XNYS:KRC Kilroy Realty Corporation Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

KRC Fair Value Estimate
Premium
KRC Consider Buying
Premium
KRC Consider Selling
Premium
KRC Fair Value Uncertainty
Premium
KRC Economic Moat
Premium
KRC Stewardship
Premium
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes  þ    No   o
Kilroy Realty, L. P.         Yes  þ    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o 
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o 
Non-accelerated filer     þ
Smaller reporting company     o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes  o     No   þ
Kilroy Realty, L.P. Yes  o     No   þ
As of April 30, 2012, 68,349,843 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the three months ended March 31, 2012 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to "Kilroy Realty Corporation" or the "Company," "we," "our," and "us" mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to "Kilroy Realty, L.P." or the "Operating Partnership" mean Kilroy Realty, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of March 31, 2012, the Company owned an approximate 97.5% common general partnership interest in the Operating Partnership. The remaining approximate 2.5% common limited partnership interests are owned by non-affiliated investors and certain directors and executive officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership's day-to-day management and control and can cause it to enter into certain major transactions including acquisitions, dispositions, and refinancings and cause changes in its line of business, capital structure, and distribution policies.
There are a few differences between the Company and the Operating Partnership which are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but guarantees some of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company's business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company is required to contribute to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company's business through the Operating Partnership's operations, by the Operating Partnership's incurrence of indebtedness or through the issuance of partnership units.
Noncontrolling interests and stockholders' equity and partners' capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners' capital in the Operating Partnership's financial statements and as noncontrolling interests in the Company's financial statements. The Operating Partnership's financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P. This noncontrolling interest represents the Company's 1% indirect general partnership interest in Kilroy Realty Finance Partnership, L.P., which is directly held by Kilroy Realty Finance, Inc., a wholly-owned subsidiary of the Company. The differences between stockholders' equity, partners' capital and noncontrolling interests result from the differences in the equity issued by the Company and the Operating Partnership, and in the Company's noncontrolling interest in Kilroy Realty Finance Partnership, L.P.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
Combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements:
Note 5, Secured and Unsecured Debt of the Operating Partnership;
Note 6, Noncontrolling Interests on the Company's Consolidated Financial Statements;

i


Note 7, Preferred Stock of the Company;
Note 8, Common Stock of the Company;
Note 9, Preferred and Common Units in the Operating Partnership's Consolidated Financial Statements;
Note 15, Net Income Available to Common Stockholders Per Share of the Company;
Note 16, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
Note 18, Pro Forma Results of the Company;
Note 19, Pro Forma Results of the Operating Partnership;
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Company"; and
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Operating Partnership".
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. §1350.




ii






KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2012
TABLE OF CONTENTS
 
 
  
 
Page
 
  
PART I-FINANCIAL INFORMATION
 
 
 
 
Item 1.
  
FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
 
  
 
  
 
  
 
  
 
 
 
Item 1.
 
FINANCIAL STATEMENTS OF KILROY REALTY, L.P.
 
 
 
 
 
 
 
 
 
  
 
 
 
 
Item 2.
  
 
 
 
Item 3.
  
 
 
 
Item 4.
  
CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)
 
 
 
 
  
PART II-OTHER INFORMATION
 
 
 
 
Item 1.
  
 
 
 
Item 1A.
  
 
 
 
Item 2.
  
 
 
 
Item 3.
  
 
 
 
Item 4.
  
MINE SAFETY DISCLOSURES
 
 
 
Item 5.
  
 
 
 
Item 6.
  
 
 
 







PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
576,433

 
$
537,574

Buildings and improvements
2,970,967

 
2,830,310

Undeveloped land and construction in progress
446,237

 
430,806

Total real estate held for investment
3,993,637

 
3,798,690

Accumulated depreciation and amortization
(770,688
)
 
(742,503
)
Total real estate assets held for investment, net
3,222,949

 
3,056,187

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 14)

 
84,156

CASH AND CASH EQUIVALENTS
374,368

 
4,777

RESTRICTED CASH (Note 14)
43,140

 
358

MARKETABLE SECURITIES (Note 12)
6,459

 
5,691

CURRENT RECEIVABLES, NET (Note 4)
6,990

 
8,395

DEFERRED RENT RECEIVABLES, NET (Note 4)
106,309

 
101,142

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
158,132

 
155,522

DEFERRED FINANCING COSTS, NET
19,060

 
18,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
21,934

 
12,199

TOTAL ASSETS
$
3,959,341

 
$
3,446,795

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 12)
$
350,219

 
$
351,825

Exchangeable senior notes, net (Notes 5, 12 and 17)
308,689

 
306,892

Unsecured debt, net (Notes 5 and 12)
1,130,651

 
980,569

Unsecured line of credit (Notes 5, 12 and 17)

 
182,000

Accounts payable, accrued expenses and other liabilities
92,574

 
81,713

Accrued distributions (Note 17)
26,622

 
22,692

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
90,206

 
79,781

Rents received in advance and tenant security deposits
30,392

 
26,917

Liabilities and deferred revenue of real estate assets held for sale (Note 14)

 
13,286

7.80% Series E and 7.50% Series F Cumulative Redeemable Preferred stock, called for redemption (Note 7)
126,500

 

Total liabilities
2,155,853

 
2,045,675

COMMITMENTS AND CONTINGENCIES (Note 11)

 

NONCONTROLLING INTEREST (Note 6):
 
 
 
7.45% Series A Cumulative Redeemable Preferred units of the Operating Partnership
73,638

 
73,638

EQUITY:
 
 
 
Stockholders' Equity (Notes 7 and 8):
 
 
 
Preferred stock, $.01 par value, 30,000,000 shares authorized:
 
 
 
7.45% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,500,000 shares authorized, none issued and outstanding

 

7.80% Series E Cumulative Redeemable Preferred stock, $.01 par value, 1,610,000 shares authorized, issued and outstanding ($40,250 liquidation preference)

 
38,425

7.50% Series F Cumulative Redeemable Preferred stock, $.01 par value, 3,450,000 shares authorized, issued and outstanding ($86,250 liquidation preference)

 
83,157

6.875% Series G Cumulative Redeemable Preferred stock, $.01 par value,
4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference)
96,155

 

Common stock, $.01 par value, 150,000,000 shares authorized, 68,349,843 and 58,819,717 shares issued and outstanding, respectively
683

 
588

Additional paid-in capital
1,827,676

 
1,448,997

Distributions in excess of earnings
(234,199
)
 
(277,450
)
Total stockholders' equity
1,690,315

 
1,293,717

Noncontrolling interest:
 
 
 
Common units of the Operating Partnership (Note 6)
39,535

 
33,765

Total equity
1,729,850

 
1,327,482

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
$
3,959,341

 
$
3,446,795

See accompanying notes to consolidated financial statements.

1






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
2012
 
2011
REVENUES:
 
 
 
Rental income
$
90,219

 
$
76,997

Tenant reimbursements
8,304

 
6,022

Other property income
887

 
754

Total revenues
99,410

 
83,773

EXPENSES:
 
 
 
Property expenses
17,535

 
17,509

Real estate taxes
8,389

 
7,890

Provision for bad debts
2

 
26

Ground leases
802

 
339

General and administrative expenses
8,767

 
6,560

Acquisition-related expenses
1,528

 
472

Depreciation and amortization
36,746

 
28,441

Total expenses
73,769

 
61,237

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 12)
484

 
184

Interest expense (Note 5)
(21,163
)
 
(20,876
)
Total other (expenses) income
(20,679
)
 
(20,692
)
INCOME FROM CONTINUING OPERATIONS
4,962

 
1,844

DISCONTINUED OPERATIONS (Note 14)
 
 
 
Income from discontinued operations
900

 
3,023

Net gain on dispositions of discontinued operations
72,809

 

Total income from discontinued operations
73,709

 
3,023

NET INCOME
78,671

 
4,867

Net income attributable to noncontrolling common units of the Operating Partnership
(1,795
)
 
(34
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
76,876

 
4,833

PREFERRED DISTRIBUTIONS AND DIVIDENDS:
 
 
 
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership
(1,397
)
 
(1,397
)
Preferred dividends (Note 7)
(3,021
)
 
(2,402
)
Original issuance costs of preferred stock called for redemption (Note 7)
(4,918
)
 

Total preferred distributions and dividends
(9,336
)
 
(3,799
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
67,540

 
$
1,034

Loss from continuing operations available to common stockholders per common share - basic (Note 15)
$
(0.07
)
 
$
(0.04
)
Loss from continuing operations available to common stockholders per common share - diluted (Note 15)
$
(0.07
)
 
$
(0.04
)
Net income available to common stockholders per share - basic (Note 15)
$
1.06

 
$
0.01

Net income available to common stockholders per share - diluted (Note 15)
$
1.06

 
$
0.01

Weighted average common shares outstanding - basic (Note 15)
63,648,704

 
52,302,075

Weighted average common shares outstanding - diluted (Note 15)
63,648,704

 
52,302,075

Dividends declared per common share
$
0.35

 
$
0.35

See accompanying notes to consolidated financial statements.


2






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share/unit data)
 
 
 
 
Common Stock 
 
 
Total
Stock-
holders'
Equity
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2010
$
121,582

 
52,349,670

 
$
523

 
$
1,211,498

 
$
(247,252
)
 
$
1,086,351

 
$
31,379

 
$
1,117,730

Net income
 
 
 
 
 
 
 
 
4,833

 
4,833

 
34

 
4,867

Issuance of share-based compensation awards
 
 
66,208

 
1

 
1,874

 
 
 
1,875

 
 
 
1,875

Noncash amortization of share-based compensation
 
 
 
 
 
 
1,420

 
 
 
1,420

 
 
 
1,420

Repurchase of common stock and restricted stock units
 
 
(11,485
)
 
 
 
(732
)
 
 
 
(732
)
 
 
 
(732
)
Exercise of stock options
 
 
15,000

 
 
 
395

 
 
 
395

 
 
 
395

Adjustment for noncontrolling interest
 
 
 
 
 
 
8

 
 
 
8

 
(8
)
 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(3,799
)
 
(3,799
)
 
 
 
(3,799
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(18,630
)
 
(18,630
)
 
(603
)
 
(19,233
)
BALANCE AS OF MARCH 31, 2011
$
121,582

 
52,419,393

 
$
524

 
$
1,214,463

 
$
(264,848
)
 
$
1,071,721

 
$
30,802

 
$
1,102,523

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock 
 
 
Total
Stock-
holders'
Equity
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2011
$
121,582

 
58,819,717

 
$
588

 
$
1,448,997

 
$
(277,450
)
 
$
1,293,717

 
$
33,765

 
$
1,327,482

Net income
 
 
 
 
 
 
 
 
76,876

 
76,876

 
1,795

 
78,671

Issuance of Series G Preferred stock (Note 7)
96,155

 
 
 
 
 
 
 
 
 
96,155

 
 
 
96,155

Series E and Series F Preferred stock, called for redemption (Note 7)
(121,582
)
 
 
 
 
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common stock (Note 8)
 
 
9,487,500

 
95

 
381,968

 
 
 
382,063

 
 
 
382,063

Issuance of share-based compensation awards (Note 10)
 
 
59,938

 
 
 
294

 
 
 
294

 
 
 
294

Noncash amortization of share-based compensation (Note 10)
 
 
 
 
 
 
1,469

 
 
 
1,469

 
 
 
1,469

Repurchase of common stock and restricted stock units (Note 10)
 
 
(22,312
)
 
 
 
(603
)
 
 
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
 
 
129

 
 
 
129

 
 
 
129

Adjustment for noncontrolling interest
 
 
 
 
 
 
(4,578
)
 
 
 
(4,578
)
 
4,578

 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(4,418
)
 
(4,418
)
 
 
 
(4,418
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(24,289
)
 
(24,289
)
 
(603
)
 
(24,892
)
BALANCE AS OF MARCH 31, 2012
$
96,155

 
68,349,843

 
$
683

 
$
1,827,676

 
$
(234,199
)
 
$
1,690,315

 
$
39,535

 
$
1,729,850

See accompanying notes to consolidated financial statements.


3






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
78,671

 
$
4,867

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
36,464

 
29,059

Increase in provision for bad debts
2

 
26

Depreciation of furniture, fixtures and equipment
288

 
252

Noncash amortization of share-based compensation awards
1,287

 
1,106

Noncash amortization of deferred financing costs and debt discounts and premiums
2,976

 
3,450

Noncash amortization of net (below)/above market rents (Note 3)
(525
)
 
653

Net gain on dispositions of discontinued operations (Note 14)
(72,809
)
 

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,261
)
 
(2,326
)
Straight-line rents
(5,487
)
 
(4,340
)
Net change in other operating assets
(3,869
)
 
(1,816
)
Net change in other operating liabilities
14,956

 
12,866

Insurance proceeds received for property damage
(951
)
 

Net cash provided by operating activities
48,742

 
43,797

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(162,380
)
 
(33,000
)
Expenditures for operating properties
(17,307
)
 
(15,985
)
Expenditures for development and redevelopment properties and undeveloped land
(13,477
)
 
(6,714
)
Net proceeds received from dispositions of operating properties (Note 14)
100,765

 

Insurance proceeds received for property damage
951

 

Increase in acquisition-related deposits
(5,250
)
 
(5,000
)
Increase in restricted cash
(386
)
 
(438
)
Net cash used in investing activities
(97,084
)
 
(61,137
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred stock (Note 7)
96,757

 

Net proceeds from issuance of common stock (Note 8)
382,063

 

Borrowings on unsecured line of credit
30,000

 
42,000

Repayments on unsecured line of credit
(212,000
)
 
(144,000
)
Proceeds from issuance of secured debt

 
135,000

Principal payments on secured debt
(1,546
)
 
(1,598
)
Proceeds from the issuance of unsecured debt (Note 5)
150,000

 

Financing costs
(1,877
)
 
(1,160
)
Decrease in loan deposits

 
2,027

Repurchase of common stock and restricted stock units (Note 10)
(603
)
 
(732
)
Proceeds from exercise of stock options
129

 
395

Dividends and distributions paid to common stockholders and common unitholders
(21,191
)
 
(18,925
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,799
)
 
(3,799
)
Net cash provided by financing activities
417,933

 
9,208

Net increase (decrease) in cash and cash equivalents
369,591

 
(8,132
)
Cash and cash equivalents, beginning of period
4,777

 
14,840

Cash and cash equivalents, end of period
$
374,368

 
$
6,708


4






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)

 
Three Months Ended March 31,
 
2012
 
2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $3,251 and $1,620 as of March 31, 2012 and 2011, respectively
$
4,487

 
$
6,965

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
5,421

 
$
4,753

Tenant improvements funded directly by tenants to third parties
$
95

 
$
2,800

Assumption of other liabilities with property acquisitions (Note 2)
$
137

 
$

Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange (Note 14)
$
42,395

 
$

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of preferred stock issuance costs
$
602

 
$

Accrual of dividends and distributions payable to common stockholders and common unitholders
$
24,524

 
$
18,950

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
2,431

 
$
1,909

Issuance of share-based compensation awards (Note 10)
$
29,989

 
$
6,432

Reclassification of preferred stock called for redemption from equity to liabilities (Note 7)
$
126,500

 
$


See accompanying notes to consolidated financial statements.


5






ITEM 1: FINANCIAL STATEMENTS OF KILROY REALTY, L.P.

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
March 31,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
576,433

 
$
537,574

Buildings and improvements
2,970,967

 
2,830,310

Undeveloped land and construction in progress
446,237

 
430,806

Total real estate held for investment
3,993,637

 
3,798,690

Accumulated depreciation and amortization
(770,688
)
 
(742,503
)
Total real estate assets held for investment, net
3,222,949

 
3,056,187

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 14)

 
84,156

CASH AND CASH EQUIVALENTS
374,368

 
4,777

RESTRICTED CASH (Note 14)
43,140

 
358

MARKETABLE SECURITIES (Note 12)
6,459

 
5,691

CURRENT RECEIVABLES, NET (Note 4)
6,990

 
8,395

DEFERRED RENT RECEIVABLES, NET (Note 4)
106,309

 
101,142

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
158,132

 
155,522

DEFERRED FINANCING COSTS, NET
19,060

 
18,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
21,934

 
12,199

TOTAL ASSETS
$
3,959,341

 
$
3,446,795

LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 12)
$
350,219

 
$
351,825

Exchangeable senior notes, net (Notes 5, 12 and 17)
308,689

 
306,892

Unsecured debt, net (Notes 5 and 12)
1,130,651

 
980,569

Unsecured line of credit (Notes 5, 12 and 17)

 
182,000

Accounts payable, accrued expenses and other liabilities
92,574

 
81,713

Accrued distributions (Note 17)
26,622

 
22,692

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
90,206

 
79,781

Rents received in advance and tenant security deposits
30,392

 
26,917

Liabilities and deferred revenue of real estate assets held for sale (Note 14)

 
13,286

7.80% Series E and 7.50% Series F Cumulative Redeemable Preferred units, called for redemption (Note 9)
126,500

 

Total liabilities
2,155,853

 
2,045,675

COMMITMENTS AND CONTINGENCIES (Note 11)

 

7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
73,638

 
73,638

CAPITAL:
 
 
 
Partners' Capital (Note 9):
 
 
 
7.80% Series E Cumulative Redeemable Preferred units, 1,610,000 units issued and outstanding ($40,250 liquidation preference)

 
38,425

7.50% Series F Cumulative Redeemable Preferred units, 3,450,000 units issued and outstanding ($86,250 liquidation preference)

 
83,157

6.875% Series G Cumulative Redeemable Preferred units,
4,000,000 units issued and outstanding ($100,000 liquidation preference)
96,155

 

Common units, 68,349,843 and 58,819,717 held by the general partner and 1,718,131 and 1,718,131 held by common limited partners issued and outstanding, respectively
1,631,001

 
1,203,259

Total partners' capital
1,727,156

 
1,324,841

Noncontrolling interest in consolidated subsidiaries
2,694

 
2,641

Total capital
1,729,850

 
1,327,482

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
$
3,959,341

 
$
3,446,795

See accompanying notes to consolidated financial statements.

6






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit data)
 
 
Three Months Ended March 31,
 
2012
 
2011
REVENUES:
 
 
 
Rental income
$
90,219

 
76,997

Tenant reimbursements
8,304

 
6,022

Other property income
887

 
754

Total revenues
99,410

 
83,773

EXPENSES:
 
 
 
Property expenses
17,535

 
17,509

Real estate taxes
8,389

 
7,890

Provision for bad debts
2

 
26

Ground leases
802

 
339

General and administrative expenses
8,767

 
6,560

Acquisition-related expenses
1,528

 
472

Depreciation and amortization
36,746

 
28,441

Total expenses
73,769

 
61,237

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 12)
484

 
184

Interest expense (Note 5)
(21,163
)
 
(20,876
)
Total other (expenses) income
(20,679
)
 
(20,692
)
INCOME FROM CONTINUING OPERATIONS
4,962

 
1,844

DISCONTINUED OPERATIONS (Note 14)
 
 
 
Income from discontinued operations
900

 
3,023

Net gain on dispositions of discontinued operations
72,809

 

Total income from discontinued operations
73,709

 
3,023

NET INCOME
78,671

 
4,867

Net income attributable to noncontrolling interests in consolidated subsidiaries
(53
)
 
(34
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
78,618

 
4,833

Preferred distributions (Note 9)
(4,418
)
 
(3,799
)
Original issuance costs of preferred units called for redemption (Note 9)
(4,918
)
 

Total preferred distributions
(9,336
)
 
(3,799
)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
$
69,282

 
$
1,034

Loss from continuing operations available to common unitholders per common unit - basic (Note 16)
$
(0.07
)
 
$
(0.04
)
Loss from continuing operations available to common unitholders per common unit - diluted (Note 16)
$
(0.07
)
 
$
(0.04
)
Net income available to common unitholders per unit - basic (Note 16)
$
1.05

 
$
0.01

Net income available to common unitholders per unit - diluted (Note 16)
$
1.05

 
$
0.01

Weighted average common units outstanding - basic (Note 16)
65,366,835

 
54,025,206

Weighted average common units outstanding - diluted (Note 16)
65,366,835

 
54,025,206

Distributions declared per common unit
$
0.35

 
$
0.35

See accompanying notes to consolidated financial statements.


7






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
 
 
Partners'
Capital
 
Total
Partners' 
Capital
 
Noncontrolling
Interests
in
Consolidated
Subsidiaries
 
 
 
Preferred
Units
  
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2010
$
121,582

  
54,072,801

 
$
994,511

 
$
1,116,093

 
$
1,637

 
$
1,117,730

Net income
 
  
 
 
4,833

 
4,833

 
34

 
4,867

Issuance of share-based compensation awards
 
  
66,208

 
1,875

 
1,875

 
 
 
1,875

Noncash amortization of share-based compensation
 
  
 
 
1,420

 
1,420

 
 
 
1,420

Repurchase of common units and restricted stock units
 
  
(11,485
)
 
(732
)
 
(732
)
 
 
 
(732
)
Exercise of stock options
 
 
15,000

 
395

 
395

 
 
 
395

Other
 
  
 
 
1

 
1

 
(1
)
 

Preferred distributions
 
  
 
 
(3,799
)
 
(3,799
)
 
 
 
(3,799
)
Distributions declared per common unit ($0.35 per unit)
 
  
 
 
(19,233
)
 
(19,233
)
 
 
 
(19,233
)
BALANCE AS OF MARCH 31, 2011
$
121,582

  
54,142,524

 
$
979,271

 
$
1,100,853

 
$
1,670

 
$
1,102,523

 
 
 
 
 
 
 
 
 
 
 
 
 
Partners'
Capital
 
Total
Partners' 
Capital
 
Noncontrolling
Interests
in
Consolidated
Subsidiaries
 
 
 
Preferred
Units
  
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2011
$
121,582

  
60,537,848

 
$
1,203,259

 
$
1,324,841

 
$
2,641

 
$
1,327,482

Net income
 
  
 
 
78,618

 
78,618

 
53

 
78,671

Issuance of Series G Preferred units (Note 9)
96,155

 
 
 
 
 
96,155

 
 
 
96,155

Series E and Series F Preferred units, called for redemption (Note 9)
(121,582
)
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common units (Note 9)
 
 
9,487,500

 
382,063

 
382,063

 
 
 
382,063

Issuance of share-based compensation awards (Note 10)
 
  
59,938

 
294

 
294

 
 
 
294

Noncash amortization of share-based compensation (Note 10)
 
  
 
 
1,469

 
1,469

 
 
 
1,469

Repurchase of common units and restricted stock units (Note 10)
 
  
(22,312
)
 
(603
)
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
129

 
129

 
 
 
129

Preferred distributions
 
  
 
 
(4,418
)
 
(4,418
)
 
 
 
(4,418
)
Distributions declared per common unit ($0.35 per unit)
 
  
 
 
(24,892
)
 
(24,892
)
 
 
 
(24,892
)
BALANCE AS OF MARCH 31, 2012
$
96,155

  
70,067,974

 
$
1,631,001

 
$
1,727,156

 
$
2,694

 
$
1,729,850


See accompanying notes to consolidated financial statements.


8






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
78,671

 
$
4,867

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
36,464

 
29,059

Increase in provision for bad debts
2

 
26

Depreciation of furniture, fixtures and equipment
288

 
252

Noncash amortization of share-based compensation awards
1,287

 
1,106

Noncash amortization of deferred financing costs and debt discounts and premiums
2,976

 
3,450

Noncash amortization of net (below)/above market rents (Note 3)
(525
)
 
653

Net gain on dispositions of discontinued operations (Note 14)
(72,809
)
 

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,261
)
 
(2,326
)
Straight-line rents
(5,487
)
 
(4,340
)
Net change in other operating assets
(3,869
)
 
(1,816
)
Net change in other operating liabilities
14,956

 
12,866

Insurance proceeds received for property damage
(951
)
 

Net cash provided by operating activities
48,742

 
43,797

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(162,380
)
 
(33,000
)
Expenditures for operating properties
(17,307
)
 
(15,985
)
Expenditures for development and redevelopment properties and undeveloped land
(13,477
)
 
(6,714
)
Net proceeds received from dispositions of operating properties (Note 14)
100,765

 

Insurance proceeds received for property damage
951

 

Increase in acquisition-related deposits
(5,250
)
 
(5,000
)
Increase in restricted cash
(386
)
 
(438
)
Net cash used in investing activities
(97,084
)
 
(61,137
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred units (Note 9)
96,757

 

Net proceeds from issuance of common units (Note 9)
382,063

 

Borrowings on unsecured line of credit
30,000

 
42,000

Repayments on unsecured line of credit
(212,000
)
 
(144,000
)
Proceeds from issuance of secured debt

 
135,000

Principal payments on secured debt
(1,546
)
 
(1,598
)
Proceeds from the issuance of unsecured debt (Note 5)
150,000

 

Financing costs
(1,877
)
 
(1,160
)
Decrease in loan deposits

 
2,027

Repurchase of common units and restricted stock units (Note 10)
(603
)
 
(732
)
Proceeds from exercise of stock options
129

 
395

Distributions paid to common unitholders
(21,191
)
 
(18,925
)
Distributions paid to preferred unitholders
(3,799
)
 
(3,799
)
Net cash provided by financing activities
417,933

 
9,208

Net increase (decrease) in cash and cash equivalents
369,591

 
(8,132
)
Cash and cash equivalents, beginning of period
4,777

 
14,840

Cash and cash equivalents, end of period
$
374,368

 
$
6,708

 

9






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)
 
 
 
Three Months Ended March 31,
 
2012
  
2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
  
 
Cash paid for interest, net of capitalized interest of $3,251 and $1,620 as of March 31, 2012 and 2011, respectively
$
4,487

 
$
6,965

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
5,421

 
$
4,753

Tenant improvements funded directly by tenants to third parties
$
95

 
$
2,800

Assumption of other liabilities with property acquisitions (Note 2)
$
137

 
$

Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange (Note 14)
$
42,395

 
$

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of preferred unit issuance costs
$
602

 
$

Accrual of distributions payable to common unitholders
$
24,524

 
$
18,950

Accrual of distributions payable to preferred unitholders
$
2,431

 
$
1,909

Issuance of share-based compensation awards (Note 10)
$
29,989

 
$
6,432

Reclassification of preferred units called for redemption from equity to liabilities (Note 9)
$
126,500

 
$

See accompanying notes to consolidated financial statements.


10


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2012 and 2011
(unaudited)

1.    Organization and Basis of Presentation
Organization
Kilroy Realty Corporation (the "Company") is a self-administered real estate investment trust (“REIT”) active in office and industrial submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Los Angeles, Orange County, San Diego, greater Seattle, and the San Francisco Bay Area, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). The Company's common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”
We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. (the "Finance Partnership"). We conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates otherwise, the terms "Kilroy Realty Corporation" or the "Company," "we," "our," and "us" refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term "Operating Partnership" refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees, and properties apply to both the Company and the Operating Partnership.
The following table of office buildings (the "Office Properties") and industrial buildings (the "Industrial Properties") summarizes our stabilized portfolio of operating properties as of March 31, 2012. As of March 31, 2012, all of our properties are owned and all of our business is currently conducted in the state of California with the exception of six office properties located in the state of Washington.
 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage Occupied
Office Properties(1)
111

 
11,797,818

 
440

 
90.0
%
Industrial Properties
39

 
3,413,354

 
60

 
97.0
%
Total Stabilized Portfolio
150

 
15,211,172

 
500

 
91.6
%
________________________
(1)
Includes seven office properties acquired in one transaction during the three months ended March 31, 2012 encompassing 374,139 rentable square feet (see Note 2 for additional information).
 
Our stabilized portfolio excludes undeveloped land, development and redevelopment properties currently under construction or committed for construction, "lease-up" properties and properties held for sale. As of March 31, 2012, we had four office redevelopment properties under construction encompassing approximately 918,000 rentable square feet. We define "lease-up" properties as properties we recently developed or redeveloped that have not yet reached 95% occupancy and are within one year following cessation of major construction activities.  We had no "lease-up" properties as of March 31, 2012. As of December 31, 2011, we had two office properties held-for-sale encompassing approximately 254,000 rentable square feet, which were sold in January 2012.
     As of March 31, 2012, the Company owned a 97.5% general partnership interest in the Operating Partnership. The remaining 2.5% common limited partnership interest in the Operating Partnership as of March 31, 2012 was owned by non-affiliated investors and certain of our directors and executive officers (see Note 6). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. The number of common units held by the Company is at all times equivalent to the number of outstanding shares of the Company's common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company's common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership's Sixth Amended and Restated Agreement of Limited Partnership (as amended, the “Partnership Agreement”) (see Note 6).
Kilroy Realty Finance, Inc., our wholly-owned subsidiary, is the sole general partner of the Finance Partnership and owns a 1.0% general partnership interest. The Operating Partnership owns the remaining 99.0% limited partnership interest. Kilroy Services, LLC ("KSLLC"), which is a wholly-owned subsidiary of the Operating Partnership, is the entity through which we conduct substantially all of our development activities. With the exception of the Operating Partnership, all of our subsidiaries, which include Kilroy Realty TRS, Inc., Kilroy Realty Management, L.P., Kilroy RB, LLC, Kilroy RB II, LLC, Kilroy Realty Northside Drive, LLC and Kilroy Realty 303, LLC are wholly-owned.

11

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Basis of Presentation
The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, KSLLC, and all of our wholly-owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, KSLLC, and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
As of March 31, 2012 the consolidated financial statements of the Company and the Operating Partnership also include one variable interest entity ("VIE") in which we are deemed to be the primary beneficiary. In February 2012, we acquired seven office buildings in one transaction which were transferred to a special purpose VIE to facilitate a potential like−kind exchange pursuant to Section 1031 of the Code to defer taxable gains on sales for federal and state income tax purposes ("Section 1031 Exchange"). The Company is obligated to complete a Section 1031 Exchange, if any, and take title to the property within 180 days of the acquisition date. The VIE will be terminated upon the completion of the Section 1031 Exchange. The impact of consolidating the VIE increased the Company's total assets and liabilities by approximately $172.2 million and $10.4 million, respectively, at March 31, 2012. As of December 31, 2011, the consolidated financial statements of the Company and the Operating Partnership included one VIE, which was established in September 2011 to facilitate a Section 1031 Exchange. The impact of consolidating this VIE increased the Company's total assets and liabilities by approximately $108.5 million and $7.3 million, respectively, at December 31, 2011. This Section 1031 Exchange was completed in January 2012 and this entity was no longer a VIE at March 31, 2012.
The accompanying interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The interim financial statements for the Company and the Operating Partnership should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.
Change in Statements of Cash Flows Presentation
Certain prior period amounts in the consolidated statements of cash flows of the Company and the Operating Partnership have been reclassified to conform to the current period presentation. We reclassified cash flow changes from "Marketable securities," "Current receivables," "Other deferred leasing costs" and "Prepaid expenses and other assets" into "Net change in other operating assets" for all periods presented. We also reclassified cash flow changes from "Accounts payable, accrued expenses and other liabilities," "Deferred revenue" and "Rents received in advance and tenant security deposits" into "Net change in other operating liabilities" for all periods presented. Each category change had previously been presented separately.
Recent Accounting Pronouncements
Effective January 1, 2012, we adopted the provisions of ASU No. 2011-04, Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amended ASC Topic 820, Fair Value Measurement. The objective of this guidance is to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The guidance also requires expanded fair value disclosures related to Level 3 financial instruments and Level 3 financial instrument transfers. The guidance does not require any new fair value measurements. The adoption of this guidance did not have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

12

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


 
2.    Acquisitions
During the three months ended March 31, 2012, we acquired the seven office properties listed below from an unrelated third party. The acquisition was funded with proceeds from the Company's public offering of common stock in February 2012 (see Note 8).
Property
 
Date of Acquisition
 
Number of
Buildings
 
Rentable Square
Feet
 
Occupancy as of March 31, 2012
 
Purchase
Price
(in millions)(1)
4100-4700 Bohannon Drive
 
 
 
 
 
 
 
 
 
 
Menlo Park, CA
 
February 29, 2012
 
7
 
374,139

 
80.1%
 
$
162.5

Total
 
 
 
7
 
374,139

 
 
 
$
162.5

________________________
(1)
Excludes acquisition-related costs.
The related assets, liabilities, and results of operations of the acquired properties are included in the consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
 
4100-4700 Bohannon Drive,
Menlo Park, CA
 
(in thousands)
Assets
 
Land
$
38,810

Buildings and improvements(1)
124,617

Deferred leasing costs and acquisition-related intangible assets(2)
9,470

Total assets acquired
172,897

 
 
Liabilities
 
Deferred revenue and acquisition-related intangible liabilities(3)
10,380

Accounts payable, accrued expenses and other liabilities
137

Total liabilities assumed
10,517

 
 
Net assets and liabilities acquired(4)
$
162,380

 
 
________________________
(1)
Represents buildings, building improvements and tenant improvements.
(2)
Represents in-place leases (approximately $5.8 million with a weighted average amortization period of 5.8 years), above-market leases (approximately $0.1 million with a weighted average amortization period of 2.6 years), and leasing commissions (approximately $3.5 million with a weighted average amortization period of 4.3 years).
(3)
Represents below-market leases (approximately $10.4 million with a weighted average amortization period of 8.2 years).
(4)
Reflects the purchase price net of other lease-related obligations.


13

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



3.    Deferred Leasing Costs and Acquisition-related Intangible Assets and Liabilities, net
The following table summarizes our deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market operating leases, in-place leases and below-market ground lease obligation) and intangible liabilities (acquired value of below-market operating leases and above-market ground lease obligation) as of March 31, 2012 and December 31, 2011:
 
 
March 31, 2012
 
December 31, 2011
 
(in thousands)
Deferred Leasing Costs and Acquisition-related Intangible Assets, net(1):
 
 
 
Deferred leasing costs
$
139,693

 
$
142,652

Accumulated amortization
(48,131
)
 
(52,974
)
Deferred leasing costs, net
91,562

 
89,678

Above-market operating leases
26,637

 
28,143

Accumulated amortization
(7,857
)
 
(8,101
)
Above-market operating leases, net
18,780

 
20,042

In-place leases
63,465

 
61,355

Accumulated amortization
(15,825
)
 
(15,753
)
In-place leases, net
47,640

 
45,602

Below-market ground lease obligation
200

 
200

Accumulated amortization
(50
)
 

Below-market ground lease obligation, net
150

 
200

Total deferred leasing costs and acquisition-related intangible assets, net
$
158,132

 
$
155,522

Acquisition-related Intangible Liabilities, net(1)(2):
 
 
 
Below-market operating leases
$
46,966

 
$
37,582

Accumulated amortization
(7,058
)
 
(6,158
)
Below-market operating leases, net
39,908

 
31,424

Above-market ground lease obligation
5,200

 
5,200

Accumulated amortization
(53
)
 
(37
)
Above-market ground lease obligation, net
5,147

 
5,163

Total acquisition-related intangible liabilities, net
$
45,055

 
$
36,587

________________________
(1)
Balances and accumulated amortization amounts at March 31, 2012 reflect the write-off of the following fully amortized amounts at January 1, 2012: deferred leasing costs (approximately $9.5 million), above-market leases (approximately $1.6 million), in-place leases (approximately $3.7 million), and below-market leases (approximately $1.0 million).
(2)
Included in deferred revenue and acquisition-related intangible liabilities, net in the consolidated balance sheets.
 

14

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the three months ended March 31, 2012 and 2011:
 
Three Months Ended March 31,
 
2012
 
2011
 
(in thousands)
Deferred leasing costs(1)
$
4,498

 
$
3,768

Net (below) above-market operating leases(2)
(525
)
 
653

In-place leases(1)
3,781

 
2,173

Net below-market ground lease obligation(3)
34

 

Total
$
7,788

 
$
6,594

_________________________
(1)
The amortization of deferred leasing costs and in-place leases is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)
The amortization of net below−market operating leases is recorded as an increase to rental income for the three months ended March 31, 2012, and the amortization of the net above-market operating leases is recorded as a decrease to rental income for the three months ended March 31, 2011 in the consolidated statements of operations.
(3)
The amortization of the net below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the period presented.

The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition−related intangibles as of March 31, 2012 for future periods:
Year Ending
Deferred Leasing Costs
 
Net Below-Market Operating Leases(1)
 
In-Place Leases
 
Net Below/(Above)-Market Ground Lease Obligation(2)
 
(in thousands)
Remaining 2012
$
14,535

 
$
(2,196
)
 
$
11,111

 
$
103

2013
17,541

 
(3,091
)
 
12,616

 
(63
)
2014
15,392

 
(2,897
)
 
9,173

 
(63
)
2015
11,828

 
(2,285
)
 
5,317

 
(63
)
2016
9,426

 
(1,393
)
 
2,903

 
(63
)
Thereafter
22,840

 
(9,266
)
 
6,520

 
(4,848
)
Total
$
91,562

 
$
(21,128
)
 
$
47,640

 
$
(4,997
)
_______________________
(1)
Represents estimated annual amortization related to net below-market operating leases. Amounts shown represent net below-market operating leases which will be recorded as an increase to rental income in the consolidated statements of operations.
(2)
Represents estimated annual net amortization related to (above)/below−market ground lease obligations. Amounts shown for 2012 represent net below−market ground lease obligations which will be recorded as an increase to ground lease expense in the consolidated statements of operations. Amounts shown for 2013−2016 and for the periods thereafter represent net above−market ground lease obligations which will be recorded as a decrease to ground lease expense in the consolidated statements of operations.

15

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



4.    Receivables
Current Receivables, net
Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as of March 31, 2012 and December 31, 2011:  
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Current receivables
$
9,574

 
$
10,985

Allowance for uncollectible tenant receivables
(2,584
)
 
(2,590
)
Current receivables, net
$
6,990

 
$
8,395

 Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of March 31, 2012 and December 31, 2011:
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Deferred rent receivables
$
109,317

 
$
104,548

Allowance for deferred rent receivables
(3,008
)
 
(3,406
)
Deferred rent receivables, net
$
106,309

 
$
101,142


5.    Secured and Unsecured Debt of the Operating Partnership
Exchangeable Senior Notes
The table below summarizes the balance and significant terms of the Company's 3.25% Exchangeable Notes due April 2012 (the "3.25% Exchangeable Notes") and 4.25% Exchangeable Notes due November 2014 (the "4.25% Exchangeable Notes" and together with the 3.25% Exchangeable Notes, the "Exchangeable Notes") outstanding as of March 31, 2012 and December 31, 2011. The Company repaid the 3.25% Exchangeable Notes in April 2012 upon maturity (see Note 17).
 
3.25% Exchangeable Notes
 
4.25% Exchangeable Notes 
 
March 31,
2012
 
December 31,
2011
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Principal amount
$
148,000

 
$
148,000

 
$
172,500

 
$
172,500

Unamortized discount
(132
)
 
(924
)
 
(11,679
)
 
(12,684
)
Net carrying amount of liability component
$
147,868

 
$
147,076

 
$
160,821

 
$
159,816

Carrying amount of equity component
$33,675
 
$19,835
Maturity date
April 2012
 
November 2014
Stated coupon rate (1)(2)
3.25%
 
4.25%
Effective interest rate (3)
5.45%
 
7.13%
Exchange rate per $1,000 principal value of the Exchangeable Notes, as adjusted (4)
11.3636
 
27.8307
Exchange price, as adjusted (4)
$88.00
 
$35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined (4)
1,681,813
 
4,800,796
_____________________ 
(1)
Interest on the 3.25% Exchangeable Notes is payable semi-annually in arrears on April 15th and October 15th of each year.
(2)
Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15th and November 15th of each year.
(3)
The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance.
(4)
The exchange rate, exchange price, and the number of shares to be delivered upon conversion are subject to adjustment under certain circumstances including increases in our common dividends.

16

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Capped Call Transactions
In connection with the offerings of the Exchangeable Notes, we entered into capped call option transactions ("capped calls") to mitigate the dilutive impact of the potential conversion of the Exchangeable Notes. The table below summarizes our capped call option positions as of both March 31, 2012 and December 31, 2011. The capped calls on the 3.25% Exchangeable Notes were terminated on April 15, 2012 upon the maturity and repayment of the 3.25% Exchangeable Notes by the Company.
 
 
3.25% Exchangeable Notes(1)

 
4.25% Exchangeable  Notes(2)

Referenced shares of common stock
1,121,201

 
4,800,796

Exchange price including effect of capped calls
$
102.72

 
$
42.81

________________________
(1)
The capped calls mitigate the dilutive impact to us of the potential exchange of two-thirds of the 3.25% Exchangeable Notes into shares of common stock.
(2)
The capped calls mitigate the dilutive impact to us of the potential exchange of all of the 4.25% Exchangeable Notes into shares of common stock.
For the three months ended March 31, 2012 and 2011, the per share average trading price of the Company's common stock on the NYSE was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:
 
March 31, 2012
 
March 31, 2011
Per share average trading price of the Company's common stock
$42.86
 
$37.96
As a result, even though the 4.25% Exchangeable Notes were not convertible as of March 31, 2012 and March 31, 2011, if they were convertible, the approximate fair value of the shares upon conversion at these dates would have been equal to approximately $208.7 million and $182.5 million, respectively, which would have exceeded the $172.5 million principal amount of the 4.25% Exchangeable Notes by approximately $36.2 million and $10.0 million, respectively. The average trading price of the Company's common stock on the NYSE for the three months ended March 31, 2012 and 2011 was below the exchange price of the 3.25% Exchangeable Notes. See Notes 15 and 16 for a discussion of the impact of the Exchangeable Notes on our diluted earnings per share and unit calculations for the periods presented.
Interest Expense for the Exchangeable Notes
The unamortized discount on the Exchangeable Notes is accreted as additional interest expense from the date of issuance through the maturity date of the applicable Exchangeable Notes. The following table summarizes the total interest expense attributable to the Exchangeable Notes based on the effective interest rates set forth above, before the effect of capitalized interest, for the three months ended March 31, 2012 and 2011:
 
Three Months Ended March 31,
 
2012
 
2011
 
(in thousands)
Contractual interest payments
$
3,035

 
$
3,035

Amortization of discount
1,797

 
1,688

Interest expense attributable to the Exchangeable Notes
$
4,832

 
$
4,723

Unsecured Term Loan Facility
In March 2012, the Operating Partnership entered into a new $150.0 million unsecured term loan (the "Unsecured Term Loan Facility"), which is included in unsecured debt, net on our consolidated balance sheets. The Unsecured Term Loan Facility bears interest at an annual rate of LIBOR plus 1.750%, which can vary depending on the Operating Partnership's credit rating, and is scheduled to mature on March 29, 2016. Under the terms of the Unsecured Term Loan Facility, we may exercise an option to extend the maturity date by one year. We may elect to borrow up to an additional $100.0 million under an accordion option, subject to bank approval. We expect to use borrowings under the Unsecured Term Loan Facility for general corporate purposes, which may include repaying other outstanding indebtedness.

17

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Unsecured Line of Credit
The following table summarizes the balance and terms of our Credit Facility as of March 31, 2012 and December 31, 2011, respectively:
 
March 31,
2012
 
December 31,
2011
 
(in thousands)
Outstanding borrowings(1)
$

 
$
182,000

Remaining borrowing capacity
500,000

 
318,000

Total borrowing capacity(2)
$
500,000

 
$
500,000

Interest rate(3) 


 
2.05
%
Facility fee-annual rate(4)
0.350%
Maturity date(5)
August 2015
________________________
(1)
As of March 31, 2012, there were no borrowings outstanding on the Credit Facility.
(2)
We may elect to borrow, subject to bank approval, up to an additional $200.0 million under an accordion feature under the terms of the Credit Facility.
(3)
The Credit Facility interest rate was calculated based on an annual rate of LIBOR plus 1.750% as of both March 31, 2012 and December 31, 2011. No interest rate is shown as of March 31, 2012 because no borrowings were outstanding.
(4)
The facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we also incurred origination and legal costs of approximately $8.3 million that are currently being amortized through the maturity date of the Credit Facility.
(5)
Under the terms of the Credit Facility, we may exercise an option to extend the maturity date by one year.
The Company intends to borrow amounts under the Credit Facility from time to time for general corporate purposes, to fund potential acquisitions, to finance development and redevelopment expenditures, and to potentially repay long-term debt. In March 2012, we amended the Credit Facility to reduce the FMV Cap Rate (as defined in the Credit Facility agreement), which is used to calculate the fair value of our assets for certain covenants under the Credit Facility, from 7.50% to 6.75%. There were no other changes to the terms of the Credit Facility.
Debt Covenants and Restrictions
The Credit Facility, the Unsecured Term Loan Facility, the unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio, and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of March 31, 2012.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of March 31, 2012:
Year Ending
(in thousands)
 
Remaining 2012
$
251,758

(1) 
2013
6,373

 
2014
262,443

 
2015
357,382

 
2016
156,551

 
Thereafter
768,476

 
Total
$
1,802,983

(2) 
________________________ 
(1)
Includes the 3.25% Exchangeable Notes with an aggregate principal amount of $148.0 million that we repaid in April 2012 upon maturity (see Note 17).
(2)
Includes gross principal balance of outstanding debt before impact of all debt discounts and premiums.

18

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Capitalized Interest and Loan Fees
The following table sets forth our gross interest expense, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three months ended March 31, 2012 and 2011. The capitalized amounts are a cost of development and redevelopment, and increase the carrying value of undeveloped land and construction in progress.
 
Three Months Ended March 31,
 
2012
 
2011
 
(in thousands)
Gross interest expense
$
24,994

 
$
22,855

Capitalized interest
(3,831
)
 
(1,979
)
Interest expense
$
21,163

 
$
20,876



6.    Noncontrolling Interests on the Company's Consolidated Financial Statements
7.45% Series A Cumulative Redeemable Preferred Units of the Operating Partnership
As of both March 31, 2012 and December 31, 2011, the Operating Partnership had outstanding 1,500,000 7.45% Series A Cumulative Redeemable Preferred Units representing preferred limited partnership interests in the Operating Partnership with a redemption value of $50.00