Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Brookfield DTLA Fund Office Trust Investor Inc. (1575311) 10-Q published on May 14, 2020 at 4:58 pm
Reporting Period: Mar 30, 2020
Brookfield DTLA receives its income primarily from lease income generated from the operations of its office and retail properties, and to a lesser extent, revenue from its parking garages. Most of our leases are either net or modified-gross leases. Net and modified-gross leases are those in which tenants pay not only base rent but also some or all real estate taxes and operating expenses of the leased property. Tenants typically reimburse us the full direct cost for use of lighting, heating and air conditioning during non-business hours, and for a certain number of parking spaces. Our retail tenants are experiencing the most immediate impact of the ongoing and developing recent novel coronavirus (“COVID–19”) pandemic. Our office tenants, while facing hardships from stay-at-home orders, do not presently have acute difficulty in fulfilling their lease commitments in the near term. However, they could face increased difficulty if prolonged mitigation efforts materially impact their business.
Occupancy decreases during the three months ended March 31, 2020 are mainly attributable to contractual expirations of lease agreements. Due to stay-at-home directives in almost every state, including California where our properties are located, many leasing transactions have paused, we believe temporarily, while companies re-direct their focus on addressing COVID–19 issues with their business, including protecting their employees and managing financial and operating matters. Leasing volume for the month of April 2020 is down significantly. At the same time, we have ongoing interest and lease negotiations with existing tenants on lease renewals/extensions and expansion of space and continued negotiations with prospective tenants on leasing of space.
Our business could be materially adversely affected by the effects of the COVID–19 pandemic and the future outbreak of other highly infectious or contagious diseases. As a result of the rapid spread of COVID–19, many companies and various governments have imposed restrictions on business activity and travel which may continue and could expand. Given the ongoing and dynamic nature of the circumstances surrounding COVID–19, it is difficult to predict how significant the impact of this coronavirus outbreak, including any responses to it, will be on the Company or for how long disruptions are likely to continue. The extent of such impact will depend on future developments, which are highly uncertain, rapidly evolving and cannot be predicted, including new information which may emerge concerning the severity of this coronavirus and actions taken to contain COVID–19 or its impact, among others. Such developments, depending on their nature, duration, and intensity, could have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate office and retail properties in an area impacted by COVID–19. Adverse impacts on our business may include:
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified and by limiting our exposure to any one tenant. The recent COVID–19 outbreak has increased the risk in the near term of our tenants’ ability to fulfill lease commitments, which has been materially impacted by retail store closures, quarantines and stay-at-home orders. Certain tenants could declare bankruptcy or become insolvent and cease business operations as a result of prolonged mitigation efforts. Our retail tenants are experiencing the most immediate impact. Our office tenants, while facing hardships from stay-at-home orders, do not presently have acute difficulty in fulfilling their lease commitments in the near term. However, they could face increased difficulty if prolonged mitigation efforts materially impact their business.
Real estate is relatively illiquid and may be even more illiquid in the context of an economic downturn that may result from the COVID–19 pandemic. Such illiquidity may limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Also, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate. Our office properties generate a relatively stable source of income from contractual tenant lease payments. Continued growth of lease income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. We are substantially protected against short-term market conditions, as most of our leases are long-term in nature with an average remaining term of approximately six years as of March 31, 2020.