BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Investments in Real Estate:
|
|
|
|
Land
|
$
|
222,555
|
|
|
$
|
222,555
|
|
Buildings and improvements
|
2,307,762
|
|
|
2,283,350
|
|
Tenant improvements
|
437,114
|
|
|
419,670
|
|
Investments in real estate, gross
|
2,967,431
|
|
|
2,925,575
|
|
Less: accumulated depreciation
|
517,329
|
|
|
466,405
|
|
Investments in real estate, net
|
2,450,102
|
|
|
2,459,170
|
|
Investment in unconsolidated real estate joint venture
|
42,395
|
|
|
42,920
|
|
Cash and cash equivalents
|
37,394
|
|
|
33,964
|
|
Restricted cash
|
46,089
|
|
|
25,024
|
|
Rents, deferred rents and other receivables, net
|
133,639
|
|
|
138,010
|
|
Intangible assets, net
|
22,046
|
|
|
31,895
|
|
Deferred charges, net
|
63,406
|
|
|
68,290
|
|
Due from affiliates, net of allowance for loan losses of $2,653
and $0 as of December 31, 2020 and 2019, respectively
|
10,847
|
|
|
18,359
|
|
Prepaid and other assets, net
|
10,538
|
|
|
9,340
|
|
Total assets
|
$
|
2,816,456
|
|
|
$
|
2,826,972
|
|
|
|
|
|
LIABILITIES AND DEFICIT
|
|
|
|
Liabilities:
|
|
|
|
Secured debt, net
|
$
|
2,239,640
|
|
|
$
|
2,199,980
|
|
Accounts payable and other liabilities
|
96,041
|
|
|
79,845
|
|
Due to affiliates
|
1,700
|
|
|
5,400
|
|
Intangible liabilities, net
|
6,005
|
|
|
8,306
|
|
Total liabilities
|
2,343,386
|
|
|
2,293,531
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
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 December 31, 2020 and 2019
|
$
|
447,028
|
|
|
$
|
428,480
|
|
Noncontrolling Interests:
|
|
|
|
Series A-1 preferred interest
|
435,242
|
|
|
418,029
|
|
Senior participating preferred interest
|
20,413
|
|
|
22,362
|
|
Series B preferred interest
|
198,827
|
|
|
185,352
|
|
Total mezzanine equity
|
1,101,510
|
|
|
1,054,223
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
Common stock, $0.01 par value, 1,000 shares issued and
outstanding as of December 31, 2020 and 2019
|
—
|
|
|
—
|
|
Additional paid-in capital
|
202,369
|
|
|
197,535
|
|
Accumulated deficit
|
(726,369)
|
|
|
(499,793)
|
|
Accumulated other comprehensive loss
|
—
|
|
|
(2,341)
|
|
Noncontrolling interests
|
(104,440)
|
|
|
(216,183)
|
|
Total stockholders’ deficit
|
(628,440)
|
|
|
(520,782)
|
|
Total liabilities and deficit
|
$
|
2,816,456
|
|
|
$
|
2,826,972
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Revenue:
|
|
|
|
|
|
Lease income
|
$
|
256,733
|
|
|
$
|
276,895
|
|
|
$
|
268,133
|
|
Parking
|
27,775
|
|
|
39,715
|
|
|
37,252
|
|
Interest and other
|
1,040
|
|
|
1,235
|
|
|
10,295
|
|
Total revenue
|
285,548
|
|
|
317,845
|
|
|
315,680
|
|
Expenses:
|
|
|
|
|
|
Rental property operating and maintenance
|
96,347
|
|
|
105,738
|
|
|
98,940
|
|
Real estate taxes
|
39,292
|
|
|
37,657
|
|
|
40,013
|
|
Parking
|
10,648
|
|
|
10,373
|
|
|
10,165
|
|
Other expenses
|
13,952
|
|
|
9,031
|
|
|
9,920
|
|
Depreciation and amortization
|
104,920
|
|
|
105,529
|
|
|
96,264
|
|
Interest
|
82,808
|
|
|
98,875
|
|
|
105,035
|
|
Total expenses
|
347,967
|
|
|
367,203
|
|
|
360,337
|
|
Other (Expense) Income:
|
|
|
|
|
|
Gain from derecognition of assets
|
—
|
|
|
24,777
|
|
|
—
|
|
Equity in loss of unconsolidated
real estate joint venture
|
(525)
|
|
|
(2,080)
|
|
|
—
|
|
Total other (expense) income
|
(525)
|
|
|
22,697
|
|
|
—
|
|
Net loss
|
(62,944)
|
|
|
(26,661)
|
|
|
(44,657)
|
|
Net loss (income) attributable to
noncontrolling interests:
|
|
|
|
|
|
Series A-1 preferred interest returns
|
17,213
|
|
|
17,213
|
|
|
17,306
|
|
Senior participating preferred interest
redemption measurement adjustments
|
(1,580)
|
|
|
(1,017)
|
|
|
1,482
|
|
Series B preferred interest returns
|
17,708
|
|
|
18,049
|
|
|
17,961
|
|
Series B common interest –
allocation of net income
|
111,743
|
|
|
35,181
|
|
|
28,343
|
|
Net loss attributable to Brookfield DTLA
|
(208,028)
|
|
|
(96,087)
|
|
|
(109,749)
|
|
Series A preferred stock dividends
|
18,548
|
|
|
18,548
|
|
|
18,532
|
|
Net loss attributable to common interest
holders of Brookfield DTLA
|
$
|
(226,576)
|
|
|
$
|
(114,635)
|
|
|
$
|
(128,281)
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(62,944)
|
|
|
$
|
(26,661)
|
|
|
$
|
(44,657)
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Interest rate swap contracts designated as cash flow hedges:
|
|
|
|
|
|
Unrealized derivative holding gains (losses)
|
562
|
|
|
(2,117)
|
|
|
1,548
|
|
Reclassification adjustment for realized loss (gain) included in net loss
|
1,779
|
|
|
—
|
|
|
(1,198)
|
|
Total other comprehensive income (loss)
|
2,341
|
|
|
(2,117)
|
|
|
350
|
|
|
|
|
|
|
|
Comprehensive loss
|
(60,603)
|
|
|
(28,778)
|
|
|
(44,307)
|
|
Less: comprehensive income
attributable to noncontrolling interests
|
145,084
|
|
|
69,543
|
|
|
65,276
|
|
Comprehensive loss attributable to
common interest holders of
Brookfield DTLA
|
$
|
(205,687)
|
|
|
$
|
(98,321)
|
|
|
$
|
(109,583)
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Non-
controlling
Interests
|
|
Total
Stockholders’
Deficit
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
1,000
|
|
|
$
|
—
|
|
|
$
|
194,210
|
|
|
$
|
(256,877)
|
|
|
$
|
(273)
|
|
|
$
|
(280,008)
|
|
|
$
|
(342,948)
|
|
Net (loss) income
|
|
|
|
|
|
|
|
(109,749)
|
|
|
|
|
65,092
|
|
|
(44,657)
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
166
|
|
|
184
|
|
|
350
|
|
Contributions
|
|
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
1,615
|
|
Dividends, preferred returns and
redemption measurement
adjustments on mezzanine
equity
|
|
|
|
|
|
|
|
(18,532)
|
|
|
|
|
(36,749)
|
|
|
(55,281)
|
|
Balance, December 31, 2018
|
|
1,000
|
|
|
—
|
|
|
195,825
|
|
|
(385,158)
|
|
|
(107)
|
|
|
(251,481)
|
|
|
(440,921)
|
|
Net (loss) income
|
|
|
|
|
|
|
|
(96,087)
|
|
|
|
|
69,426
|
|
|
(26,661)
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
(2,234)
|
|
|
117
|
|
|
(2,117)
|
|
Contributions
|
|
|
|
|
|
1,710
|
|
|
|
|
|
|
|
|
1,710
|
|
Dividends, preferred returns and
redemption measurement
adjustments on mezzanine
equity
|
|
|
|
|
|
|
|
(18,548)
|
|
|
|
|
(34,245)
|
|
|
(52,793)
|
|
Balance, December 31, 2019
|
|
1,000
|
|
|
—
|
|
|
197,535
|
|
|
(499,793)
|
|
|
(2,341)
|
|
|
(216,183)
|
|
|
(520,782)
|
|
Net (loss) income
|
|
|
|
|
|
|
|
(208,028)
|
|
|
|
|
145,084
|
|
|
(62,944)
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
2,341
|
|
|
—
|
|
|
2,341
|
|
Contributions
|
|
|
|
|
|
4,834
|
|
|
|
|
|
|
|
|
4,834
|
|
Dividends, preferred returns and
redemption measurement
adjustments on mezzanine
equity
|
|
|
|
|
|
|
|
(18,548)
|
|
|
|
|
(33,341)
|
|
|
(51,889)
|
|
Balance, December 31, 2020
|
|
1,000
|
|
|
$
|
—
|
|
|
$
|
202,369
|
|
|
$
|
(726,369)
|
|
|
$
|
—
|
|
|
$
|
(104,440)
|
|
|
$
|
(628,440)
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(62,944)
|
|
|
$
|
(26,661)
|
|
|
$
|
(44,657)
|
|
Adjustments to reconcile net loss to
net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
104,920
|
|
|
105,529
|
|
|
96,264
|
|
Gain from derecognition of assets
|
—
|
|
|
(24,777)
|
|
|
—
|
|
Equity in loss of unconsolidated real estate joint venture
|
525
|
|
|
2,080
|
|
|
—
|
|
Write-off of lease receivables deemed uncollectible
|
8,400
|
|
|
165
|
|
|
190
|
|
Provision for loan losses
|
2,653
|
|
|
—
|
|
|
—
|
|
Amortization of acquired below-market leases,
net of acquired above-market leases
|
1,331
|
|
|
(195)
|
|
|
222
|
|
Straight-line rent amortization
|
1,441
|
|
|
(10,083)
|
|
|
(11,399)
|
|
Amortization of tenant inducements
|
3,897
|
|
|
3,852
|
|
|
4,228
|
|
Amortization and write-off of debt financing costs and discounts
|
5,471
|
|
|
5,264
|
|
|
9,565
|
|
Unrealized loss on interest rate cap contracts
|
127
|
|
|
44
|
|
|
—
|
|
Realized loss (gain) on interest rate swap contracts
|
1,779
|
|
|
—
|
|
|
(1,198)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Rents, deferred rents and other receivables, net
|
(4,496)
|
|
|
299
|
|
|
(12,179)
|
|
Deferred charges, net
|
(7,053)
|
|
|
(8,497)
|
|
|
(22,209)
|
|
Due from affiliates, net
|
(647)
|
|
|
(2,690)
|
|
|
—
|
|
Prepaid and other assets, net
|
(1,019)
|
|
|
(570)
|
|
|
(82)
|
|
Accounts payable and other liabilities
|
(1,570)
|
|
|
(5,541)
|
|
|
6,083
|
|
Due to affiliates
|
134
|
|
|
1,566
|
|
|
(7,439)
|
|
Net cash provided by operating activities
|
52,949
|
|
|
39,785
|
|
|
17,389
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Expenditures for real estate improvements
|
(58,062)
|
|
|
(127,775)
|
|
|
(90,065)
|
|
Net cash used in investing activities
|
(58,062)
|
|
|
(127,775)
|
|
|
(90,065)
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from secured debt
|
$
|
305,000
|
|
|
$
|
277,610
|
|
|
$
|
1,081,686
|
|
Principal payments on secured debt
|
(265,000)
|
|
|
(220,000)
|
|
|
(931,831)
|
|
Proceeds from Series B preferred interest
|
47,850
|
|
|
40,700
|
|
|
—
|
|
Proceeds from senior participating preferred interest
|
777
|
|
|
538
|
|
|
—
|
|
Distributions to Series B preferred interest
|
(17,865)
|
|
|
(20,574)
|
|
|
(26,554)
|
|
Repurchases of Series B preferred interest
|
(34,218)
|
|
|
(34,521)
|
|
|
—
|
|
Distributions to senior participating preferred interest
|
(1,146)
|
|
|
(602)
|
|
|
(3,587)
|
|
Contributions to additional paid-in capital
|
1,000
|
|
|
1,710
|
|
|
1,615
|
|
Purchase of interest rate cap contracts
|
(130)
|
|
|
(35)
|
|
|
—
|
|
Payment for early extinguishment of debt and
termination of interest rate swap contracts
|
(849)
|
|
|
—
|
|
|
—
|
|
Debt financing costs paid
|
(5,811)
|
|
|
(3,618)
|
|
|
(10,388)
|
|
Net cash provided by financing activities
|
29,608
|
|
|
41,208
|
|
|
110,941
|
|
Net change in cash, cash equivalents and
restricted cash
|
24,495
|
|
|
(46,782)
|
|
|
38,265
|
|
Cash, cash equivalents and restricted cash
at beginning of year
|
58,988
|
|
|
105,770
|
|
|
67,505
|
|
Cash, cash equivalents and restricted cash
at end of year
|
$
|
83,483
|
|
|
$
|
58,988
|
|
|
$
|
105,770
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
76,873
|
|
|
$
|
93,020
|
|
|
$
|
96,074
|
|
Cash paid for income taxes
|
$
|
792
|
|
|
$
|
59
|
|
|
$
|
1,127
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Supplemental disclosure of non-cash investing
and financing activities:
|
|
|
|
|
|
Accrual for current-period additions to real estate investments
|
$
|
53,760
|
|
|
$
|
33,812
|
|
|
$
|
17,179
|
|
Contribution of investments in real estate, net, to
unconsolidated real estate joint venture
|
$
|
—
|
|
|
$
|
20,139
|
|
|
$
|
—
|
|
Increase (decrease) in fair value of
interest rate swaps
|
$
|
562
|
|
|
$
|
(2,117)
|
|
|
$
|
1,548
|
|
Writeoff of fully depreciated investments
in real estate
|
$
|
36,613
|
|
|
$
|
37,373
|
|
|
$
|
—
|
|
Writeoff of fully amortized intangible assets
|
$
|
14,414
|
|
|
$
|
40,077
|
|
|
$
|
—
|
|
Writeoff of fully amortized intangible liabilities
|
$
|
6,850
|
|
|
$
|
5,766
|
|
|
$
|
—
|
|
Noncash contributions to additional paid-in capital
|
$
|
3,834
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a reconciliation of Brookfield DTLA’s cash, cash equivalents and restricted cash at the beginning and end of the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Cash and cash equivalents at beginning of year
|
$
|
33,964
|
|
|
$
|
80,421
|
|
|
$
|
31,958
|
|
Restricted cash at beginning of year
|
25,024
|
|
|
25,349
|
|
|
35,547
|
|
Cash, cash equivalents and restricted cash at
beginning of year
|
$
|
58,988
|
|
|
$
|
105,770
|
|
|
$
|
67,505
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
$
|
37,394
|
|
|
$
|
33,964
|
|
|
$
|
80,421
|
|
Restricted cash at end of year
|
46,089
|
|
|
25,024
|
|
|
25,349
|
|
Cash, cash equivalents and restricted cash at
end of year
|
$
|
83,483
|
|
|
$
|
58,988
|
|
|
$
|
105,770
|
|
See accompanying notes to consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Description of Business
Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended, 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, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P. (“BPY”), an exempted limited partnership under the Laws of Bermuda, which in turn is the flagship commercial property entity and the primary vehicle through which Brookfield Asset Management Inc. (“BAM”), a corporation under the Laws of Canada, invests in real estate on a global basis.
As of December 31, 2020 and 2019, Brookfield DTLA owned Bank of America Plaza (“BOA Plaza”), EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, which are Class A office properties, and FIGat7th, a retail center nestled between EY Plaza and 777 Tower. Additionally, Brookfield DTLA Fund Properties II LLC (“Fund II”) has a noncontrolling interest in an unconsolidated real estate joint venture with Brookfield DTLA FP IV Holdings LLC (“DTLA FP IV Holdings”), a wholly‑owned subsidiary of DTLA Holdings, which owns 755 South Figueroa, a residential development property. All of these properties are located in the Los Angeles Central Business District (the “LACBD”).
Brookfield DTLA primarily receives its income from lease income, including tenant reimbursements, generated from the operations of its office and retail properties, and to a lesser extent, revenue from its parking garages.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2—Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated balance sheets as of December 31, 2020 and 2019 include the accounts of Brookfield DTLA and subsidiaries in which it has a controlling financial interest. All intercompany transactions have been eliminated in consolidation as of and for the years ended December 31, 2020, 2019 and 2018.
Determination of Controlling Financial Interest
We consolidate entities in which Brookfield DTLA is considered to be the primary beneficiary of a variable interest entity (“VIE”) or has a majority of the voting interest in the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove the Company’s power to direct the activities, and most significantly impacting the economic performance, of the VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.
Brookfield DTLA Fund Properties II LLC. The Company earns a return through an indirect investment in Fund II. DTLA Holdings, the parent of Brookfield DTLA, owns all of the common interest in Fund II. Brookfield DTLA has an indirect preferred stock interest in Fund II and its wholly-owned subsidiary is the managing member of Fund II. The Company determined that Fund II is a VIE. As a result of having the power to direct the significant activities of Fund II that impact Fund II’s economic performance, and the obligation to absorb losses of, or the right to receive benefits from, Fund II that could potentially be significant to the Fund II, Brookfield DTLA meets the two conditions for being the primary beneficiary of Fund II.
We consolidate entities through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets. As of December 31, 2020, the consolidated VIEs had in aggregate total consolidated assets of $2.8 billion (of which $2.5 billion is related to investments in real estate) and total consolidated liabilities of $2.3 billion (of which $2.2 billion is related to non-recourse debt secured by our office and retail properties). The Company is obligated to repay substantially all of the liabilities of our consolidated VIEs, except for the non-recourse secured debt.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investment in Unconsolidated Real Estate Joint Venture. Fund II has a noncontrolling interest in a joint venture, Brookfield DTLA Fund Properties IV LLC (“Fund IV”), with DTLA FP IV Holdings. The Company determined that the joint venture is a VIE mainly because its equity investment at risk is insufficient to finance the joint venture’s activities without additional subordinated financial support. While the joint venture meets the definition of a VIE, Brookfield DTLA is not its primary beneficiary as the Company lacks the power through voting or similar rights to direct the activities that most significantly impact the joint venture’s economic performance. Therefore, the Company accounts for its ownership interest in the joint venture under the equity method.
The liabilities of the joint venture may only be settled using the assets of 755 South Figueroa and are not recourse to the Company. Brookfield DTLA’s exposure to its investment in the joint venture is limited to its investment balance and the Company has no obligation to make future contributions to the joint venture. Pursuant to the operating agreement of the joint venture, DTLA FP IV Holdings may be required to fund additional amounts for the development of 755 South Figueroa, routine operating costs, and guaranties or commitments of the joint venture.
Impact of COVID-19
Prior to the end of the first quarter of 2020, there was a global outbreak of a new strain of Coronavirus (“COVID-19”) which prompted government and businesses to take unprecedented measures in response. Many states, including California where our properties are located, have implemented “stay-at-home” restrictions to help combat the spread of COVID-19. The State of California order includes the shutdown of all nonessential services, such as dine-in restaurants, bars, gyms and conference or convention centers, and other businesses not deemed to support critical infrastructure (the “Shutdown”). Essential services, such as grocery stores, pharmacies, gas stations, food banks, convenience stores and delivery restaurants, were allowed to remain open. Consequently, business activities and supply chains were interrupted; travel was disrupted; there has been significant volatility in financial markets, resulting in uncertainty in equity prices, increased interest spreads, and lower interest rates; and local, regional, national and international economic conditions, as well as the labor markets, were adversely impacted. During the second quarter of 2020, although the State of California began easing the “stay-at-home” restrictions and reopening non-essential businesses, the physical occupancy of our properties remained low. In July 2020, the State of California announced a new COVID-19 order that significantly rolled back the State’s reopening plan. In December 2020, most of the California State, including the Los Angeles County, were put under the “stay-at-home” restrictions again as COVID-19 cases hit record levels in California.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our properties, which are located in the City of Los Angeles, have been adversely affected as a result of the Shutdown and the preventive measures taken to combat the spread of the pandemic. Some of the effects include the following:
•Higher-risk activities and businesses such as indoor dining, bars, fitness centers and movie theaters are prohibited statewide in California. As a result, our tenants in FIGat7th, which include retail shops, restaurants and a big box gym, are experiencing the most immediate impact of the Shutdown on their businesses. Due to the uncertainties posed to our tenants in FIGat7th by the COVID-19 pandemic, during the year ended December 31, 2020, the Company recognized adjustments of $2.3 million to lower our lease income related to certain leases where we determined that the collection of future lease payments was not probable.
•While our office properties have remained open during the Shutdown, most of our office tenants have been working remotely since the “stay-at-home” order was issued and many continue to do so. As of December 31, 2020, most of our office tenants have been current in paying amounts due to us under their leases. However, they could face increased difficulty in meeting their lease obligations if prolonged mitigation efforts and the cost of social distancing modifications materially impact their businesses. Due to the uncertainties posed to our office property tenants by the COVID-19 pandemic, during the year ended December 31, 2020, the Company recognized adjustments of $6.1 million to lower our lease income related to certain leases where we determined that the collection of future lease payments was not probable.
•Parking net operating income, which represents parking revenue less parking expenses, declined by $12.2 million or 42% from $29.3 million during the year ended December 31, 2019 to $17.1 million during the year ended December 31, 2020, as a result of the Shutdown that impacted both our office and retail properties.
•Decline in property values resulting from lower than anticipated revenues due to reduced increases in forecasted rental rates on new or renewal leases, applied credit losses, lower leasing velocity and reductions in projected leasing of available space. While the carrying values of the properties are recorded at cost less accumulated depreciation, we estimate the undiscounted cashflows and fair values of the properties as part of our impairment review of investments in real estate. See Note 2—“Basis of Presentation and Summary of Significant Accounting Policies—Significant Accounting Policies—Impairment Review” for further discussion.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. The Company bases its estimates on historical experience and on various other assumptions that it considers to be reasonable under the circumstances, including the impact of events such as the Shutdown. For example, estimates and assumptions have been made with respect to the fair value of assets and liabilities for purposes of the contribution of the Company’s wholly-owned interests in exchange for its noncontrolling interest in its unconsolidated real estate joint venture in May 2019, the useful lives of assets, recoverable amounts of receivables, impairment of long-lived assets and the fair value of debt. Actual results could ultimately differ from such estimates.
Significant Accounting Policies
Investments in Real Estate, Net—
Land is carried at cost. Buildings are recorded at historical cost and are depreciated on a straight‑line basis over their estimated useful lives of 60 years. Building improvements are recorded at historical cost and are depreciated on a straight-line basis over their estimated useful lives, ranging from 5 years to 25 years. Land improvements are combined with building improvements for financial reporting purposes and are carried at cost. Tenant improvements that are determined to be assets of Brookfield DTLA are recorded at cost and amortized on a straight‑line basis over the shorter of their estimated useful life or the applicable lease term, with the related amortization reported as part of depreciation and amortization expense in the consolidated statements of operations.
Depreciation expense related to investments in real estate during the years ended December 31, 2020, 2019 and 2018 totaled $87.5 million, $85.6 million and $75.7 million, respectively, and is reported as part of depreciation and amortization expense in the consolidated statements of operations.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company capitalizes costs associated with capital expenditures and tenant improvements. Capitalization of costs is required while activities are ongoing to prepare an asset for its intended use. Costs incurred after the capital expenditures and tenant improvement projects are substantially complete and ready for its intended use are expensed as incurred. Expenditures for repairs and maintenance, borrowing costs, real estate taxes and insurance are expensed as incurred.
Investment in Unconsolidated Real Estate Joint Venture—
Fund II’s noncontrolling interests in the real estate joint venture with DTLA FP IV Holdings were initially recorded at the fair value of the assets contributed and have been adjusted to redemption value as of December 31, 2020. The redemption value represents the amount to be distributed to Fund II in the event of termination or liquidation of DTLA FP IV Holdings. Adjustments to increase or decrease the carrying amount to redemption value are recorded in the consolidated statements of operations as equity in earning (loss) of unconsolidated real estate joint venture.
Impairment Review—
Investments in long-lived assets, including our investments in real estate, are reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of the long-lived assets might not be recoverable, which is referred to as a “triggering event” or an “impairment indicator.” The carrying amount of long-lived assets to be held and used is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. Triggering events or impairment indicators for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, changes in occupancy, significant near-term lease expirations, current and historical operating and/or cash flow losses, rental rates, and other market factors. The impact of the Shutdown on economic and market conditions, together with many of our office property tenants working from home, was deemed to be a triggering event during the year ended December 31, 2020.
When conducting the impairment review of our investments in real estate, we assessed the expected undiscounted cash flows based upon numerous factors, including the impact of the Shutdown. These factors include, but are not limited to, the credit quality of our tenants, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections, renewal percentage, and rent collection rates. If the undiscounted cash flows expected to be generated by a property are less than its carrying amount, the Company determines the fair value of the property and an impairment loss would be recorded to write down the carrying amount of such property to its fair value. Based on its review, management concluded that none of Brookfield DTLA’s real estate properties were impaired during the years ended December 31, 2020, 2019 and 2018.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company’s investment in its unconsolidated real estate joint venture is also reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of our investment might not be recoverable using similar criteria as its investments in real estate. An impairment loss is measured based on the excess of the carrying amount of an investment compared to its estimated fair value. Impairment analyses are based on current plans, intended holding periods and information available at the time the analyses are prepared. Based on its review, management concluded that Brookfield DTLA’s investment in its unconsolidated real estate joint venture was not impaired during the years ended December 31, 2020 and 2019.
Our future results may continue to be impacted by risks associated with the Shutdown and the related global reduction in services, investments, commerce, travel, and substantial volatility in stock markets worldwide, which may result in a decrease in our cash flows and a potential increase in impairment losses and/or revaluations of our investments in real estate and unconsolidated real estate joint venture.
Cash and Cash Equivalents—
Cash and cash equivalents include cash, deposits with major commercial banks, and short-term investments with an original maturity of three months or less.
Restricted Cash—
Restricted cash consists primarily of deposits for tenant improvements and leasing commissions, real estate taxes and insurance reserves, debt service reserves and other items as required by certain of the Company’s secured debt agreements. It also includes cash accounts controlled by loan administrative agents or lenders pursuant to cash sweep events associated with the loans secured by certain properties. See Note 6 — Secured Debts, Net for details.
Rents, Deferred Rents and Other Receivables, Net—
Deferred rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. The Company offers various types of lease incentives to induce tenants to sign a lease, including free rent lease periods, and various allowances such as cash paid to tenants and for tenant improvements that are the assets of the tenants. The Company records these allowances as tenant inducements, which are included in rents, deferred rents and other receivables in the consolidated balance sheets and amortized as a reduction to lease income on a straight-line basis over the term of the related lease. See Note 4—“Rents, Deferred Rents and Other Receivables, Net.”
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under Accounting Standards Codification (“ASC”) Topic 842, Leases, Brookfield DTLA must assess on an individual lease basis whether it is probable that the Company will collect the future lease payments throughout the term of the lease. The Company considers the tenant’s payment history and current credit status when assessing collectibility. If the collectibility of the lease payments is probable at lease commencement, the Company recognizes lease income over the term of the lease on a straight-line basis. During the term of the lease, Brookfield DTLA monitors the credit quality and any related material changes of our tenants by (i) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (ii) monitoring news reports regarding our tenants and their respective businesses, including the impact of the Shutdown on the tenant’s business, (iii) monitoring the tenant’s payment history and current credit status, and (iv) analyzing current economic trends. When collectibility is not deemed probable at the lease commencement date, the Company’s lease income is constrained to the lesser of (i) the income that would have been recognized if collection were probable, or (ii) the lease payments that have been collected from the lessee. If the collectibility assessment changes to probable after the lease commencement date, any difference between the lease income that would have been recognized if collectibility had always been assessed as probable and the lease income recognized to date is recognized as a current-period adjustment to lease income. If the collectibility assessment changes to not probable after the lease commencement date, lease income is reversed to the extent that the lease payments that have been collected from the lessee are less than the lease income recognized to date. Changes to the collectibility of operating leases are recorded as adjustments to lease income in the consolidated statements of operations. During the year ended December 31, 2020, as the result of our assessment of the collectibility of amounts due under leases with our tenants, the Company recognized a reduction in lease income totaling $8.4 million, of which $4.8 million related to lease income from an affiliate of the Company.
The Company received certain rent relief requests for certain periods in 2020 from many of our retail tenants and some of our office tenants as a result of the Shutdown. Some of our tenants have availed themselves of various federal and state relief funds, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program, which can be utilized to partially meet rental obligations. While our tenants are required to fulfill their commitments to us under their leases, we have implemented and will continue to carefully consider temporary rent deferrals and rent abatements on a lease-by-lease basis.
The following table sets forth information regarding the collection percentage as of December 31, 2020 related to the amounts due from our tenants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Property Type
|
|
March 2020
Billings Collected(1)
|
|
Second Quarter of 2020
Billings Collected(1)
|
|
Third Quarter of 2020
Billings Collected(1)
|
|
Fourth Quarter of 2020
Billings Collected(1)
|
Office
|
|
100
|
%
|
|
98
|
%
|
|
98
|
%
|
|
98
|
%
|
Retail
|
|
97
|
%
|
|
39
|
%
|
|
62
|
%
|
|
65
|
%
|
Total
|
|
100
|
%
|
|
96
|
%
|
|
97
|
%
|
|
97
|
%
|
(1)Adjusted for rent concessions granted to tenants.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangibles Assets and Liabilities, Net—
Brookfield DTLA evaluates each acquisition of real estate to determine whether the integrated set of assets and activities meets the definition of a business and needs to be accounted for as a business combination. An acquisition of an integrated set of assets and activities that does not meet the definition of a business is accounted for as an asset acquisition. For acquisitions of real estates that are accounted for as business combinations, the Company allocates the acquisition consideration (excluding acquisition costs) to the assets acquired, liabilities assumed, noncontrolling interests, and any previously existing ownership interests at fair value as of the acquisition date. Acquired assets include tangible real estate assets consisting primarily of land, buildings, and tenant improvements, as well as identifiable intangible assets and liabilities, consisting primarily of acquired above- and below-market leases, in-place leases and tenant relationships.
The principal valuation technique employed by Brookfield DTLA in determining the fair value of identified assets acquired and liabilities assumed is the income approach, which is then compared to the cost approach. Tangible values for investments in real estate are calculated based on replacement costs for like-type quality assets. Above- and below-market lease values are determined by comparing in-place rents with current market rents. In‑place lease amounts are determined by calculating the potential lost revenue during the replacement of the current leases in place. Leasing commissions and legal/marketing fees are determined based upon market allowances pro-rated over the remaining lease terms. Loans assumed in an acquisition are analyzed using current market terms for similar debt.
The value of the acquired above- and below-market leases are amortized and recorded as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to lease income in the consolidated statements of operations over the remaining terms of the associated leases. The value of tenant relationships is amortized over the expected term of the relationship, which includes an estimated probability of lease renewal. The value of in-place leases is amortized as an expense over the remaining life of the leases. Amortization of tenant relationships and in‑place leases is included as part of depreciation and amortization in the consolidated statements of operations.
Deferred Charges, Net—
Deferred charges mainly include initial direct costs, primarily commissions related to the leasing of the Company’s office properties, and are stated net of accumulated amortization of $45.7 million and $43.6 million as of December 31, 2020 and 2019, respectively.
All leasing commissions paid for new or renewed leases are capitalized and deferred. Deferred leasing costs are amortized on a straight‑line basis over the initial fixed terms of the related leases as part of depreciation and amortization expense in the consolidated statements of operations. Costs to negotiate or arrange a lease, regardless of its outcome, such as tax or legal advice to negotiate lease terms, and lessor costs related to advertising or soliciting potential tenants, are expensed as incurred.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Due From/To Affiliates—
Amounts due from/to affiliates consist of related party receivables from and payables due to affiliates of BPY and BAM, primarily related to lease income, parking income, and fees for property and asset management and other services. See Note 14—“Related Party Transactions.”
Prepaid and Other Assets, Net—
Prepaid and other assets, net, mainly include prepaid insurance, real estate taxes, interest, and refundable deposits.
Secured Debt, Net—
Debt secured by our properties are presented in the consolidated balance sheets net of unamortized debt financing costs.
Debt financing costs totaling $5.4 million, $5.3 million, and $9.6 million were amortized during the years ended December 31, 2020, 2019 and 2018, respectively, over the terms of the related loans using the effective interest method and are included as part of interest expense in the consolidated statements of operations. Any unamortized amounts remaining upon the early repayment of debt are written off, and the related costs and accumulated amortization are removed from the consolidated balance sheets. The write-off of unamortized debt financing costs are included as loss on early extinguishment of debt in other expenses in the consolidated statements of operations.
Mezzanine Equity—
Mezzanine equity in the 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 as 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 DTLA Holdings to redeem the Preferred Interests.
The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of December 31, 2020 and 2019. Adjustments to increase or decrease the carrying amount to redemption value are recorded in the consolidated statements of operations as redemption measurement adjustments.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition—
Lease Income—
Brookfield DTLA’s lease income primarily represents revenue related to agreements for rental of our investments in real estate, subject to ASC Topic 842, Leases. All of the leases in which the Company is the lessor are classified as operating leases. The Company’s leases do not have guarantees of residual value of the underlying assets. We manage risk associated with the residual value of our leased assets by carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms. Upon the expiration or termination of a lease, the Company often has the ability to re-lease the space with an existing tenant or to a new tenant within a reasonable amount of time.
The Company’s lease income is comprised of variable payments including fixed and contingent rental payments and tenant recoveries. Fixed contractual payments from the Company’s leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of lease income recognized during the period. Straight-line rental revenue is commenced when the tenant assumes control of the leased premises.
Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenant’s sales. Percentage rents are recognized as lease income in the consolidated statements of operations only after the tenant sales thresholds have been achieved.
Tenant recoveries, including reimbursements of utilities, repairs and maintenance, common area expenses, real estate taxes and insurance, and other operating expenses, are recognized as part of lease income in the consolidated statements of operations in the period when the applicable expenses are incurred and the tenant’s obligation to reimburse us arises.
Some of the Company’s leases have termination options that allow the tenant to terminate the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way or further into the original lease term and require advance notification from the tenant and payment of a termination fee that reimburses the Company for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such as commissions, tenant improvements and lease incentives. Termination fees are recognized as part of lease income in the consolidated statements of operations at the later of when the tenant has vacated the space or the lease has expired, a fully executed lease termination agreement has been delivered to the Company, the amount of the fee is determinable and collectability of the fee is reasonably assured.
Parking Revenue—
Parking revenue is recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers, when the services are provided and the performance obligations are satisfied, which normally occurs at a point in time.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts its operations with the intent 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 makes distributions to its stockholders, if any, that generally equal or exceed its taxable income.
Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). A TRS is permitted to engage in activities that a REIT cannot engage in directly, such as performing non‑customary services for the Company’s tenants, holding assets that the Company cannot hold directly and conducting certain affiliate transactions. A TRS is subject to both federal and state income taxes. The Company’s various TRS did not have significant tax provisions or deferred income tax items during the years ended December 31, 2020, 2019 and 2018.
As of December 31, 2020 and 2019, Brookfield DTLA had net operating loss carryforwards (“NOLs”) totaling $348.8 million and $290.2 million, respectively. The NOLs generated prior to January 1, 2018 will begin to expire in 2033, while NOLs generated in tax years beginning January 1, 2018 or later have an indefinite carryforward period. A valuation allowance fully offsets the NOLs and as a result, no deferred tax assets have been established.
Uncertain Tax Positions—
Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA has no unrecognized tax benefits as of December 31, 2020 and 2019, and does not expect its unrecognized tax benefits balance to change during the next 12 months. As of December 31, 2020, Brookfield DTLA’s 2016, 2017, 2018 and 2019 tax years remain open under the normal statute of limitations and may be subject to examination by federal, state and local authorities.
Derivative Financial Instruments—
Brookfield DTLA uses interest rate swap and cap contracts to manage risk from fluctuations in interest rates. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. The Company believes these contracts are with counterparties who are creditworthy financial institutions.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At the inception of the contracts, Brookfield DTLA designates its interest rate swap contracts as cash flow hedges and documents the relationship of the hedge to the underlying transaction. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting. Changes in fair value associated with hedge ineffectiveness, if any, are recorded as part of interest expense in the consolidated statements of operations. Changes in fair value of cash flow hedge derivative financial instruments are deferred and recorded as part of accumulated other comprehensive loss in the consolidated statements of stockholders’ deficit until the underlying transaction affects earnings. In the event that an anticipated transaction is no longer likely to occur, the Company recognizes the change in fair value of the derivative financial instrument in the consolidated statement of operations in the period the determination is made. Interest rate swap assets are included in prepaid and other assets, net and interest rate swap liabilities are included in accounts payable and other liabilities in the consolidated balance sheets.
Additionally, Brookfield DTLA uses interest rate cap contracts to limit impact of changes in the LIBOR rate on certain of its debt. The Company does not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change as part of other expenses in the consolidated statements of operations.
Other Financial Instruments—
Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of cash and lease receivables. Brookfield DTLA assesses collectibility of lease receivables by monitoring the credit quality and any related material changes of our tenants. This involves (i) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (ii) monitoring news reports regarding our tenants and their respective businesses, (iii) monitoring the tenant’s payment history and current credit status, and (iv) analyzing current economic trends. As a consequence, management believes that its lease receivable credit risk exposure is limited. Brookfield DTLA places its temporary cash investments with federally insured institutions. Cash balances with any one institution may at times be in excess of the federally insured limits.
Fair Value Measurements—
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis, such as interest rate swaps and cap contracts. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired long-lived assets such as investments in real estate and unconsolidated real estate joint venture). Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date and, in many cases, requires management to make a number of significant judgments. Based on the observable inputs used in the valuation techniques, Brookfield DTLA classifies its assets and liabilities measured and disclosed at fair value in accordance with a three-level hierarchy (i.e., Level 1, Level 2 and Level 3) established under ASC 820, Fair Value Measurement.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company estimates the fair value of its debt by calculating the credit-adjusted present value of principal and interest payments for each loan. The calculation incorporates observable market interest rates, which management considers to be Level 2 inputs, assumes that each loan will be outstanding until maturity, and excludes any options to extend the maturity date of the loan available per the terms of the loan agreement, if any. See Note 12—“Financial Instruments.”
Recently Issued Accounting Literature
New Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. In November 2018, the FASB released ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses. This amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Subtopic 842-30, Leases–Lessor by adjusting lease income. See Note 2 “Basis of Presentation and Summary of Significant Accounting Policies — Significant Accounting Policies — Rents, Deferred Rents and Other Receivables, Net” for a discussion of the accounting policy regarding impairment of receivables arising from operating leases. ASU 2016-13 and ASU 2018-19 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Brookfield DTLA adopted the guidance on January 1, 2020. The adoption of this update did not have any impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 amends Topic 820 by adding new fair value measurement disclosure requirements, as well as modifying and removing certain disclosure requirements. This guidance is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Brookfield DTLA adopted the guidance on January 1, 2020. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which amends the related-party guidance in Topic 810. Specifically, ASU 2018-17 removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform to the amendments in ASU 2016-17. ASU 2018-17 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Brookfield DTLA adopted the guidance on January 1, 2020. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform —Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Brookfield DTLA adopted this guidance in March 2020. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
In April 2020, the FASB issued a staff question-and-answer document (“Lease Modification Q&A”) to clarify whether lease concessions related to the effects of the COVID-19 pandemic require the application of the lease modification guidance under ASC Topic 842, Leases. Under Topic 842, the Company would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease (precluded from applying the lease modification accounting framework). As discussed in the Lease Modification Q&A, the FASB staff believes that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842 as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract). If the concessions are directly related to the effects of COVID-19, and result in revised cash flows that are substantially the same or less than the original lease contracts, entities are allowed to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. To provide relief for tenants whose operations and businesses were disrupted by the Shutdown, the Company agreed to abate or defer rent due from certain tenants for certain periods. For leases with abatements, the Company did not utilize the guidance provided in the Lease Modification Q&A and instead elected to account for the abatements on a lease-by-lease basis in accordance with the existing lease modification accounting framework. For leases with deferrals, the Company elected to account for the lease concessions as if they were part of the enforceable rights rather than as a modification. During the year ended December 31, 2020, the impact of lease concessions granted did not have a material effect on the Company’s consolidated financial statements.
Segment Reporting
Brookfield DTLA currently operates as one reportable segment, which includes the operation and management of its six commercial office properties and one retail property. Each of Brookfield DTLA’s properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. Management does not distinguish or group Brookfield DTLA’s consolidated operations based on geography, size or type. Brookfield DTLA’s properties have similar economic characteristics and provide similar products and services to tenants. As a result, Brookfield DTLA’s properties are aggregated into a single reportable segment.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Management also views the unconsolidated real estate joint venture, Brookfield DTLA Fund Properties IV LLC, as a separate operating segment. This joint venture engages in the development of the multifamily residential real estate property, 755 South Figueroa, which has different economic characteristics compared to commercial office and retail properties described above. The progress of the development project, funding requirements, projected returns and other discrete financial information of the joint venture are regularly reviewed by management to assess performance. However, since this joint venture is not considered material to the overall results of the Company, it is not a reportable segment.
Note 3—Investment in Unconsolidated Real Estate Joint Venture
On May 31, 2019, Fund II entered into an agreement to contribute and transfer all of its wholly‑owned interests in Brookfield DTLA 4050/755 Inc., the indirect property owner of 755 South Figueroa, a residential development property, in exchange for noncontrolling interests in a newly formed joint venture with DTLA FP IV Holdings (the “Existing Agreement”).
During the year ended December 31, 2019, the Company recognized a gain from derecognition of assets in the consolidated statements of operations representing the difference between the amount of consideration measured and allocated to the assets and their carrying amount as follows:
|
|
|
|
|
|
|
|
|
Consideration
|
|
$
|
45,000
|
|
Investments in real estate, net
|
$
|
20,139
|
|
|
Cash and cash equivalents
|
73
|
|
|
Prepaid and other assets
|
11
|
|
|
Carrying amount
|
|
20,223
|
|
Gain from derecognition of assets
|
|
$
|
24,777
|
|
The consideration allocated to the assets contributed to the joint venture by Fund II increased by $9.8 million during the three months ended December 31, 2019 as a result of an amendment to the Existing Agreement. As of December 31, 2019, the Company’s ownership interest in the joint venture was 55.8%. During the year ended December 31, 2020, DTLA FP IV Holdings made additional cash contributions of $13.6 million to the joint venture, which reduced the Company’s ownership interest in the joint venture to 47.8%.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 4—Rents, Deferred Rents and Other Receivables, Net
Brookfield DTLA’s rents, deferred rents and other receivables are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Straight-line and other deferred rents
|
$
|
109,196
|
|
|
$
|
109,859
|
|
Tenant inducements receivable
|
33,280
|
|
|
33,304
|
|
Tenant receivables
|
5,057
|
|
|
6,027
|
|
Other receivables
|
2,079
|
|
|
1,854
|
|
Rents, deferred rents and other receivables, gross
|
149,612
|
|
|
151,044
|
|
Less: accumulated amortization of tenant inducements
|
15,973
|
|
|
13,034
|
|
|
|
|
|
Rents, deferred rents and other receivables, net
|
$
|
133,639
|
|
|
$
|
138,010
|
|
Note 5—Intangible Assets and Liabilities
Brookfield DTLA’s intangible assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Intangible Assets
|
|
|
|
In-place leases
|
$
|
46,448
|
|
|
$
|
47,872
|
|
Tenant relationships
|
6,900
|
|
|
15,397
|
|
Above-market leases
|
19,874
|
|
|
24,367
|
|
Intangible assets, gross
|
73,222
|
|
|
87,636
|
|
Less: accumulated amortization
|
51,176
|
|
|
55,741
|
|
Intangible assets, net
|
$
|
22,046
|
|
|
$
|
31,895
|
|
|
|
|
|
Intangible Liabilities
|
|
|
|
Below-market leases
|
$
|
46,945
|
|
|
$
|
53,795
|
|
Less: accumulated amortization
|
40,940
|
|
|
45,489
|
|
Intangible liabilities, net
|
$
|
6,005
|
|
|
$
|
8,306
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the effect of amortization/accretion of intangible assets and liabilities reported in the consolidated financial statements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Lease income
|
$
|
(1,331)
|
|
|
$
|
195
|
|
|
$
|
(222)
|
|
Depreciation and amortization expense
|
$
|
6,217
|
|
|
$
|
8,792
|
|
|
$
|
9,642
|
|
As of December 31, 2020, the estimated amortization/accretion of intangible assets and liabilities in future periods is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Place
Leases
|
|
Other
Intangible Assets
|
|
Intangible
Liabilities
|
|
|
|
|
|
|
2021
|
$
|
3,274
|
|
|
$
|
2,684
|
|
|
$
|
1,551
|
|
2022
|
2,756
|
|
|
2,274
|
|
|
1,492
|
|
2023
|
1,947
|
|
|
1,948
|
|
|
794
|
|
2024
|
1,091
|
|
|
1,863
|
|
|
278
|
|
2025
|
952
|
|
|
1,191
|
|
|
263
|
|
Thereafter
|
1,613
|
|
|
453
|
|
|
1,627
|
|
Total future amortization/accretion of intangibles
|
$
|
11,633
|
|
|
$
|
10,413
|
|
|
$
|
6,005
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 6—Secured Debt, Net
Brookfield DTLA’s secured debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date (1)
|
|
Contractual Interest Rates
|
|
|
|
Principal Amount
as of December 31,
|
|
|
|
|
2020
|
|
2019
|
Variable-Rate Loans:
|
|
|
|
|
|
|
|
|
|
Wells Fargo Center–North Tower (2)
|
10/9/2023
|
|
LIBOR + 1.65%
|
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Wells Fargo Center–North Tower (2)
|
10/9/2023
|
|
LIBOR + 4.00%
|
|
|
|
65,000
|
|
|
65,000
|
|
Wells Fargo Center–North Tower (2)(3)
|
10/9/2023
|
|
LIBOR + 5.00%
|
|
|
|
35,000
|
|
|
35,000
|
|
Wells Fargo Center–South Tower (4)
|
11/4/2023
|
|
LIBOR + 1.80%
|
|
|
|
260,796
|
|
|
260,796
|
|
777 Tower (5)
|
10/31/2024
|
|
LIBOR + 1.60%
|
|
|
|
231,842
|
|
|
231,842
|
|
777 Tower (6)
|
10/31/2024
|
|
LIBOR + 4.15%
|
|
|
|
43,158
|
|
|
43,158
|
|
EY Plaza (7)
|
10/9/2025
|
|
LIBOR + 2.86%
|
|
|
|
275,000
|
|
|
—
|
|
EY Plaza (7)
|
10/9/2025
|
|
LIBOR + 6.85%
|
|
|
|
30,000
|
|
|
—
|
|
Total variable-rate loans
|
|
|
|
|
|
|
1,340,796
|
|
|
1,035,796
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Debt:
|
|
|
|
|
|
|
|
|
|
BOA Plaza
|
9/1/2024
|
|
4.05%
|
|
|
|
400,000
|
|
|
400,000
|
|
Gas Company Tower
|
8/6/2021
|
|
3.47%
|
|
|
|
319,000
|
|
|
319,000
|
|
Gas Company Tower
|
8/6/2021
|
|
6.50%
|
|
|
|
131,000
|
|
|
131,000
|
|
FIGat7th
|
3/1/2023
|
|
3.88%
|
|
|
|
58,500
|
|
|
58,500
|
|
Total fixed-rate debt
|
|
|
|
|
|
|
908,500
|
|
|
908,500
|
|
|
|
|
|
|
|
|
|
|
|
Debt Refinanced:
|
|
|
|
|
|
|
|
|
|
EY Plaza
|
|
|
|
|
|
|
—
|
|
|
230,000
|
|
EY Plaza
|
|
|
|
|
|
|
—
|
|
|
35,000
|
|
Total debt refinanced
|
|
|
|
|
|
|
—
|
|
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt
|
|
|
|
|
|
|
2,249,296
|
|
|
2,209,296
|
|
Less: unamortized debt financing costs
|
|
|
|
|
|
9,656
|
|
|
9,316
|
|
Total secured debt, net
|
|
|
|
|
|
|
$
|
2,239,640
|
|
|
$
|
2,199,980
|
|
__________
(1)Maturity dates include the effect of extension options that the Company controls, if applicable. As of December 31, 2020, we meet the criteria specified in the loan agreements to extend the loan maturity dates.
(2)As required by the loan agreements, we have entered into interest rate cap contracts that limit the LIBOR portion of the interest rate to 3.85%.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4)As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 3.63%. As of December 31, 2020, a future advance amount of $29.2 million is available under this loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(5)As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.00%. As of December 31, 2020, a future advance amount of $36.8 million is available under this loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, and leasing commissions. The Company can draw against this future advance amount as long as a pro rata draw is made against the mezzanine loan future advance amount.
(6)As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.00%. As of December 31, 2020, a future advance amount of $6.8 million is available under this loan that can be drawn to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, and leasing commissions. The Company can draw against this future advance amount as long as a pro rata draw is made against the mortgage loan future advance amount.
(7)As required by the loan agreements, we have entered into interest rate cap contracts that limit the LIBOR portion of the interest rate to 4.00%.
The weighted average interest rate of the Company’s secured debt was 3.19% and 3.99% as of December 31, 2020 and 2019, respectively. As of December 31, 2020, the weighted average term to maturity of our debt was approximately three years.
Debt Maturities
The following table provides information regarding the Company’s minimum future principal payments due on the Company’s secured debt (after the impact of extension options that the Company controls, if applicable) as of December 31, 2020:
|
|
|
|
|
|
2021
|
$
|
450,000
|
|
2022
|
—
|
|
2023
|
819,296
|
|
2024
|
675,000
|
|
2025
|
305,000
|
|
Total secured debt
|
$
|
2,249,296
|
|
As of December 31, 2020, $1,035.8 million of the Company’s secured debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreements) and $813.5 million may be prepaid with prepayment penalties.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
EY Plaza—
On September 23, 2020, Brookfield DTLA refinanced the mortgage and mezzanine loans secured by the EY Plaza office property and received net proceeds totaling $297.9 million, of which $265.0 million was used to repay the mortgage and mezzanine loans that previously encumbered the property with original maturity date on November 27, 2020. Out of the remaining net proceeds of $32.9 million, $20.5 million was deposited into a cash account held by the lenders as reserve funds to satisfy various outstanding lease-related obligations (such as free rent or rent abatements, discounted or free parking rent and leasing costs) that existed as of the closing date, $12.4 million is intended for funding various capital and tenant improvements at the properties.
The new $305.0 million loan is comprised of a $275.0 million mortgage loan and a $30.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 2.86% and 6.85%, respectively, requires the payment of interest-only until maturity, and matures initially on October 9, 2022. The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until October 2021 after which the loan may be repaid without prepayment fees. A voluntary prepayment of the mortgage or mezzanine loans requires a simultaneous pro-rata prepayment of all loans encumbering this property. Brookfield DTLA has three options to extend the loans maturity dates for a period of one year each, as long as the maturity date of the mezzanine loan is extended simultaneously with the mortgage loan, and no Event of Default (as defined in the underlying loan agreements) has occurred.
In September 2020, in conjunction with the extinguishment of the $265.0 million mortgage and mezzanine loans described above, the Company early terminated the related LIBOR-based interest rate swap and cap contracts with notional amounts of $218.9 million and $35.0 million, respectively, and reclassified the entire loss of $1.8 million on interest rate swap contracts designated as cash flow hedges from accumulated other comprehensive loss to other expenses in the consolidated statements of operations. See Note 11 “Accumulated Other Comprehensive Loss” for further details. In addition, the Company recognized a loss on early extinguishment of debt and termination of interest rate swap contracts of $1.0 million in other expenses in the consolidated statements of operations.
Gas Company Tower—
As of December 31, 2020, Brookfield DTLA was in the process of refinancing the debt secured by Gas Company Tower prior to its scheduled maturity in August 2021. The refinance was completed on February 5, 2021. See Note 19 “Subsequent Event” for further details.
Non-Recourse Carve Out Guarantees
All of our secured 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 DTLA Holdings, if certain triggering events (as defined in the loan agreements) occur.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Debt Compliance
As of December 31, 2020, Brookfield DTLA was in compliance with all material financial covenants contained in the loan agreements.
Certain loan agreements held by Brookfield DTLA contain debt yield and debt service coverage ratios. As of December 31, 2020, Brookfield DTLA was meeting or exceeding these financial ratios, with the exception of the loans secured by Wells Fargo Center—South Tower and Wells Fargo Center—North Tower that did not meet their respective minimum debt yield ratio. In addition, in June 2020, a cash sweep event was triggered on the loan secured by Gas Company Tower as a certain lease space restriction was not met.
Wells Fargo Center–South Tower —
Pursuant to the terms of the Wells Fargo Center–South Tower mortgage loan agreement, effective September 2020, a cash sweep event commenced as the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, any excess operating cash flows are currently swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses, capital expenditures and leasing costs; property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; and fees and expenses due to the loan administrative agent.
Wells Fargo Center–North Tower —
As of December 31, 2020, the borrower’s debt yield ratio was under the minimum debt yield ratio. While this does not constitute an Event of Default under the terms of the mortgage loan agreement, following the occurrence of such debt yield event, any excess operating cash flows are to be swept to a cash account controlled by the loan administrative agent. Funds within this account shall be applied to the borrower's approved operating expenses, capital expenditures and leasing costs; property taxes and insurance; interest and any other amounts due and payable under the loan and interest rate cap contracts; reserve accounts; and fees and expenses due to the loan administrative agent. The cash sweep has not started as of December 31, 2020.
Gas Company Tower —
Pursuant to the terms of the Gas Company Tower senior mortgage loan agreement, effective June 2020, a cash sweep event commenced upon exercise of lease contraction rights by one of the major tenants. While this is not an Event of Default, all available cash (as defined in the underlying loan agreement) is currently swept to an account managed by the lender. The lender will regularly fund operating expenses based on an approved budget, and the borrower may request the release of additional funds to cover approved leasing costs. The cash sweep event ended in February 2021 upon the refinancing and repayment of the Gas Company Tower senior mortgage and mezzanine loans. See Note 19 “Subsequent Event” for further details.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 7—Accounts Payable and Other Liabilities
Brookfield DTLA’s accounts payable and other liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
|
|
|
Tenant improvements and inducements payable
|
$
|
47,679
|
|
|
$
|
29,140
|
|
Unearned rent and tenant payables
|
27,331
|
|
|
23,817
|
|
Accrued capital expenditures and leasing commissions
|
15,201
|
|
|
18,205
|
|
Accrued expenses and other liabilities
|
5,830
|
|
|
8,683
|
|
Accounts payable and other liabilities
|
$
|
96,041
|
|
|
$
|
79,845
|
|
Note 8—Noncontrolling Interests
Mezzanine Equity Component
Mezzanine equity in the consolidated balance sheets is comprised of the following:
Series A Preferred Stock. Brookfield DTLA is authorized to issue up to 10,000,000 shares of Series A preferred stock, $0.01 par value per share, with a liquidation preference of $25.00 per share. As of December 31, 2020 and 2019, 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 DTLA Holdings.
Series A Preferred Interest. The Series A preferred interest in Fund II is indirectly held by the Company through wholly-owned subsidiaries (subject to certain REIT accommodation preferred interests).
Series A-1 Preferred Interest. The Series A-1 preferred interest is held by DTLA Holdings or wholly-owned subsidiaries of DTLA Holdings.
Senior Participating Preferred Interest. Brookfield DTLA Fund Properties III LLC (“Fund III”), a wholly-owned subsidiary of DTLA Holdings, issued a senior participating preferred interest to DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Series B Preferred Interest. At the time of the merger with MPG, DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to Fund II, which directly or indirectly owns the Brookfield DTLA properties. Effective November 2020, pursuant to the Amendment to Limited Liability Company Agreement of Fund II, such contribution commitment by DTLA Holdings increased by $50.0 million to $310.0 million. As of December 31, 2020, $46.7 million is available to the Company under this commitment for future funding. The Series B preferred interest in Fund II held by DTLA Holdings is effectively senior to the interest in Fund II indirectly held by the Company and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by the Company and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in Fund II may limit the amount of funds available to the Company for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.
The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are held by a noncontrolling interest holder. Series A preferred stock, Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are classified as 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. See Note 9—“Mezzanine Equity.”
Stockholders’ Deficit Component
Common interests held by DTLA Holdings are presented as “noncontrolling interests” as part of Stockholders’ Deficit in the consolidated balance sheets.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9—Mezzanine Equity
A summary of the change in mezzanine equity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
|
9,730,370
|
|
|
$
|
391,400
|
|
|
$
|
383,510
|
|
|
$
|
25,548
|
|
|
$
|
190,291
|
|
|
$
|
990,749
|
|
Issuance of Series B preferred interest
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Dividends
|
|
|
|
18,532
|
|
|
|
|
|
|
|
|
18,532
|
|
Preferred returns
|
|
|
|
|
|
17,306
|
|
|
|
|
17,961
|
|
|
35,267
|
|
Redemption measurement adjustments
|
|
|
|
|
|
|
|
1,482
|
|
|
|
|
1,482
|
|
Contributions from noncontrolling
interests
|
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
(3,587)
|
|
|
(26,554)
|
|
|
(30,141)
|
|
Balance, December 31, 2018
|
|
9,730,370
|
|
|
409,932
|
|
|
400,816
|
|
|
23,443
|
|
|
181,698
|
|
|
1,015,889
|
|
Issuance of Series B preferred interest
|
|
|
|
|
|
|
|
|
|
40,700
|
|
|
40,700
|
|
Dividends
|
|
|
|
18,548
|
|
|
|
|
|
|
|
|
18,548
|
|
Preferred returns
|
|
|
|
|
|
17,213
|
|
|
|
|
18,049
|
|
|
35,262
|
|
Redemption measurement adjustments
|
|
|
|
|
|
|
|
(1,017)
|
|
|
|
|
(1,017)
|
|
Contributions from noncontrolling
interests
|
|
|
|
|
|
|
|
538
|
|
|
|
|
538
|
|
Repurchases of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
(34,521)
|
|
|
(34,521)
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
(602)
|
|
|
(20,574)
|
|
|
(21,176)
|
|
Balance, December 31, 2019
|
|
9,730,370
|
|
|
428,480
|
|
|
418,029
|
|
|
22,362
|
|
|
185,352
|
|
|
1,054,223
|
|
Issuance of Series B preferred interest
|
|
|
|
|
|
|
|
|
|
47,850
|
|
|
47,850
|
|
Dividends
|
|
|
|
18,548
|
|
|
|
|
|
|
|
|
18,548
|
|
Preferred returns
|
|
|
|
|
|
17,213
|
|
|
|
|
17,708
|
|
|
34,921
|
|
Redemption measurement adjustments
|
|
|
|
|
|
|
|
(1,580)
|
|
|
|
|
(1,580)
|
|
Contributions from noncontrolling
interests
|
|
|
|
|
|
|
|
777
|
|
|
|
|
777
|
|
Repurchases of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
(34,218)
|
|
|
(34,218)
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
(1,146)
|
|
|
(17,865)
|
|
|
(19,011)
|
|
Balance, December 31, 2020
|
|
9,730,370
|
|
|
$
|
447,028
|
|
|
$
|
435,242
|
|
|
$
|
20,413
|
|
|
$
|
198,827
|
|
|
$
|
1,101,510
|
|
During the year ended December 31, 2020, the Company used the cash received from the issuance of the Series B preferred interest for capital expenditures and leasing costs. Repurchases of and distributions to noncontrolling interests were made using the excess cash from upsized refinancing of the loans secured by EY Plaza in September 2020, as well as operating cash flows generated from other properties. During the year ended December 31, 2019, the Company used the cash received from the issuance of the Series B preferred interest for capital expenditures and leasing costs. Repurchases of and distributions to noncontrolling interests were made using the excess cash from upsized refinancing of the loans secured by 777 Tower in October 2019. During the year ended December 31, 2018, distributions to noncontrolling interests were made using cash on hand.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Series A Preferred Stock
As of December 31, 2020, the Series A preferred stock is reported at its redemption value of $447.0 million calculated using the redemption price of $243.3 million plus $203.8 million of accumulated and unpaid dividends on such Series A preferred stock through December 31, 2020.
No dividends were declared on the Series A preferred stock during the years ended December 31, 2020, 2019 and 2018. Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share.
The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. There is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem the Series A preferred stock. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.
Series A-1 Preferred Interest
As of December 31, 2020, the Series A-1 preferred interest is reported at its redemption value of $435.2 million calculated using its liquidation value of $225.7 million plus $209.5 million of unpaid interest through December 31, 2020. Interest earned on the Series A-1 preferred interest is cumulative and accrues at an annual rate of 7.625%.
Senior Participating Preferred Interest
As of December 31, 2020, the senior participating preferred interest is reported at its redemption value of $20.4 million using the 4.0% participating interest in the residual value of BOA Plaza, EY Plaza and FIGat7th upon disposition or liquidation.
Series B Preferred Interest
As of December 31, 2020, the Series B preferred interest is reported at its redemption value of $198.8 million calculated using its liquidation value of $194.6 million plus $4.2 million of unpaid preferred returns on such Series B preferred interest through December 31, 2020. Brookfield DTLA is entitled to receive a market rate of return on its contributions, currently 9.0% as of December 31, 2020.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Distribution Waterfall
Brookfield DTLA may, at its discretion, distribute all or a portion of its available cash (as defined in the limited liability company agreement of Fund II) in the following priority: (1)
|
|
|
|
|
|
|
|
|
First to:
|
Series B preferred interest unpaid preferred return
|
|
|
|
Second to:
|
Series B preferred interest unreturned preferred capital
|
|
|
|
|
|
|
|
|
Third, proportionally in respect of
unpaid preferred return to:
|
|
|
|
|
|
Series A preferred interest unpaid preferred return (2)
|
|
|
|
|
Series A-1 preferred interest unpaid preferred return (3)
|
|
|
|
|
|
|
|
|
Fourth, proportionally in respect
of unreturned capital to: (2) (4)
|
|
|
|
|
|
Series A preferred interest unreturned capital
|
|
|
|
|
Series A-1 preferred interest unreturned capital (3)
|
|
|
|
|
|
|
|
|
And fifth to:
|
Common interests to Brookfield DTLA and DTLA Holdings (5)
|
|
|
|
__________
(1)Cash available to Fund II arises from its interests in its investments. Fund II owns indirectly all of the interests in Gas Company Tower, Wells Fargo Center–South Tower, Wells Fargo Center–North Tower, 777 Tower and an interest in the 755 South Figueroa development site which will decrease as capital is called to fund the development. See Note 1 “Organization and Description of Business”. In addition, Fund II owns 96% indirectly of the interests in EY Plaza, FIGat7th and BOA Plaza (the “Fund III Assets”). DTLA Holdings owns the remaining 4% interest in the Fund III Assets. The amounts due to DTLA Holdings on the senior participating preferred interest for its preferred return and unreturned capital in Fund III were fully paid as of December 31, 2015. All of Fund II’s interests in these assets are subject to certain REIT accommodation preferred interests. This waterfall may be effected by future equity issuances in respect of Fund II, Fund III, Fund IV, or their subsidiaries, and are subject to all of the indebtedness of the entities.
(2)The Fund II Series A preferred interest is comprised of two parts, one is a preferred component with the analogous economic terms as the Company’s Series A Preferred Stock and a common component, which is junior to the preferred component of the Series A interest on analogous terms to the relationship between the Company’s Series A Preferred Stock and Common Stock. The Series A preferred interest is junior to the Fund II Series B preferred interest. See Note 8 “Noncontrolling Interests — Series B Preferred Interest”. Amounts paid in respect of the Fund II’s Series A preferred interest are generally available upon distribution to the Company for further distribution in respect of the Company’s Series A Preferred Stock, and, when and if distributed in respect of the Series A Preferred Stock, will be distributed first to accumulated and unpaid dividends and to reduce its unreturned liquidation capital.
(3)DTLA Holdings in its capacity as the holder of the Series A-1 preferred interest can waive receipt of distributions that would otherwise be made to it in respect of the Series A-1 preferred interest and such amounts shall be paid instead to the Series A preferred interest or as otherwise provided by the subsequent provisions of the waterfall. Any amounts waived by DTLA Holdings shall not reduce the Series A-1 unpaid preferred return or unreturned capital.
(4)Applicable if distribution is (a) in connection with a liquidating event or redemption or (b) at the election of Brookfield DTLA.
(5)Based on the interests of the Series A and Series B interests of the Fund after repayment of the preferred capital portion of each of them, until the Senior A junior unreturned liquidation capital is reduced to zero.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 10—Stockholders’ Deficit
Common Stock
Brookfield DTLA is authorized to issue up to 1,000,000 shares of common stock, $0.01 par value per share. As of December 31, 2020 and 2019, 1,000 shares of common stock were issued and outstanding. No dividends were declared on the Company’s common stock during the years ended December 31, 2020, 2019 and 2018.
Brookfield DTLA has not paid any cash dividends on its common stock in the past. Any future dividends declared would be at the discretion of Brookfield DTLA’s board of directors and would depend on its financial condition, results of operations, contractual obligations and the terms of its financing agreements at the time a dividend is considered, and other relevant factors.
Additional Paid-in Capital
During the years ended December 31, 2020, 2019 and 2018, Brookfield DTLA recorded contributions to additional paid-in capital totaling $4.8 million, $1.7 million and $1.6 million, respectively, from DTLA Holdings, which were used for general corporate purposes.
Note 11—Accumulated Other Comprehensive Loss
A summary of the change in accumulated other comprehensive loss related to Brookfield DTLA’s derivative financial instruments designated as cash flow hedges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(2,341)
|
|
|
$
|
(224)
|
|
|
$
|
(574)
|
|
Net unrealized gains (losses) arising during
the year
|
562
|
|
|
(2,117)
|
|
|
1,548
|
|
Reclassification of losses (gains) related to
terminated interest rate swaps to
other expenses included in net income
|
1,779
|
|
|
—
|
|
|
(1,198)
|
|
Net changes
|
2,341
|
|
|
(2,117)
|
|
|
350
|
|
Balance at end of year
|
$
|
—
|
|
|
$
|
(2,341)
|
|
|
$
|
(224)
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 12—Financial Instruments
Derivative Financial Instruments
In September 2020, in conjunction with the extinguishment of our $265.0 million loans that previously encumbered EY Plaza, the Company terminated the related LIBOR-based interest rate swap and cap contracts with notional amounts of $218.9 million and $35.0 million, respectively, and reclassified the entire loss of $1.8 million on the interest rate swap contracts from accumulated other comprehensive loss to other expenses in the consolidated statements of operations. Concurrently, as required by the current loan agreements secured by EY Plaza, on September 22, 2020, the Company entered into interest rate cap contracts with an aggregate notional amount of $305.0 million, which are not designated as cash flow hedges. As of December 31, 2020, Brookfield DTLA no longer had any interest rate swap contracts.
The following table presents the interest rate cap contracts pursuant to the terms of certain of its loan agreements as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Strike
Rate (1)
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps:
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Center–North Tower (2)
|
|
$
|
400,000
|
|
|
3.85
|
%
|
|
|
|
|
|
10/15/2021
|
Wells Fargo Center–North Tower (2)
|
|
65,000
|
|
|
3.85
|
%
|
|
|
|
|
|
10/15/2021
|
Wells Fargo Center–North Tower (2)
|
|
35,000
|
|
|
3.85
|
%
|
|
|
|
|
|
10/15/2021
|
Wells Fargo Center–South Tower (3)
|
|
290,000
|
|
|
3.63
|
%
|
|
|
|
|
|
11/4/2022
|
777 Tower
|
|
268,600
|
|
|
4.00
|
%
|
|
|
|
|
|
11/10/2021
|
777 Tower
|
|
50,000
|
|
|
4.00
|
%
|
|
|
|
|
|
11/10/2021
|
EY Plaza
|
|
275,000
|
|
|
4.00
|
%
|
|
|
|
|
|
10/15/2022
|
EY Plaza
|
|
30,000
|
|
|
4.00
|
%
|
|
|
|
|
|
10/15/2022
|
Total derivatives not designated
as cash flow hedging instruments
|
|
$
|
1,413,600
|
|
|
|
|
|
|
|
|
|
__________
(1)The index used for all derivative financial instruments shown above is 1-Month LIBOR.
(2)In September 2020, Brookfield DTLA exercised the first one-year option to extend the maturity date of the $500.0 million mortgage and mezzanine loans secured by Wells Fargo Center—North Tower to October 2021. In October 2020, Brookfield DTLA entered interest rate cap contracts of aggregate notional amount of $500.0 million that limit the LIBOR portion of the interest rate to 3.85% with expiration date on October 15, 2021.
(3)In connection with the mortgage loan secured by Wells Fargo Center— South Tower, effective October 2020, Brookfield DTLA entered an interest rate cap contract of notional amount of $290.0 million that limit the LIBOR portion of the interest rate to 3.63% with expiration date on November 4, 2022.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the fair value of Brookfield DTLA’s derivative financial instruments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31,
|
|
|
Balance Sheet Location
|
|
2020
|
|
2019
|
|
|
|
|
|
Derivatives not designated as
hedging instruments:
Interest rate caps
|
|
Prepaid and other assets, net
|
|
$
|
5
|
|
|
$
|
1
|
|
Derivatives designated as
cash flow hedging instruments:
Interest rate swaps
|
|
Accounts payable and other liabilities
|
|
$
|
—
|
|
|
$
|
1,143
|
|
The following table presents the gain (loss) recorded on interest rate swaps for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized
in OCL
|
|
(Loss) Gain Reclassified
from AOCL to Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
For the years ended:
|
|
|
|
|
|
|
|
|
December 31, 2020
|
$
|
562
|
|
|
$
|
(1,779)
|
|
(1)
|
|
|
|
|
December 31, 2019
|
$
|
(2,117)
|
|
|
$
|
—
|
|
|
|
|
|
|
December 31, 2018
|
$
|
1,548
|
|
|
$
|
1,198
|
|
(2)
|
|
|
|
|
__________
(1)Included in other expenses in the consolidated statements of operations.
(2)Included in interest and other revenue in the consolidated statements of operations.
Changes in fair value of interest rate cap contracts recognized in the consolidated statements of operations during the years ended December 31, 2020, 2019 and 2018 were de minimis.
Other Financial Instruments
Brookfield DTLA’s other financial instruments that are exposed to concentrations of credit risk consist primarily of bank deposits and rents receivable. Brookfield DTLA places its bank deposits with major commercial banks. Cash balances with any one institution may at times be in excess of the Federal Deposit Insurance Corporation-insured limit of $250,000.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 13—Fair Value Measurements and Disclosures
ASC Topic 820, Fair Value Measurement, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the “exit price”).
ASC Topic 820 established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three categories:
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Level 1—
|
|
Quoted prices (unadjusted) in active markets that are accessible at the measurement date.
|
•
|
Level 2—
|
|
Observable prices that are based on inputs not quoted in active markets but corroborated by market data.
|
•
|
Level 3—
|
|
Unobservable prices that are used when little or no market data is available.
|
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Brookfield DTLA utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as consider counterparty credit risk in its assessment of fair value.
Recurring Measurements—
The fair value of Brookfield DTLA’s interest rate swap contracts was determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flows of the derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The Company has incorporated credit valuation adjustments to appropriately reflect both our and the respective counterparty’s non‑performance risk in the fair value measurements. The interest rate swap contracts were terminated in September 2020. See Note 12 “Financial Instruments.”
Brookfield DTLA’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total
Fair
Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Liabilities)
(Level 1)
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
Interest rate caps at:
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
December 31, 2019
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Interest rate swaps at:
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2019
|
|
$
|
1,143
|
|
|
$
|
—
|
|
|
$
|
1,143
|
|
|
$
|
—
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Nonrecurring Measurements—
Disclosures about Fair Value of Financial Instruments—
Secured debt — The Company estimates the fair value of its debt by calculating the credit-adjusted present value of principal and interest payments for each loan. The calculation incorporates observable market interest rates (Level 2 inputs), assumes that each loan will be outstanding until maturity, and excludes any options to extend the maturity date of the loan available per the terms of the loan agreement, if any. The table below presents the estimated fair value and carrying value of the Company’s secured debt included in liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
Fair Value
|
|
$
|
2,246,225
|
|
|
$
|
2,210,389
|
|
Carrying value
|
|
$
|
2,239,640
|
|
|
$
|
2,199,980
|
|
Short-term financial instruments — As of December 31, 2020 and 2019, the carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, other assets, accounts payable and other liabilities, and balances with affiliates approximate fair value because of the short-term nature of these instruments.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 14—Related Party Transactions
Management Agreements
Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays an asset management fee to BPY and BAM, which is calculated based on 0.75% of DTLA Holdings’ invested equity in Brookfield DTLA’s properties. Leasing management fees paid to the Manager and Brookfield affiliates range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs. Development management fees are paid to the Manager and Brookfield affiliates by the unconsolidated real estate joint venture based on 3.00% of hard and soft construction costs.
A summary of costs incurred by the applicable Brookfield DTLA subsidiaries under these arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Property management fee expense
|
$
|
8,035
|
|
|
$
|
8,479
|
|
|
$
|
8,111
|
|
Asset management fee expense
|
$
|
6,040
|
|
|
$
|
6,161
|
|
|
$
|
6,330
|
|
Leasing and construction management fees
|
$
|
5,344
|
|
|
$
|
5,051
|
|
|
$
|
3,209
|
|
Development management fees (1)
|
$
|
1,007
|
|
|
$
|
991
|
|
|
$
|
—
|
|
General, administrative and reimbursable expenses
|
$
|
2,492
|
|
|
$
|
2,865
|
|
|
$
|
3,007
|
|
__________
(1)Amounts presented are calculated by applying the Company’s ownership interest percentage in the unconsolidated real estate joint venture as of year end to the costs incurred during the year.
Expenses incurred under these arrangements are included in rental property operating and maintenance expense in the consolidated statements of operations, with the exception of asset management fee expense which is included in other expenses. Leasing management fees are capitalized as deferred charges, construction management fees are capitalized as part of investments in real estate, and development management fees are capitalized and included in the investment in unconsolidated real estate joint venture in the consolidated balance sheets.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Insurance Agreements
Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager that provide, among other things, all risk property and business interruption coverage for BPY’s commercial portfolio with an aggregate limit of $2.5 billion per occurrence as well as an aggregate limit of $465.0 million of earthquake insurance for California, and $350.0 million of flood and weather catastrophe insurance. In addition, Brookfield DTLA’s properties are covered by a terrorism insurance policy that provides a maximum of $4.0 billion per occurrence for all of BPY’s properties located in the United States. Brookfield DTLA is in compliance with the contractual obligations regarding terrorism insurance contained in such policies. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager. Brookfield DTLA reimburses the Manager for the amount of fees and expenses related to such policies that have been allocated to the Company’s properties as determined by the Manager in its reasonable discretion taking into consideration certain facts and circumstances, including the value of the Company’s properties.
A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement, which are included in rental property operating and maintenance expense in the consolidated statements of operations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Insurance expense (1)
|
$
|
11,836
|
|
|
$
|
9,286
|
|
|
$
|
8,026
|
|
(1)An affiliate of BAM secures insurance policies for the Company through third-party brokers and insurance companies and charges the Company a fee for the services it provides. Fees charged vary but will not exceed 2.50% of the total net insurance premiums of the Company and its covered properties. Fees incurred for these services totaled $282 thousand, $237 thousand and $192 thousand during the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, the Company’s terrorism insurance coverage is purchased through a captive facility that is an affiliate of BPY. Insurance premiums incurred totaled $149 thousand, $173 thousand and $190 thousand during the years ended December 31, 2020, 2019 and 2018, respectively.
Other Related Party Transactions with BAM Affiliates
A summary of the impact of other related party transactions with BAM affiliates on the Company’s consolidated statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Lease income (1)
|
$
|
11,443
|
|
|
$
|
5,916
|
|
|
$
|
1,928
|
|
Parking revenue (1)
|
$
|
1,317
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest and other revenue
|
$
|
51
|
|
|
$
|
208
|
|
|
$
|
—
|
|
Rental property operating and maintenance expense (2)
|
$
|
577
|
|
|
$
|
676
|
|
|
$
|
862
|
|
Other expenses
|
$
|
90
|
|
|
$
|
142
|
|
|
$
|
—
|
|
Interest expense (3)
|
$
|
1,982
|
|
|
$
|
613
|
|
|
$
|
—
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
__________
(1)In September 2019, BAM acquired a significant interest in Oaktree Capital Group, LLC (“Oaktree”), an existing tenant at Wells Fargo Center–North Tower. Lease income and parking revenue from Oaktree and its subsidiaries have been reported as related party transactions since the date of acquisition by BAM.
(2)Amounts presented are for purchases of chilled water for air conditioning at one of the Company’s properties.
(3)A subsidiary of Oaktree is the lender of the $35.0 million mezzanine loan secured by Wells Fargo Center–North Tower. Interest payable to the lender totaled $85 thousand as of December 31, 2020 and is reported as part of accounts payable and other liabilities in the consolidated balance sheets. See Note 6—“Secured Debt, Net.” Interest expense on this loan has been reported as a related party transaction since the date of acquisition by BAM.
In 2017, an affiliate of the Company obtained a construction loan of $2.6 million from Wells Fargo Center–North Tower. During the year ended December 31, 2020, the Company fully reserved the construction loan and interest receivable of $2.5 million and $144 thousand, respectively, as collection was not deemed probable. The related charges are included in other expenses in the consolidated statements of operations.
The Manager or its affiliates may incur certain out-of-pocket expenses on behalf of the Company and pass through such expenses at cost to the Company.
Note 15—Future Minimum Base Rents
Brookfield DTLA leases space to tenants primarily under non-cancelable operating leases that generally contain provisions for payment of base rent plus reimbursement of certain operating expenses. The table below presents the undiscounted cash flows for future minimum base rents to be received from tenants under executed non-cancelable office and retail leases as of December 31, 2020:
|
|
|
|
|
|
2021
|
$
|
163,687
|
|
2022
|
153,038
|
|
2023
|
138,681
|
|
2024
|
121,851
|
|
2025
|
108,018
|
|
Thereafter
|
548,065
|
|
Total future minimum base rents
|
$
|
1,233,340
|
|
Note 16—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.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Concentration of Tenant Credit Risk
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. Brookfield DTLA’s properties are typically leased to high credit-rated tenants for lease terms ranging from five to ten years, although we also enter into some short-term as well as longer-term leases. As our entire portfolio is located in the LACBD, any specific economic changes within that location could affect our tenant base, and by extension, our profitability.
Brookfield DTLA generally does not require collateral or other security from its tenants, other than security deposits or letters of credit. Our credit risk is mitigated by the high quality of our existing tenant base, review of prospective tenants’ risk profiles prior to lease execution, and frequent monitoring of our tenant portfolio to identify problem tenants. However, since we may have a concentration of lease income from certain tenants, the inability of those tenants to make payments under their leases could have a material adverse effect on our results of operations, cash flows or financial condition.
Concentration of Lease Income Risk
During the years ended December 31, 2020, 2019 and 2018, BOA Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower, EY Plaza and 777 Tower each contributed more than 10% of Brookfield DTLA’s consolidated lease revenue. The revenue generated by these six properties totaled 97%, 96% and 98% of Brookfield DTLA’s consolidated revenue during the years ended December 31, 2020, 2019 and 2018, respectively.
Capital Commitments
As of December 31, 2020, the Company had $53.1 million in tenant-related commitments, including tenant improvements, tenant inducements and leasing commissions, which are based on executed leases. Additionally, we had $3.6 million in construction-related commitments, mainly related to retention payable to contractors for the atrium redevelopment project at Wells Fargo Center as of December 31, 2020.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 17—Quarterly Financial Information (Unaudited)
The following is a summary of consolidated financial information on a quarterly basis for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2020
|
|
|
|
|
|
|
|
Total revenue
|
$
|
75,854
|
|
|
$
|
68,522
|
|
|
$
|
70,593
|
|
|
$
|
70,579
|
|
Total expenses
|
89,965
|
|
|
83,788
|
|
|
86,050
|
|
|
88,164
|
|
Total other (loss) income
|
(675)
|
|
|
(28)
|
|
|
172
|
|
|
6
|
|
Net loss
|
(14,786)
|
|
|
(15,294)
|
|
|
(15,285)
|
|
|
(17,579)
|
|
Net loss (income) attributable to
noncontrolling interests:
|
|
|
|
|
|
|
|
Series A-1 preferred interest returns
|
4,303
|
|
|
4,303
|
|
|
4,303
|
|
|
4,304
|
|
Senior participating preferred interest
redemption measurement adjustments
|
(225)
|
|
|
(2,081)
|
|
|
(37)
|
|
|
763
|
|
Series B preferred interest returns
|
4,208
|
|
|
4,567
|
|
|
4,689
|
|
|
4,244
|
|
Series B common interest –
allocation of net income (loss)
|
9,822
|
|
|
90,090
|
|
|
(9,889)
|
|
|
21,720
|
|
Net loss attributable to Brookfield DTLA
|
(32,894)
|
|
|
(112,173)
|
|
|
(14,351)
|
|
|
(48,610)
|
|
Series A preferred stock dividends
|
4,637
|
|
|
4,637
|
|
|
4,637
|
|
|
4,637
|
|
Net loss attributable to common interest
holders of Brookfield DTLA
|
$
|
(37,531)
|
|
|
$
|
(116,810)
|
|
|
$
|
(18,988)
|
|
|
$
|
(53,247)
|
|
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2019
|
|
|
|
|
|
|
|
Total revenue
|
$
|
76,207
|
|
|
$
|
79,166
|
|
|
$
|
79,612
|
|
|
$
|
82,860
|
|
Total expenses
|
89,540
|
|
|
90,383
|
|
|
90,815
|
|
|
96,465
|
|
Total other income (loss) (1)
|
—
|
|
|
14,688
|
|
|
(29)
|
|
|
8,038
|
|
Net (loss) income
|
(13,333)
|
|
|
3,471
|
|
|
(11,232)
|
|
|
(5,567)
|
|
Net loss (income) attributable to
noncontrolling interests:
|
|
|
|
|
|
|
|
Series A-1 preferred interest returns
|
4,303
|
|
|
4,303
|
|
|
4,303
|
|
|
4,304
|
|
Senior participating preferred interest
redemption measurement adjustments
|
(572)
|
|
|
(179)
|
|
|
602
|
|
|
(868)
|
|
Series B preferred interest returns
|
4,091
|
|
|
4,591
|
|
|
4,966
|
|
|
4,401
|
|
Series B common interest –
allocation of net income
|
9,925
|
|
|
18,659
|
|
|
5,260
|
|
|
1,337
|
|
Net loss attributable to Brookfield DTLA
|
(31,080)
|
|
|
(23,903)
|
|
|
(26,363)
|
|
|
(14,741)
|
|
Series A preferred stock dividends
|
4,637
|
|
|
4,637
|
|
|
4,637
|
|
|
4,637
|
|
Net loss attributable to common interest
holders of Brookfield DTLA
|
$
|
(35,717)
|
|
|
$
|
(28,540)
|
|
|
$
|
(31,000)
|
|
|
$
|
(19,378)
|
|
__________
(1)In May 2019, Fund II entered into an agreement (“Existing Agreement”) to contribute and transfer all of its wholly-owned interests in Brookfield DTLA 4050/755 Inc. in exchange for noncontrolling interests in a newly formed joint venture, which resulted in the derecognition of the assets of 755 South Figueroa, a residential development property. As a result of the derecognition of assets, the Company recognized a gain, representing the difference between the amount of consideration measured and allocated to the assets and their carrying amount, as part of other income in the consolidated statements of operations during the second quarter of 2019. The consideration allocated to the assets contributed to the joint venture by Fund II increased by $9.8 million during the fourth quarter of 2019 as a result of an amendment to the Existing Agreement, and accordingly, an additional gain of the same amount was recognized in the consolidated statements of operations as part of other income.
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 18—Investments in Real Estate
A summary of information related to Brookfield DTLA’s investments in real estate as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encum-
brances
|
|
Initial Cost
to Company
|
|
Costs Capitalized
Subsequent to
Acquisition
|
|
Gross Amount at Which
Carried at Close of Period
|
|
Accum-
ulated
Depre-
ciation (4)
|
|
Year
Acquired
or
Con-
structed (5)
|
|
Land
|
|
Buildings and
Improve-
ments
|
Buildings and
Improve-
ments
|
|
|
Land
|
|
Buildings
and
Improve-
ments (1)(2)
|
|
Total (3)
|
Los Angeles, CA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Center– North Tower
333 S. Grand Avenue
|
|
$
|
500,000
|
|
|
$
|
41,024
|
|
|
$
|
449,576
|
|
|
$
|
161,626
|
|
|
|
|
$
|
41,024
|
|
|
$
|
611,202
|
|
|
$
|
652,226
|
|
|
$
|
102,555
|
|
|
2013 A
|
BOA Plaza
333 S. Hope Street
|
|
400,000
|
|
|
54,163
|
|
|
343,976
|
|
|
89,657
|
|
|
|
|
54,163
|
|
|
433,633
|
|
|
487,796
|
|
|
113,545
|
|
|
2006 A
|
Wells Fargo Center– South Tower
355 S. Grand Avenue
|
|
260,796
|
|
|
21,231
|
|
|
392,920
|
|
|
83,504
|
|
|
|
|
21,231
|
|
|
476,424
|
|
|
497,655
|
|
|
64,650
|
|
|
2013 A
|
Gas Company Tower
525-555 W. Fifth Street
|
|
450,000
|
|
|
20,742
|
|
|
392,650
|
|
|
80,847
|
|
|
|
|
20,742
|
|
|
473,497
|
|
|
494,239
|
|
|
76,266
|
|
|
2013 A
|
EY Plaza
725 S. Figueroa Street
|
|
305,000
|
|
|
47,385
|
|
|
242,503
|
|
|
93,451
|
|
|
|
|
47,385
|
|
|
335,954
|
|
|
383,339
|
|
|
86,937
|
|
|
2006 A
|
777 Tower
777 S. Figueroa Street
|
|
275,000
|
|
|
38,010
|
|
|
296,964
|
|
|
43,270
|
|
|
|
|
38,010
|
|
|
340,234
|
|
|
378,244
|
|
|
53,149
|
|
|
2013 A
|
FIGat7th
735 S. Figueroa Street
|
|
58,500
|
|
|
—
|
|
|
44,743
|
|
|
29,189
|
|
|
|
|
—
|
|
|
73,932
|
|
|
73,932
|
|
|
20,227
|
|
|
2013 C
|
|
|
$
|
2,249,296
|
|
|
$
|
222,555
|
|
|
$
|
2,163,332
|
|
|
$
|
581,544
|
|
|
|
|
$
|
222,555
|
|
|
$
|
2,744,876
|
|
|
$
|
2,967,431
|
|
|
$
|
517,329
|
|
|
|
__________
(1)Land improvements are combined with building improvements for financial reporting purposes and are carried at cost.
(2)Includes tenant improvements.
(3)The aggregate gross cost of Brookfield DTLA’s investments in real estate for federal income tax purposes approximated $2.8 billion as of December 31, 2020.
(4)Depreciation in the consolidated statements of operations is computed on a straight-line basis over the following estimated useful lives: buildings (60 years), building improvements (ranging from 5 years to 25 years), and tenant improvements (the shorter of the useful life or the applicable lease term).
(5)Year represents either the year the property was acquired by the Company (“A”) or the year the property was placed in service by the Company after construction was completed (“C”).
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a reconciliation of Brookfield DTLA’s investments in real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Investments in Real Estate
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,925,575
|
|
|
$
|
2,834,450
|
|
|
$
|
2,756,322
|
|
Additions during the year:
|
|
|
|
|
|
Improvements
|
78,469
|
|
|
148,637
|
|
|
78,128
|
|
Deductions during the year:
|
|
|
|
|
|
Dispositions
|
—
|
|
|
20,139
|
|
|
—
|
|
Writeoff of fully depreciated investments in real estate
|
36,613
|
|
|
37,373
|
|
|
—
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
2,967,431
|
|
|
$
|
2,925,575
|
|
|
$
|
2,834,450
|
|
The following is a reconciliation of Brookfield DTLA’s accumulated depreciation on its investments in real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Accumulated Depreciation
|
|
|
|
|
|
Balance at beginning of year
|
$
|
466,405
|
|
|
$
|
418,205
|
|
|
$
|
342,465
|
|
Additions during the year:
|
|
|
|
|
|
Depreciation expense
|
87,537
|
|
|
85,573
|
|
|
75,740
|
|
Deductions during the year:
|
|
|
|
|
|
Writeoff of fully depreciated investments in real estate
|
36,613
|
|
|
37,373
|
|
|
—
|
|
Balance at end of year
|
$
|
517,329
|
|
|
$
|
466,405
|
|
|
$
|
418,205
|
|
.y
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 19—Subsequent Event
Gas Company Tower—
On February 5, 2021, Brookfield DTLA refinanced its Gas Company Tower secured loans. The original $450.0 million secured loans were replaced with secured loans of $465.0 million, comprised of a $350.0 million mortgage loan, a $65.0 million mezzanine loan and a $50.0 million mezzanine loan, each of which bears interest at variable rates equal to LIBOR plus 1.89%, 5.00% and 7.75%, respectively. The initial maturity date of these interest-only loans is February 9, 2023. The mortgage loan can be prepaid, in whole or in part, with prepayment fees (as defined in the underlying loan agreement) until February 2022 after which the loan may be repaid without prepayment fees. A voluntary prepayment of the mortgage or mezzanine loans requires a simultaneous pro-rata prepayment of all loans encumbering this property. Brookfield DTLA has three options to extend the loans maturity dates for a period of one year each, as long as the maturity date of the mezzanine loans is extended simultaneously with the mortgage loan, and no Event of Default (as defined in the underlying loan agreements) has occurred. All proceeds from the new secured loans were used to pay off the original $450.0 million encumbrance and to satisfy the new loans’ required reserves.
As required by the new Gas Company Tower secured debt agreements, the Company entered into interest rate cap contracts expiring on February 15, 2023, with a total notional amount of $465.0 million, limiting the LIBOR portion of the interest rate to 4.00%.