DTLAP 10-Q Quarterly Report March 31, 2017 | Alphaminr
Brookfield DTLA Fund Office Trust Investor Inc.
ALPHAMINR

DTLAP 10-Q Quarter ended March 31, 2017

Balance Sheet
Cash Flow
Income Statement
Debt
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
10-Q 1 dtla201733110q.htm REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2017 Document


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, 2017
or
¨

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

Commission File Number: 001-36135
________________________
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
(Exact name of registrant as specified in its charter)
Maryland
46-2616226
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
250 Vesey Street, 15th Floor
New York, NY
(Address of principal executive offices)
10281
(Zip Code)
(212) 417-7000
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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



As of May 12, 2017, 100% of the registrant’s common stock (all of which is privately owned and is not traded on any public market) was held by Brookfield DTLA Holdings LLC.


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS

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


PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands)

March 31, 2017
December 31, 2016
ASSETS
Investments in Real Estate:
Land
$
227,555

$
227,555

Buildings and improvements
2,192,811

2,191,676

Tenant improvements
326,392

321,542

2,746,758

2,740,773

Less: accumulated depreciation
347,428

329,149

Investments in real estate, net
2,399,330

2,411,624

Cash and cash equivalents
41,142

30,301

Restricted cash
57,455

60,084

Rents, deferred rents and other receivables, net
116,253

118,211

Intangible assets, net
70,245

75,586

Deferred charges, net
63,088

64,967

Due from affiliates, net
2,316

—

Prepaid and other assets, net
13,091

9,186

Total assets
$
2,762,920

$
2,769,959

LIABILITIES AND DEFICIT
Liabilities:
Mortgage loans, net
$
2,076,918

$
2,076,804

Accounts payable and other liabilities
73,634

85,504

Due to affiliates, net
—

14,327

Intangible liabilities, net
20,605

22,227

Total liabilities
$
2,171,157

$
2,198,862

Commitments and Contingencies (See Note 13)











See accompanying notes to condensed consolidated financial statements.

1

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited; in thousands, except share amounts)

March 31, 2017
December 31, 2016
LIABILITIES AND DEFICIT (continued)
Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 9,730,370 shares issued and
outstanding as of March 31, 2017
and December 31, 2016
$
377,489

$
372,852

Noncontrolling Interests:
Series A-1 preferred interest
370,600

366,297

Senior participating preferred interest
25,475

25,019

Series B preferred interest
96,500

65,364

Total mezzanine equity
870,064

829,532

Stockholders ’ Deficit:
Common stock, $0.01 par value, 1,000 shares
issued and outstanding as of March 31, 2017
and December 31, 2016
—

—

Additional paid-in capital
194,210

194,210

Accumulated deficit
(225,152
)
(215,264
)
Accumulated other comprehensive loss
(1,188
)
(1,607
)
Noncontrolling interest – Series B common interest
(246,171
)
(235,774
)
Total stockholders’ deficit
(278,301
)
(258,435
)
Total liabilities and deficit
$
2,762,920

$
2,769,959
















See accompanying notes to condensed consolidated financial statements.

2

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands)

For the Three Months Ended
March 31, 2017
March 31, 2016
Revenue:
Rental income
$
40,068

$
40,327

Tenant reimbursements
23,620

22,889

Parking
9,212

9,125

Interest and other
3,015

2,472

Total revenue
75,915

74,813

Expenses:
Rental property operating and maintenance
23,115

23,261

Real estate taxes
9,611

9,673

Parking
2,649

2,060

Other expense
1,046

737

Depreciation and amortization
25,364

25,076

Interest
24,236

23,978

Total expenses
86,021

84,785

Net loss
(10,106
)
(9,972
)
Net loss attributable to
noncontrolling interests:
Series A-1 preferred interest –
current dividends
4,303

4,303

Senior participating preferred interest –
redemption measurement adjustment
56

656

Series B preferred interest –
current dividends
1,644

—

Series B common interest –
allocation of net loss
(10,858
)
(10,242
)
Net loss attributable to Brookfield DTLA
(5,251
)
(4,689
)
Series A preferred stock –
current dividends
4,637

4,637

Net loss available to common interest
holders of Brookfield DTLA
$
(9,888
)
$
(9,326
)










See accompanying notes to condensed consolidated financial statements.

3

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Net loss
$
(10,106
)
$
(9,972
)
Other comprehensive loss:
Derivative transactions:
Derivative holding gains (losses)
880

(3,896
)
Comprehensive loss
(9,226
)
(13,868
)
Less: comprehensive loss attributable to
noncontrolling interests
(4,394
)
(7,322
)
Comprehensive loss available to
common interest holders of
Brookfield DTLA
$
(4,832
)
$
(6,546
)




































See accompanying notes to condensed consolidated financial statements.


4

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
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
)

Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interest
Total
Stockholders ’
Deficit
Common
Stock
Balance, December 31, 2015
1,000

$
—

$
191,710

$
(177,879
)
$
(2,580
)
$
(195,788
)
$
(184,537
)
Net loss
(4,689
)
(5,283
)
(9,972
)
Other comprehensive loss
(1,857
)
(2,039
)
(3,896
)
Dividends on Series A
preferred stock, Series A-1
preferred interest and
senior participating
preferred interest
(4,637
)
(4,959
)
(9,596
)
Balance, March 31, 2016
1,000

$
—

$
191,710

$
(187,205
)
$
(4,437
)
$
(208,069
)
$
(208,001
)















See accompanying notes to condensed consolidated financial statements.

5

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Cash flows from operating activities:
Net loss
$
(10,106
)
$
(9,972
)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization
25,364

25,076

(Recovery of) provision for doubtful accounts
(5
)
31

Amortization of below-market leases/
above-market leases
(568
)
(450
)
Straight-line rent amortization
(1,046
)
(3,265
)
Amortization of tenant inducements
890

788

Amortization of discounts and deferred financing costs
1,102

1,267

Changes in assets and liabilities:
Rents, deferred rents and other receivables
2,113

(195
)
Deferred charges
(920
)
(1,777
)
Prepaid and other assets
(3,905
)
(3,805
)
Accounts payable and other liabilities
(3,522
)
(1,026
)
Due (from) to affiliates, net
(16,642
)
3,719

Net cash (used in) provided by operating activities
(7,245
)
10,391

Cash flows from investing activities:
Expenditures for improvements to real estate
(13,447
)
(10,443
)
Decrease in restricted cash
2,629

3,713

Net cash used in investing activities
(10,818
)
(6,730
)
Cash flows from financing activities:
Principal payments on mortgage loans
(988
)
(627
)
Dividends paid on Series A preferred stock
—

(21,893
)
Contribution from senior participating preferred interest, net
400

—

Contribution from Series B preferred interest
29,492

—

Net cash provided by (used in) financing activities
28,904

(22,520
)
Net change in cash and cash equivalents
10,841

(18,859
)
Cash and cash equivalents at beginning of period
30,301

53,736

Cash and cash equivalents at end of period
$
41,142

$
34,877






See accompanying notes to condensed consolidated financial statements.

6

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Supplemental disclosure of cash flow information:
Cash paid for interest
$
23,202

$
22,707

Supplemental disclosure of non-cash activities:
Accrual for real estate improvements
$
17,003

$
8,655

Accrual for deferred leasing costs
1,323

2,145

Increase (decrease) in fair value of interest rate swap, net
880

(3,896
)











See accompanying notes to condensed consolidated financial statements.

7


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 incorporated under the Laws of Canada (“BPO”).

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

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

Note 2 — Basis of Presentation

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

Principles of Consolidation and Basis of Presentation

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

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


8


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

Use of Estimates

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

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02 establishing ASC Topic 842, Leases . The guidance in this update supersedes the guidance in ASC Topic 840, Leases . ASU 2016-02 revises GAAP related to accounting for leases by lessees. Under this new guidance, lessees will be required to recognize a lease liability and a right-of-use asset in the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification determining the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements.


9


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows . ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We do not expect the adoption of this update to have a material impact on Brookfield DTLA’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash to ASC Topic 230, Statement of Cash Flows . ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon adoption, we will retrospectively reconcile the activity in our cash, cash equivalents, restricted cash and restricted cash equivalents during reporting periods.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business by providing a screen to determine when a set of assets and activities acquired is not a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017 including interim periods within those periods. ASU 2017-01 must be applied prospectively on or after the effective date. We are currently evaluating the impact of the adoption of ASU 2017-01 on Brookfield DTLA’s consolidated financial statements.

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


10


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Income Taxes

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

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

Brookfield DTLA made no provision for income taxes in its condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 , respectively. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

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


11


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

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

March 31, 2017
December 31, 2016
Allowance for doubtful accounts
$
208

$
213

Accumulated amortization of tenant inducements
10,814

9,924


Brookfield DTLA recorded a $5 thousand recovery of doubtful accounts during the three months ended March 31, 2017 . Brookfield DTLA recorded a $31 thousand provision for doubtful accounts during the three months ended March 31, 2016 .

Note 4—Intangible Assets and Liabilities

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

March 31, 2017
December 31, 2016
Intangible Assets
In-place leases
$
110,519

$
110,519

Tenant relationships
46,248

46,248

Above-market leases
39,936

39,936

196,703

196,703

Less: accumulated amortization
126,458

121,117

Intangible assets, net
$
70,245

$
75,586

Intangible Liabilities
Below-market leases
$
76,344

$
76,344

Less: accumulated amortization
55,739

54,117

Intangible liabilities, net
$
20,605

$
22,227


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

For the Three Months Ended
March 31, 2017
March 31, 2016
Rental income
$
568

$
450

Depreciation and amortization expense
4,287

4,817



12


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

As of March 31, 2017 , the estimate of the amortization/accretion of intangible assets and liabilities during the remainder of 2017 , the next four years and thereafter is as follows (in thousands):

In-Place
Leases
Other
Intangible Assets
Intangible
Liabilities
2017
$
6,857

$
4,603

$
4,034

2018
6,754

5,146

3,812

2019
5,704

4,313

3,238

2020
5,059

3,417

3,031

2021
4,821

3,381

2,906

Thereafter
9,619

10,571

3,584

$
38,814

$
31,431

$
20,605


Note 5—Deferred Charges, Net

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

March 31, 2017
December 31, 2016
Accumulated amortization of deferred leasing costs
$
52,374

$
49,575



13


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 6 — Mortgage Loans

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

Contractual
Maturity Date
Principal Amount as of
Interest Rate
March 31, 2017
December 31, 2016
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–South Tower (1)
12/6/2018
4.52
%
$
250,000

$
250,000

777 Tower (2)
11/1/2018
2.97
%
220,000

220,000

Figueroa at 7th (3)
9/10/2017
3.11
%
35,000

35,000

Total variable-rate loans
505,000

505,000

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (4)
11/27/2020
3.93
%
179,871

180,859

Total floating-rate debt
684,871

685,859

Fixed-Rate Debt:
Wells Fargo Center–North Tower (5)
4/6/2017
5.70
%
550,000

550,000

BOA Plaza
9/1/2024
4.05
%
400,000

400,000

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

319,000

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

131,000

Total fixed-rate debt
1,400,000

1,400,000

Total debt
2,084,871

2,085,859

Less: unamortized discounts and debt issuance costs
7,953

9,055

Total debt, net
$
2,076,918

$
2,076,804

__________
(1)
This loan bears interest at LIBOR plus 3.69% . As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00% . Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2017 , a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures.
(2)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(3)
This loan bears interest at LIBOR plus 2.25% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 1.75% . As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178% . The effective interest rate of 3.93% includes interest on the swap.
(5)
On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower.


14


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Refinanced

On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower. In connection with the refinancing, the Company repaid $80.0 million of principal. During April 2017, the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings that was used to pay for costs associated with the refinancing of Wells Fargo Center–North Tower. See Note 14 “Subsequent Events.

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.250% , 5.250% and 7.000% , respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.750% .

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

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

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of March 31, 2017 , our debt to be repaid during the remainder of 2017 , the next four years and thereafter is as follows (in thousands):

2017 (1)
$
588,038

2018
474,233

2019
4,449

2020
168,151

2021
450,000

Thereafter
400,000

$
2,084,871

__________
(1)
On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower that was scheduled to mature on April 6, 2017 .

As of March 31, 2017 , $764.9 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), $470.0 million may be prepaid with prepayment penalties, and $450.0 million is locked out from prepayment until September 6, 2017 .


15


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Figueroa at 7th—

Brookfield DTLA intends to extend or refinance the $35.0 million mortgage loan secured by Figueroa at 7th on or about its September 10, 2017 maturity date. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2017 , we meet the criteria specified in the loan agreement to extend the maturity date of this loan.

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, 2017 and were in compliance with the amounts required by the loan agreements.

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

Note 7 —Mezzanine Equity

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


16


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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, 2017 and December 31, 2016 . Adjustments to increase the carrying amount to redemption value are recorded in the condensed consolidated statement of operations as a redemption measurement adjustment.

Series A Preferred Stock

As of March 31, 2017 and December 31, 2016 , 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of Brookfield DTLA Holdings.

No dividends were declared on the Series A preferred stock during the three months ended March 31, 2017 and 2016 . Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share. As of March 31, 2017 , the cumulative amount of unpaid dividends totals $134.2 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, 2017 , the Series A preferred stock is reported at its redemption value of $377.5 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, 2017 .

Series A-1 Preferred Interest

The Series A-1 preferred interest is held by Brookfield DTLA Holdings or wholly owned subsidiaries of Brookfield DTLA Holdings.

The Series A-1 preferred interest has mirror rights to the Series A preferred interests issued by Brookfield DTLA Fund Properties II LLC (“New OP”), which are held by a wholly owned subsidiary of Brookfield DTLA, but only with respect to their respective preferred liquidation preferences, and share pro rata with 48.13% to the Series A-1 preferred interest and 51.87% to the Series A preferred interest based on their current liquidation preferences in accordance with their respective preferred liquidation preferences in distributions from New OP, until their preferred liquidation preferences have been reduced to zero. Thereafter, distributions will be made 47.66% to the common component of the Series A interest and 52.34% to the common component of the Series B interest, which is held by Brookfield DTLA
Holdings. The economic terms of the Series A preferred stock mirror those of the New OP Series A preferred interests, including distributions in respect of the preferred liquidation preference.


17


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

As of March 31, 2017 , the Series A-1 preferred interest is reported at its redemption value of $370.6 million calculated using its liquidation value of $225.7 million plus $144.9 million of accumulated and unpaid dividends on such Series A-1 preferred interest through March 31, 2017 .

Senior Participating Preferred Interest

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

During February 2017, the Company received a net cash contribution totaling $0.4 million from Brookfield DTLA Holdings, which was used for general corporate purposes.

As of March 31, 2017 , the senior participating preferred interest is reported at its redemption value of $25.5 million using the value of the participating interest.

Series B Preferred Interest

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

The Series B preferred interest in New OP held by Brookfield DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in New OP may limit the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.

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

As of March 31, 2017 , the Series B preferred interest is reported at its redemption value of $96.5 million calculated using its liquidation value of $92.8 million plus $3.7 million of accumulated and unpaid dividends on such Series B preferred interest through March 31, 2017 .


18


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Subsequent to March 31, 2017 , the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0% as part of the Series B preferred interest. The Company used these funds to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan. See Note 14 “Subsequent Events.”

Change in Mezzanine Equity

A summary of the change in mezzanine equity for the three months ended March 31, 2017 is as follows (in thousands, except share amounts):

Number of
Shares of
Series A
Preferred
Stock
Series A
Preferred
Stock
Noncontrolling Interests
Total
Mezzanine
Equity
Series A-1
Preferred
Interest
Senior
Participating
Preferred
Interest
Series B
Preferred
Interest
Balance, December 31, 2016
9,730,370

$
372,852

$
366,297

$
25,019

$
65,364

$
829,532

Issuance of Series B preferred interest
29,492

29,492

Current dividends
4,637

4,303

—

1,644

10,584

Contribution from senior participating
preferred interest, net
400

400

Redemption measurement adjustment
56

56

Balance, March 31, 2017
9,730,370

$
377,489

$
370,600

$
25,475

$
96,500

$
870,064


Note 8—Noncontrolling Interests

Mezzanine Equity Component

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

Stockholders’ Deficit Component

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


19


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 9—Accumulated Other Comprehensive Loss

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Balance at beginning of period
$
(3,373
)
$
(5,415
)
Other comprehensive income (loss)
before reclassifications
880

(3,896
)
Amounts reclassified from accumulated
other comprehensive loss
—

—

Net current-period
other comprehensive income (loss)
880

(3,896
)
Balance at end of period
$
(2,493
)
$
(9,311
)

Note 10 —Fair Value Measurements

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

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

Fair Value Measurements Using
Total
Fair
Value
Quoted Prices in
Active Markets
for Identical
(Liabilities)
Assets (Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Interest rate swap at:
March 31, 2017
$
(2,493
)
$
—

$
(2,493
)
$
—

December 31, 2016
(3,373
)
—

(3,373
)
—

Interest rate caps at:
March 31, 2017
$
14

$
—

$
14

$
—

December 31, 2016
53

—

53

—



20


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Note 11 — Financial Instruments

Derivative Financial Instruments

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

Fair Value
March 31, 2017
December 31, 2016
Derivatives designated as cash flow hedging instruments:
Interest rate swap
$
(2,493
)
$
(3,373
)

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

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

$
—

March 31, 2016
(3,896
)
—


Interest Rate Swap—

As of March 31, 2017 and December 31, 2016 , Brookfield DTLA held an interest rate swap with a notional amount of $185.0 million , which was assigned to the EY Plaza mortgage loan. The swap requires net settlement each month and expires on November 2, 2020 .

Interest Rate Caps—

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

March 31, 2017
December 31, 2016
Wells Fargo Center–South Tower
$
270,000

$
270,000

777 Tower
220,000

220,000

$
490,000

$
490,000



21


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

As required by the Wells Fargo Center–North Tower mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rate to 2.750% . See Note 14 “Subsequent Events.

Other Financial Instruments

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

March 31, 2017
December 31, 2016
Estimated fair value
$
2,066,475

$
2,059,449

Carrying amount
2,084,871

2,085,859


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

Note 12—Related Party Transactions

Management Agreements

Brookfield DTLA has entered into arrangements with BOP Management Inc., an affiliate of BPO, under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Asset Manager LLC and Brookfield Asset Management Private Institutional Capital Adviser US, LLC an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Property management fee expense
$
2,051

$
1,959

Asset management fee expense
1,583

1,583

General, administrative and
reimbursable expenses
640

596

Leasing and construction management fees
147

590



22


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Insurance Agreements

Insurance premiums for Brookfield DTLA’s properties are paid by an affiliate of BPO and Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Insurance expense
$
1,933

$
1,949


Note 13 —Commitments and Contingencies

Litigation

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

Note 14 —Subsequent Events

Contribution from Brookfield DTLA Holdings

On April 4, 2017 , the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0% as part of the Series B preferred interest. The Company used these funds to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan.

Refinancing of Wells Fargo Center–North Tower Mortgage Loan

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

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.250% , 5.250% and 7.000% , respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.750% .


23


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

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



24

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

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview and Background

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

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

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

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


25


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Liquidity and Capital Resources

General

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

Sources and Uses of Liquidity

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

Sources
Uses
•
Cash on hand;
•
Property operations;
•
Cash generated from operations;
•
Capital expenditures;
•
Contributions from Brookfield
DTLA Holdings; and
•
Payments in connection with loans;
•
Proceeds from additional secured or
unsecured debt financings.
•
Distributions to Brookfield
DTLA Holdings; and
•
Dividend payment in connection
with legal settlement.

Potential Sources of Liquidity —

Cash on Hand —

As of March 31, 2017 and December 31, 2016 , Brookfield DTLA had cash and cash equivalents totaling $41.1 million and $30.3 million , respectively.


26


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, 2017 :

Square Feet
Leased % and In-Place Rents
Property
Net
Building
Rentable
% of Net
Rentable
%
Leased
Total
Annualized
Rents (1)
Annualized
Rent
$/RSF (2)
BOA Plaza
1,405,428

18.67
%
93.6
%
$
32,218,604

$
24.49

Wells Fargo Center–North Tower
1,400,639

18.61
%
88.6
%
31,626,687

25.49

Gas Company Tower
1,345,163

17.87
%
89.0
%
29,061,257

24.27

EY Plaza
1,224,967

16.28
%
91.1
%
26,744,379

23.95

Wells Fargo Center–South Tower
1,124,960

14.95
%
66.6
%
18,958,783

25.32

777 Tower
1,024,835

13.62
%
85.9
%
21,236,316

24.12

7,525,992

100.00
%
86.4
%
$
159,846,026

$
24.59

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of March 31, 2017 . This amount reflects total base rent before any rent abatements as of March 31, 2017 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of March 31, 2017 for the twelve months ending March 31, 2018 are approximately $15.5 million , or $2.39 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.


27


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, 2017 , plus currently available space, for the remainder of 2017 , each of the nine calendar years beginning January 1, 2018 and thereafter. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.

Year
Total Area in
Square Feet
Covered by
Expiring
Leases
Percentage
of Leased
Square Feet
Annualized
Rent (1)
Percentage of
Annualized
Rent
Current
Rent per
Leased
Square
Foot (2)
Rent per
Leased Square
Foot at
Expiration (3)
2017
230,846

3.5
%
$
5,762,350

3.6
%
$
24.96

$
25.03

2018
670,729

10.3
%
12,762,027

8.0
%
19.03

19.58

2019
436,377

6.7
%
12,148,577

7.6
%
27.84

30.27

2020
288,873

4.4
%
7,425,130

4.6
%
25.70

28.28

2021
456,392

7.0
%
11,559,515

7.2
%
25.33

29.04

2022
913,923

14.1
%
23,943,625

15.0
%
26.20

30.72

2023
721,768

11.1
%
17,806,456

11.1
%
24.67

29.82

2024
407,786

6.3
%
10,303,969

6.5
%
25.27

31.00

2025
706,416

10.9
%
19,123,190

12.0
%
27.07

33.11

2026
517,636

8.0
%
11,408,109

7.1
%
22.04

28.74

Thereafter
1,148,454

17.7
%
27,603,078

17.3
%
24.03

37.30

Total expiring leases
6,499,200

100.0
%
$
159,846,026

100.0
%
$
24.59

$
30.30

Currently available
1,026,792

Total rentable square feet
7,525,992

__________
(1)
Annualized rent represents the annualized monthly contractual rent under existing leases as of March 31, 2017 . This amount reflects total base rent before any rent abatements as of March 31, 2017 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for leases in effect as of March 31, 2017 for the twelve months ending March 31, 2018 are approximately $15.5 million , or $2.39 per leased square foot.
(2)
Current rent per leased square foot represents current base rent, divided by total leased square feet as of the same date.
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the three months ended March 31, 2017 . Management believes that on average our current in‑place rents are generally close to market in the LACBD.

The following table summarizes leasing activity at Brookfield DTLA for the three months ended March 31, 2017 :

Leasing Activity
Percentage Leased
Leased square feet as of December 31, 2016
6,619,016

87.9
%
Expirations
(249,606
)
(3.3
)%
New leases
89,414

1.2
%
Renewals
40,376

0.6
%
Leased square feet as of March 31, 2017
6,499,200

86.4
%


28


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

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

Contributions from Brookfield DTLA Holdings —

Drawdowns under Capital Commitment—

At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Brookfield DTLA Fund Properties II LLC (“New OP”), which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a preferred return, if and when called by New OP.

On February 27, 2017 , the Company received a $29.5 million cash contribution from Brookfield DTLA Holdings under this commitment, which is entitled to receive a preferred return of 9.0% . The Company used these funds for general corporate purposes. As of March 31, 2017 , $167.2 million was available to the Company under this commitment for future funding.

Subsequent to March 31, 2017 , the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings under this commitment, which is entitled to a preferred return of 9.0% . The Company used these funds to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan. As of May 15, 2017 , $85.2 million is available to the Company under this commitment for future funding. See “Subsequent Events.”

Other Contributions—

In addition to amounts received under the commitment described above, during February 2017 the Company received a net cash contribution totaling $0.4 million from Brookfield DTLA Holdings, which was used for general corporate purposes.

Proceeds from Additional Secured or Unsecured Debt Financings—

As of March 31, 2017 , a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of May 15, 2017 , no funds have been drawn against the future advance amount.


29


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Potential Uses of Liquidity —

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

Property Operations —

BOA Plaza and EY Plaza have historically generated sufficient cash from operations to fund their operating activities. In the future, should the cash generated by Brookfield DTLA’s properties, including the properties acquired from MPG, not be sufficient to fund their operations, such cash would be provided by Brookfield DTLA Holdings or another source of funds available to the Company or, if such cash were not made available, the Company might not have sufficient cash to fund its operations.

At the time of the merger with MPG, Brookfield DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, for up to $260.0 million of its future cash needs, for which it will be entitled to receive a preferred return, if and when called by New OP. As of May 15, 2017 , $85.2 million is available to the Company under this commitment for future funding. See “Subsequent Events.”

Capital Expenditures —

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

Brookfield DTLA expects that leasing activities at its properties, including the properties acquired from MPG, will require material amounts of cash for at least several years. Excluding tenant improvements and leasing commissions, Brookfield DTLA projects spending approximately $134 million over the next ten years, with the majority (approximately $115 million ) over the next five years. The expected expenditures include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as lobby renovations, upgrades to fire alarm, security and HVAC systems, and roof replacements.

As of March 31, 2017 , a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of May 15, 2017 , no funds have been drawn against the future advance amount.


30


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Payments in Connection with Loans —

Debt Refinanced—

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

Debt Maturities—

Brookfield DTLA intends to extend or refinance the $35.0 million mortgage loan secured by Figueroa at 7th on or about its September 10, 2017 maturity date. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2017 , we meet the criteria specified in the loan agreement to extend the maturity date of this loan. There can be no assurance that this extension or refinancing can be accomplished, what terms will be available in the market for this type of financing at the time of any extension or refinancing, or that any refinancing will generate net cash proceeds.

Distributions to Brookfield DTLA Holdings —

During the three months ended March 31, 2017 , the Company made a $0.1 million cash distribution to Brookfield DTLA Holdings related to the senior participating preferred interest using cash on hand. During the three months ended March 31, 2016 , the Company made no cash distributions to Brookfield DTLA Holdings.

Dividend Payment in Connection with Legal Settlement—

On January 4, 2016 , Brookfield DTLA paid a cash dividend of $2.25 per share to holders of record of its Series A preferred stock at the close of business on December 15, 2015 using cash on hand. This dividend payment reduced the accumulated and unpaid dividends owed on the Series A preferred stock by $21.9 million . The dividend was declared on December 4, 2015 by the board of directors in connection with the settlement on a class-wide basis of the litigation brought in Maryland State Court and styled as In re MPG Office Trust Inc. Preferred Shareholder Litigation , Case No. 24-C-13-004097.


31


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, 2017 , Brookfield DTLA’s debt was comprised of mortgage loans secured by seven properties. A summary of our debt as of March 31, 2017 is as follows (in millions, except percentage and year amounts):

Principal
Amount
Percent of
Total Debt
Effective
Interest
Rate
Weighted Average
Term to
Maturity
Fixed-rate (1)
$
1,400.0

67.15
%
4.79
%
4 years
Variable-rate swapped to fixed-rate
179.9

8.63
%
3.93
%
4 years
Variable-rate (2)
505.0

24.22
%
3.75
%
2 years
$
2,084.9

100.00
%
4.47
%
3 years
__________
(1)
On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower.
(2)
As of March 31, 2017 , a maximum future advance amount of $20.0 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of May 15, 2017 , no funds have been drawn against the future advance amount.


32


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, 2017 is as follows (in thousands, except percentage amounts):

Interest
Rate
Contractual
Maturity Date
Principal
Amount (1)
Annual Debt
Service
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–South Tower (2)
4.52
%
12/6/2018
$
250,000

$
11,457

777 Tower (3)
2.97
%
11/1/2018
220,000

6,625

Figueroa at 7th (4)
3.11
%
9/10/2017
35,000

1,103

Total variable-rate loans
505,000

19,185

Variable-Rate Swapped to Fixed-Rate
Loan:
EY Plaza (5)
3.93
%
11/27/2020
179,871

7,163

Total floating-rate debt
684,871

26,348

Fixed-Rate Debt
Wells Fargo Center–North Tower (6)
5.70
%
4/6/2017
550,000

31,769

BOA Plaza
4.05
%
9/1/2024
400,000

16,425

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

11,232

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

8,633

Total fixed-rate rate debt
1,400,000

68,059

Total debt
2,084,871

$
94,407

Less: unamortized discounts and debt issuance costs
7,953

Total debt, net
$
2,076,918

__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
This loan bears interest at LIBOR plus 3.69% . As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 3.00% . Brookfield DTLA has three options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2017 , a maximum future advance amount of $20.0 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements, leasing commissions and capital expenditures. As of May 15, 2017 , no funds have been drawn against the future advance amount.
(3)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has two options to extend the maturity date of the loan, each for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(4)
This loan bears interest at LIBOR plus 2.25% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement).
(5)
This loan bears interest at LIBOR plus 1.75% . As required by the loan agreement, we have entered into an interest rate swap agreement to hedge this loan, which effectively fixes the LIBOR portion of the interest rate at 2.178% . The effective interest rate of 3.93% includes interest on the swap.
(6)
On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower.


33


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Refinanced

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

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.250% , 5.250% and 7.000% , respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.750% .

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

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

Debt Maturities

Brookfield DTLA intends to extend or refinance the $35.0 million mortgage loan secured by Figueroa at 7th on or about its September 10, 2017 maturity date. Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of 12 months, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of March 31, 2017 , we meet the criteria specified in the loan agreement to extend the maturity date of this loan.

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.


34


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended March 31, 2017 and were in compliance with the amounts required by the loan agreements.

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


35


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, 2017 to March 31, 2016

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

For the Three Months Ended
Increase/
(Decrease)
%
Change
March 31, 2017
March 31, 2016
Revenue:
Rental income
$
40.1

$
40.3

$
(0.2
)
—
%
Tenant reimbursements
23.6

22.9

0.7

3
%
Parking
9.2

9.1

0.1

1
%
Interest and other
3.0

2.5

0.5

20
%
Total revenue
75.9

74.8

1.1

1
%
Expenses:
Rental property operating and maintenance
23.1

23.2

(0.1
)
—
%
Real estate taxes
9.6

9.7

(0.1
)
(1
)%
Parking
2.6

2.1

0.5

24
%
Other expense
1.1

0.7

0.4

57
%
Depreciation and amortization
25.4

25.1

0.3

1
%
Interest
24.2

24.0

0.2

1
%
Total expenses
86.0

84.8

1.2

1
%
Net loss
$
(10.1
)
$
(10.0
)
$
(0.1
)

Interest and Other Revenue

Interest and other revenue increased $0.5 million , or 20% , for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 , primarily as a result of increased lease termination income.

Parking Expense

Parking expense increased $0.5 million , or 24% , for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 , mainly due to timing of certain garage expenses.

Other Expense

Other expense increased $0.4 million , or 57% , for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 , mainly as a result of increased marketing and other miscellaneous expenses.


36


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, 2017
March 31, 2016
(In thousands)
Net cash (used in) provided by operating activities
$
(7,245
)
$
10,391

$
(17,636
)
Net cash used in investing activities
(10,818
)
(6,730
)
4,088

Net cash provided by (used in) financing activities
28,904

(22,520
)
51,424


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, 2017 totaled $7.2 million , compared to net cash provided by operating activities of $10.4 million during the three months ended March 31, 2016 . The $17.6 million decrease is primarily related to changes in amounts due from affiliates, net.

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 $10.8 million during the three months ended March 31, 2017 , compared to net cash used in investing activities of $6.7 million during the three months ended March 31, 2016 , mainly as a result of an increase in expenditures for real estate improvements.


37


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 $28.9 million during the three months ended March 31, 2017 , compared to net cash used in financing activities of $22.5 million during the three months ended March 31, 2016 . Contributions from the Series B preferred interest and Brookfield DTLA Holdings were the primary drivers of the net cash provided by financing activities during the three months ended March 31, 2017 . During the three months ended March 31, 2016 , dividends paid on the Series A preferred stock was the use of cash for financing activities.

Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of March 31, 2017 , including any guaranteed or minimum commitments under contractual obligations (in thousands):

2017
2018
2019
2020
2021
Thereafter
Total
Principal payments on
mortgage loans (1)
$
588,038

$
474,233

$
4,449

$
168,151

$
450,000

$
400,000

$
2,084,871

Interest payments –
Fixed-rate debt (2)
27,863

36,290

36,290

36,390

28,289

43,875

208,997

Variable-rate swapped to
fixed-rate debt
5,370

6,979

6,787

6,382

—

—

25,518

Variable-rate debt (3)
14,116

16,177

—

—

—

—

30,293

Tenant-related
commitments (4)
67,813

11,833

10,763

2,192

1,137

4,342

98,080

$
703,200

$
545,512

$
58,289

$
213,115

$
479,426

$
448,217

$
2,447,759

__________
(1)
On April 5, 2017 , Brookfield DTLA refinanced the $550.0 million mortgage loan secured by Wells Fargo Center–North Tower that was scheduled to mature on April 6, 2017 .
(2)
Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(3)
Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of March 31, 2017 plus the contractual spread per the loan agreements.
(4)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of March 31, 2017 .


38


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

Brookfield DTLA has entered into arrangements with BOP Management Inc., an affiliate of BPO, under which the affiliate provides property management and various other services. Property management fees under these agreements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays BOP Asset Manager LLC and Brookfield Asset Management Private Institutional Capital Adviser US, LLC an asset management fee, which is calculated based on 0.75% of the capital contributed by Brookfield DTLA Holdings.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Property management fee expense
$
2,051

$
1,959

Asset management fee expense
1,583

1,583

General, administrative and
reimbursable expenses
640

596

Leasing and construction management fees
147

590


Insurance Agreements

Insurance premiums for Brookfield DTLA’s properties are paid by an affiliate of BPO and Brookfield DTLA reimburses this BPO affiliate for the actual cost of such premiums.

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

For the Three Months Ended
March 31, 2017
March 31, 2016
Insurance expense
$
1,933

$
1,949


Litigation

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


39


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Critical Accounting Policies

Please refer to Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on March 20, 2017 for a discussion of our critical accounting policies for “Business Combinations,” “Consolidation,” “Impairment Evaluation,” “Revenue Recognition,” and “Allowance for Doubtful Accounts.” There have been no changes to these policies during the three months ended March 31, 2017 .

Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02 establishing ASC Topic 842, Leases . The guidance in this update supersedes the guidance in ASC Topic 840, Leases . ASU 2016-02 revises GAAP related to accounting for leases by lessees. Under this new guidance, lessees will be required to recognize a lease liability and a right-of-use asset in the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification determining the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on Brookfield DTLA’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments to ASC Topic 230, Statement of Cash Flows . ASU 2016-15 clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows to reduce diversity in practice with respect to (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, with early adoption permitted. We do not expect the adoption of this update to have a material impact on Brookfield DTLA’s consolidated financial statements.


40


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

In November 2016, the FASB issued ASU 2016-18, Restricted Cash to ASC Topic 230, Statement of Cash Flows . ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon adoption, we will retrospectively reconcile the activity in our cash, cash equivalents, restricted cash and restricted cash equivalents during reporting periods.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business to ASC Topic 805, Business Combinations. ASU 2017-01 introduced amendments that are intended to make the guidance on the definition of a business more consistent and cost-efficient. The objective of the update is to add further guidance that assists entities in evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business by providing a screen to determine when a set of assets and activities acquired is not a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017 including interim periods within those periods. ASU 2017-01 must be applied prospectively on or after the effective date. We are currently evaluating the impact of the adoption of ASU 2017-01 on Brookfield DTLA’s consolidated financial statements.

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

Subsequent Events

Contribution from Brookfield DTLA Holdings

On April 4, 2017 , the Company received an $82.0 million cash contribution from Brookfield DTLA Holdings, which is entitled to a preferred return of 9.0% as part of the Series B preferred interest. The Company used these funds to pay for costs associated with the refinancing of the Wells Fargo Center–North Tower mortgage loan.


41


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

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

Refinancing of Wells Fargo Center–North Tower Mortgage Loan

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

The new $470.0 million loan is comprised of a $370.0 million mortgage loan, a $55.0 million mezzanine loan and a $45.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.250% , 5.250% and 7.000% , respectively, and require the payment of interest-only until maturity. As required by the mortgage and mezzanine loan agreements, on April 5, 2017 the Company entered into interest rate cap agreements with a total notional amount of $470.0 million that limit the LIBOR portion of the interest rates to 2.750% .

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

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



42

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, G. Mark Brown, our principal executive officer, and Edward F. Beisner, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2017 .

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2017 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.


43

PART II — OTHER INFORMATION

Item 1.
Legal Proceedings.

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

Item 1A.
Risk Factors.

Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

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

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

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

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

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


44

•
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.


45

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

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

None.

Item 3.
Defaults Upon Senior Securities.

Dividends on the Series A preferred stock are cumulative and therefore will continue to accrue at an annual rate of $1.90625 per share. As of April 30, 2017 , the cumulative amount of unpaid dividends totaled $135.8 million .

Item 4.
Mine Safety Disclosures.

Not applicable.

Item 5.
Other Information.

None.


46

Item 6.
Exhibits.

Exhibit No.
Exhibit Description
Certification of Principal Executive Officer dated May 15, 2017
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer dated May 15, 2017
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial Officer dated
May 15, 2017 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
__________
*
Filed herewith.
**
Furnished herewith.

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

47

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, 2017

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

48
TABLE OF CONTENTS