March 31, 2018 and 2017. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of March 31, 2018, the cumulative amount of unpaid dividends totals $152.8 million and has been reflected in the carrying amount of the Series A preferred stock.

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

As of March 31, 2018, the Series A preferred stock is reported at its redemption value of $396.0 million calculated using the redemption price of $25.00 per share plus all accumulated and unpaid dividends on such Series A preferred stock through March 31, 2018.

Series A-1 Preferred Interest

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

The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by 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 March 31, 2018, the Series A-1 preferred interest is reported at its redemption value of $387.8 million calculated using its liquidation value of $225.7 million plus $162.1 million of accumulated and unpaid dividends on such Series A-1 preferred interest through March 31, 2018.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Senior Participating Preferred Interest

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

During the three months ended March 31, 2018, Brookfield DTLA made cash distributions totaling $1.0 million to Brookfield DTLA Holdings as returns of investment related to the senior participating preferred interest using cash on hand.

As of March 31, 2018, the senior participating preferred interest is reported at its redemption value of $26.2 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.

During the three months ended March 31, 2018, Brookfield DTLA made a $3.5 million cash distribution to Brookfield DTLA Holdings as a preferred return on the Series B preferred interest using cash on hand.

As of March 31, 2018, the Series B preferred interest is reported at its redemption value of $190.6 million calculated using its liquidation value of $174.8 million plus $15.8 million of accumulated and unpaid dividends on such Series B preferred interest through March 31, 2018.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the three months ended March 31, 2018 is as follows (in thousands, except share amounts):



	Number of Shares of Series A Preferred Stock	Series A Preferred Stock		Noncontrolling Interests								Total Mezzanine Equity
	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, 2017	9,730,370	$	391,400	$	383,510	$	25,548		$	190,291		$	990,749
Current dividends		4,637		4,303		—			3,879			12,819
Distributions to holders						(1,043		)	(3,527		)	(4,570		)
Redemption measurement adjustment						1,657						1,657
Balance, March 31, 2018	9,730,370	$	396,037	$	387,813	$	26,162		$	190,643		$	1,000,655

Note 9—Noncontrolling Interests

Mezzanine Equity Component

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

Stockholders’ Deficit Component

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 10—Accumulated Other Comprehensive Loss

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



	For the Three Months Ended
	March 31, 2018			March 31, 2017

Balance at beginning of period	$	(574	)	$	(3,373	)
Other comprehensive income before reclassifications	1,702			880
Amounts reclassified from accumulated other comprehensive loss	(1,198		)	—
Net current-period other comprehensive income	504			880
Balance at end of period	$	(70	)	$	(2,493	)

Note 11—Income Taxes

Income Taxes

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Brookfield DTLA recorded provisions for income taxes of $80 thousand and $60 thousand during the three months ended March 31, 2018 and 2017, respectively. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

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

Uncertain Tax Positions

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA had no unrecognized tax benefits as of March 31, 2018 and December 31, 2017, and Brookfield DTLA does not expect its unrecognized tax benefits balance to change during the next 12 months. As of March 31, 2018, Brookfield DTLA’s 2013 tax period and 2014, 2015 and 2016 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities. 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.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 12—Fair Value Measurements

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

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



				Fair Value Measurements Using
	Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Liabilities) (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swaps at:
March 31, 2018	$	1,128		$	—	$	1,128		$	—
December 31, 2017	(574		)	—		(574		)	—

Interest rate caps at:
March 31, 2018	$	99		$	—	$	99		$	—
December 31, 2017	15			—		15			—

Note 13—Financial Instruments

Derivative Financial Instruments

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



	Fair Value
	March 31, 2018		December 31, 2017
Derivatives designated as cash flow hedging instruments:
Interest rate swaps	$	1,128	$	(574	)

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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



	Amount of Gain (Loss) Recognized in AOCL		Amount of Gain (Loss) Reclassified from AOCL to Statement of Operations
Derivatives designated as cash flow hedging instruments:
Interest rate swaps for the three months ended:
March 31, 2018	$	1,702	$	1,198
March 31, 2017	880		—

Interest Rate Swaps—

As of March 31, 2018, Brookfield DTLA held the following interest rate swaps pursuant to the terms of the EY Plaza mortgage and mezzanine loan agreements (in thousands, except percentages and dates):



	Notional Amount		Swap Rate		LIBOR Spread		Effective Rate		Expiration Date

Interest rate swap	$	175,794	2.18	%	1.65	%	3.83	%	11/2/2020
Interest rate swap	54,206		2.47	%	1.65	%	4.12	%	11/2/2020
	$	230,000	2.25	%	1.65	%	3.90	%

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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Interest Rate Caps—

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



	March 31, 2018		December 31, 2017

Wells Fargo Center–North Tower	$	370,000	$	370,000
Wells Fargo Center–North Tower	55,000		55,000
Wells Fargo Center–North Tower	45,000		45,000
Wells Fargo Center–South Tower	270,000		270,000
777 Tower	220,000		220,000
EY Plaza	35,000		—
	$	995,000	$	960,000

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

Other Financial Instruments

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



	March 31, 2018		December 31, 2017

Estimated fair value	$	2,105,739	$	2,003,600
Carrying amount	2,113,500		2,001,831

We calculated the estimated fair value of our mortgage loans by discounting the future contractual cash flows of the loans using current risk adjusted rates available to borrowers with similar credit ratings. The fair value measurement is determined on the basis of current market expectations using assumptions that market participants would use when pricing liabilities, including assumptions about risk. The estimated fair value of mortgage loans is classified as Level 3.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 14—Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by 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
	March 31, 2018		March 31, 2017

Property management fee expense	$	1,932	$	2,051
Asset management fee expense	1,583		1,583
General, administrative and reimbursable expenses	398		640
Leasing and construction management fees	283		147

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
	March 31, 2018		March 31, 2017

Insurance expense	$	1,955	$	1,933

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 15—Commitments and Contingencies

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

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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; and
•	Proceeds from additional secured or unsecured debt financings.	•	Distributions to Brookfield DTLA Holdings.

Potential Sources of Liquidity—

Cash on Hand—

As of March 31, 2018 and December 31, 2017, Brookfield DTLA had cash and cash equivalents totaling $112.6 million and $32.0 million, respectively.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cash Generated from Operations—

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

Occupancy levels. The following table presents leasing information for Brookfield DTLA for leases in place as of March 31, 2018:



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

BOA Plaza	1,405,428	18.7	%	91.5	%	$	32,915,714	$	25.60
Wells Fargo Center–North Tower	1,400,639	18.6	%	84.6	%	30,808,704		25.99
Gas Company Tower	1,345,163	17.9	%	90.2	%	29,954,307		24.70
EY Plaza	1,224,967	16.3	%	89.2	%	26,927,156		24.64
Wells Fargo Center–South Tower	1,124,960	14.9	%	75.7	%	21,304,766		25.03
777 Tower	1,024,835	13.6	%	81.4	%	20,845,736		24.98
	7,525,992	100.0	%	85.9	%	$	162,756,383	$	25.19

__________

(1)

Annualized rent represents the annualized monthly contractual rent under existing leases as of March 31, 2018. This amount reflects total base rent before any rent abatements as of March 31, 2018 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of March 31, 2018 for the twelve months ending March 31, 2019 are approximately $10.4 million, or $1.60 per leased square foot.


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

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table presents a summary of lease expirations at Brookfield DTLA for leases in place at March 31, 2018, plus currently available space, for the remainder of 2018, each of the nine calendar years beginning January 1, 2019 and thereafter. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.



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

2018	319,243	4.9	%	$	7,092,873	4.4	%	$	22.22	$	22.27
2019	486,097	7.5	%	11,990,130		7.4	%	24.67		25.63
2020	327,532	5.1	%	8,347,538		5.1	%	25.49		27.39
2021	423,454	6.5	%	11,328,621		7.0	%	26.75		29.65
2022	656,822	10.2	%	17,549,658		10.8	%	26.72		29.98
2023	885,847	13.7	%	21,401,967		13.1	%	24.16		28.32
2024	400,218	6.2	%	10,416,949		6.4	%	26.03		31.19
2025	700,286	10.8	%	19,187,373		11.8	%	27.40		32.88
2026	548,333	8.5	%	12,447,012		7.5	%	22.70		28.53
2027	139,674	2.2	%	3,664,255		2.3	%	26.23		35.17
Thereafter	1,574,900	24.4	%	39,330,007		24.2	%	24.97		38.04
Total expiring leases	6,462,406	100.0	%	$	162,756,383	100.0	%	$	25.19	$	31.24
Currently available	1,063,586
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 three months ended March 31, 2018. Management believes that on average our current in‑place rents are at market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the three months ended March 31, 2018:



	Leasing Activity		Percentage Leased

Leased square feet as of December 31, 2017	6,530,729		86.8	%
Expirations	(151,607	)	(2.0	)%
New leases	66,999		0.9	%
Renewals	16,285		0.2	%
Leased square feet as of March 31, 2018	6,462,406		85.9	%

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

Contributions from Brookfield DTLA Holdings—

Drawdowns under Capital Commitment—

At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a preferred return, if and when called by New OP. The Company received no contributions under this commitment during the three months ended March 31, 2018. As of May 15, 2018, $85.2 million is available to the Company under this commitment for future funding.

Other Contributions—

The Company received no other contributions during the three months ended March 31, 2018.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Proceeds from Additional Secured or Unsecured Debt Financings—

Figueroa at 7th—

EY Plaza—

Wells Fargo Center–South Tower—

As of March 31, 2018, a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of May 15, 2018, no funds have been drawn against the future advance amount.

Potential Uses of Liquidity—

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

Property Operations—

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 May 15, 2018, $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 $113 million over the next ten years, with the majority (approximately $98 million) over the next five years. The expected expenditures include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as atrium renovations at Wells Fargo Center, upgrades to fire alarm, security and HVAC systems, elevator upgrades, parking structure lighting, and roof replacements.

Payments in Connection with Loans—

Debt Maturities—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to extend or refinance the mortgage loan secured by 777 Tower on or about its scheduled maturity in November 2018. As of March 31, 2018, we do not meet the criteria specified in the loan agreement to extend the maturity date of this loan, and we do not have a commitment from the lenders to extend the maturity date of or to refinance this loan. As of March 31, 2018, the Company does not expect to make a principal paydown when the loan is extended or refinanced (based on current market conditions). There can be no assurance that this extension or refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Distributions to Brookfield DTLA Holdings—

During the three months ended March 31, 2018, Brookfield DTLA made a $3.5 million distribution to Brookfield DTLA Holdings as a preferred return on the Series B preferred interest and distributions totaling $1.0 million to Brookfield DTLA Holdings as returns of investment related to the senior participating preferred interest using cash on hand.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Indebtedness

As of March 31, 2018, Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of March 31, 2018 is as follows (in millions, except percentage and year amounts):



	Principal Amount		Percent of Total Debt		Effective Interest Rate		Weighted Average Term to Maturity

Fixed-rate	$	908.5	42.99	%	4.19	%	5 years
Variable-rate swapped to fixed-rate	230.0		10.88	%	3.90	%	3 years
Variable-rate (1)	975.0		46.13	%	4.81	%	1 year
	$	2,113.5	100.00	%	4.44	%	3 years

__________

(1)

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain information with respect to our indebtedness as of March 31, 2018 is as follows (in thousands, except percentage amounts):



	Interest Rate		Contractual Maturity Date	Principal Amount (1)		Annual Debt Service
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (2)	4.03	%	4/9/2019	$	370,000	$	15,107
Wells Fargo Center–North Tower (3)	7.03	%	4/9/2019	55,000		3,919
Wells Fargo Center–North Tower (4)	8.78	%	4/9/2019	45,000		4,005
Wells Fargo Center–South Tower (5)	5.39	%	12/6/2018	250,000		13,662
777 Tower (6)	3.85	%	11/1/2018	220,000		8,588
EY Plaza (7)	6.43	%	11/27/2020	35,000		2,281
Total variable-rate loans				975,000		47,562

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (8)	3.90	%	11/27/2020	230,000		9,085
Total floating-rate debt				1,205,000		56,647

Fixed-Rate Debt
BOA Plaza	4.05	%	9/1/2024	400,000		16,425
Gas Company Tower	3.47	%	8/6/2021	319,000		11,232
Gas Company Tower	6.50	%	8/6/2021	131,000		8,633
Figueroa at 7th	3.88	%	3/1/2023	58,500		2,301
Total fixed-rate rate debt				908,500		38,591
Total debt				2,113,500		$	95,238
Less: unamortized debt issuance costs				9,534
Total debt, net				$	2,103,966

__________


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


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


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


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

(5)

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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)


(7)	This loan bears interest at LIBOR plus 4.55%. As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.50%.


(8)	This loan bears interest at LIBOR plus 1.65%. As required by the loan agreement, we have entered into interest rate swap agreements to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.25%. The effective interest rate of 3.90% includes interest on the swaps.

Debt Refinanced

Figueroa at 7th—

EY Plaza—

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Debt Maturities

777 Tower—

Wells Fargo Center–South Tower—

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 March 31, 2018 to March 31, 2017

Condensed Consolidated Statements of Operations Information

(In millions, except percentage amounts)



	For the Three Months Ended						Increase/ (Decrease)			% Change
	March 31, 2018			March 31, 2017			Increase/ (Decrease)			% Change
Revenue:
Rental income	$	41.0		$	40.1		$	0.9		2	%
Tenant reimbursements	22.1			23.6			(1.5		)	(6	)%
Parking	9.1			9.2			(0.1		)	(1	)%
Interest and other	2.9			3.0			(0.1		)	(3	)%
Total revenue	75.1			75.9			(0.8		)	(1	)%

Expenses:
Rental property operating and maintenance	23.3			23.1			0.2			1	%
Real estate taxes	10.0			9.6			0.4			4	%
Parking	2.7			2.6			0.1			4	%
Other expense	0.7			1.1			(0.4		)	(38	)%
Depreciation and amortization	24.4			25.4			(1.0		)	(4	)%
Interest	23.8			24.2			(0.4		)	(2	)%
Total expenses	84.9			86.0			(1.1		)	(1	)%
Net loss	$	(9.8	)	$	(10.1	)	$	0.3

Tenant Reimbursements Revenue

Tenant reimbursements revenue decreased $1.5 million, or 6%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, primarily as a result of a 1% decrease in occupancy.

Other Expense

Other expense decreased $0.4 million, or 38%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, mainly due to lower leasing expenses.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $1.0 million, or 4%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, largely as a result of reduced amortization of acquired in-place lease intangible assets.

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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 Three Months Ended						Increase/ (Decrease)
	March 31, 2018			March 31, 2017			Increase/ (Decrease)
	(In thousands)
Net cash used in operating activities	$	(12,652	)	$	(7,245	)	$	5,407
Net cash used in investing activities	(17,320		)	(13,447		)	3,873
Net cash provided by financing activities	105,208			28,904			76,304

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 used in operating activities during the three months ended March 31, 2018 totaled $12.7 million, compared to net cash used in operating activities of $7.2 million during the three months ended March 31, 2017. The $5.4 million increase is primarily due to payment of management fees and other amounts owed to affiliates.

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 $17.3 million during the three months ended March 31, 2018, compared to net cash used in investing activities of $13.4 million during the three months ended March 31, 2017. The $3.9 million change is the result of 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 $105.2 million during the three months ended March 31, 2018, compared to net cash provided by financing activities of $28.9 million during the three months ended March 31, 2017. Net proceeds from the refinancing of the EY Plaza and Figueroa at 7th mortgage loans was the main source of the net cash provided by financing activities during the three months ended March 31, 2018. Contributions from the Series B preferred interest were the primary driver of the net cash provided by financing activities during the three months ended March 31, 2017.

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet arrangements as of March 31, 2018 and December 31, 2017, respectively.

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of March 31, 2018, including any guaranteed or minimum commitments under contractual obligations (in thousands):



	2018		2019		2020		2021		2022		Thereafter		Total

Principal payments on mortgage loans	$	470,000	$	470,000	$	265,000	$	450,000	$	—	$	458,500	$	2,113,500
Interest payments –
Fixed-rate debt (1)	29,075		38,591		38,697		30,590		18,726		27,828		183,507
Variable-rate swapped to fixed-rate debt	6,267		9,073		8,907		—		—		—		24,247
Variable-rate debt (2)	38,973		8,528		2,075		—		—		—		49,576
Tenant-related commitments (3)	71,465		25,968		9,889		1,763		2,112		3,554		114,751
	$	615,780	$	552,160	$	324,568	$	482,353	$	20,838	$	489,882	$	2,485,581

__________


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


(2)	Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of March 31, 2018 plus the contractual spread per the loan agreements.


(3)	Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of March 31, 2018.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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
	March 31, 2018		March 31, 2017

Property management fee expense	$	1,932	$	2,051
Asset management fee expense	1,583		1,583
General, administrative and reimbursable expenses	398		640
Leasing and construction management fees	283		147

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
	March 31, 2018		March 31, 2017

Insurance expense	$	1,955	$	1,933

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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 27, 2018 for a discussion of our critical accounting policies for “Business Combinations,” “Consolidation,” “Impairment Evaluation,” “Revenue Recognition,” and “Allowance for Doubtful Accounts.” There have been no changes to these policies during the three months ended March 31, 2018.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted in 2018

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Accounting Pronouncements Effective After 2018

In February 2016, the FASB issued an update (“ASU 2016-02”) to ASC Topic 842, Leases, to amend the accounting guidance for leases. ASU 2016-02 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. The guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on a principle of whether or not the lease is effectively a financed purchase. For all leases with a term greater than 12 months, lessees are required to record a right-of-use asset representing its right to use the underlying asset for the lease term and a liability to make lease payments on its balance sheet and will recognize lease expense on a straight‑line basis in its statement of operations. For leases with a term of 12 months or less, lessees are permitted to make an accounting policy election by class of underlying asset not to recognize lease assets or liabilities on its balance sheet. If a lessee makes this election, it will recognize lease expense for such leases using the effective interest method. We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements, and we currently believe that the adoption of this standard will not significantly change the accounting for operating leases on Brookfield DTLA’s consolidated balance sheet where we are the lessor, and that such leases will be accounted for in a similar manner. Under ASU 2016-02, initial direct costs for both lessees and lessors will include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, Brookfield DTLA may no longer be able to capitalize internal leasing costs and instead may be required to expense these costs as incurred. ASU 2016-02 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted.

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BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

See Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 27, 2018 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2017.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, G. Mark Brown, our principal executive officer, and Edward F. Beisner, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2018.

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2018 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.


Item 1A.	Risk Factors.

Factors That May Affect Future Results

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

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

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

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


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


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

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


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


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


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


•	Uncertainties of real estate development or redevelopment;


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


•	Risks relating to Brookfield DTLA’s insurance coverage;


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


•	Potential environmental liabilities;


•	Dependence on management personnel;


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


•	Operational and reputational risks;


•	Catastrophic events, such as earthquakes and hurricanes; and


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

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

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Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on March 27, 2018. Those risks are also relevant to our performance and financial condition. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


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

None.


Item 3.	Defaults Upon Senior Securities.

Dividends on the Series A preferred stock are cumulative and therefore will continue to accrue at an annual rate of $1.90625 per share. As of April 30, 2018, the cumulative amount of unpaid dividends totaled $154.3 million.


Item 4.	Mine Safety Disclosures.

Not applicable.


Item 5.	Other Information.

None.

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Item 6.	Exhibits.



Exhibit No.		Exhibit Description
31.1*		Certification of Principal Executive Officer dated May 15, 2018 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer dated May 15, 2018 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer and Principal Financial Officer dated May 15, 2018 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

__________



*	Filed herewith.
**	Furnished herewith.


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

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SIGNATURES

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



Date:	As of May 15, 2018



	BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
	Registrant

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

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

Brookfield DTLA Fund Office Trust Investor Inc. - FORM 10-Q - May 15, 2018

Attached files

Brookfield DTLA Fund Office Trust Investor Inc. Reports