XNYS:KRC Kilroy Realty Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 1, 2012, 68,932,731 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 period ended June 30, 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 June 30, 2012, the Company owned an approximate 97.6% common general partnership interest in the Operating Partnership. The remaining approximate 2.4% 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 and Common Stock of the Company;
Note 8, Preferred and Common Units of the Operating Partnership;
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 AND SIX MONTHS ENDED JUNE 30, 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)
 
June 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
576,433

 
$
537,574

Buildings and improvements (Note 2)
3,137,665

 
2,830,310

Undeveloped land and construction in progress (Note 2)
557,657

 
430,806

Total real estate held for investment
4,271,755

 
3,798,690

Accumulated depreciation and amortization
(801,083
)
 
(742,503
)
Total real estate assets held for investment, net
3,470,672

 
3,056,187

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

 
84,156

CASH AND CASH EQUIVALENTS
18,111

 
4,777

RESTRICTED CASH
97

 
358

MARKETABLE SECURITIES (Note 12)
6,546

 
5,691

CURRENT RECEIVABLES, NET (Note 4)
7,643

 
8,395

DEFERRED RENT RECEIVABLES, NET (Note 4)
110,689

 
101,142

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
168,488

 
155,522

DEFERRED FINANCING COSTS, NET
18,919

 
18,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
46,357

 
12,199

TOTAL ASSETS
$
3,847,522

 
$
3,446,795

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 2, 5 and 12)
$
381,097

 
$
351,825

Exchangeable senior notes, net (Notes 5 and 12)
161,844

 
306,892

Unsecured debt, net (Notes 5 and 12)
1,130,732

 
980,569

Unsecured line of credit (Notes 5 and 12)
102,000

 
182,000

Accounts payable, accrued expenses and other liabilities
98,940

 
81,713

Accrued distributions (Note 17)
25,975

 
22,692

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
108,462

 
79,781

Rents received in advance and tenant security deposits
31,768

 
26,917

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

 
13,286

Total liabilities
2,040,818

 
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 (Note 7):
 
 
 
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,
4,600,000 shares authorized, 4,000,000 shares issued and outstanding ($100,000 liquidation preference)
96,155

 

Common stock, $.01 par value, 150,000,000 shares authorized, 68,927,731 and 58,819,717 shares issued and outstanding, respectively
689

 
588

Additional paid-in capital
1,856,431

 
1,448,997

Distributions in excess of earnings
(259,495
)
 
(277,450
)
Total stockholders' equity
1,693,780

 
1,293,717

Noncontrolling interest:
 
 
 
Common units of the Operating Partnership (Note 6)
39,286

 
33,765

Total equity
1,733,066

 
1,327,482

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
$
3,847,522

 
$
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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
Rental income
$
94,265

 
$
80,158

 
$
184,484

 
$
157,155

Tenant reimbursements
9,065

 
7,130

 
17,369

 
13,152

Other property income
592

 
1,102

 
1,479

 
1,856

Total revenues
103,922

 
88,390

 
203,332

 
172,163

EXPENSES:
 
 
 
 
 
 
 
Property expenses
21,196

 
17,356

 
38,731

 
34,865

Real estate taxes
8,881

 
8,127

 
17,270

 
16,017

Provision for bad debts

 
120

 
2

 
146

Ground leases
615

 
424

 
1,417

 
763

General and administrative expenses
9,251

 
7,440

 
18,018

 
14,000

Acquisition-related expenses
1,813

 
1,194

 
3,341

 
1,666

Depreciation and amortization
40,624

 
31,378

 
77,370

 
59,819

Total expenses
82,380

 
66,039

 
156,149

 
127,276

OTHER (EXPENSES) INCOME:
 
 
 
 
 
 
 
Interest income and other net investment (losses) gains (Note 12)
(110
)
 
58

 
374

 
242

Interest expense (Note 5)
(19,155
)
 
(21,228
)
 
(40,318
)
 
(42,104
)
Total other (expenses) income
(19,265
)
 
(21,170
)
 
(39,944
)
 
(41,862
)
INCOME FROM CONTINUING OPERATIONS
2,277

 
1,181

 
7,239

 
3,025

DISCONTINUED OPERATIONS (Note 14)
 
 
 
 
 
 
 
Income from discontinued operations

 
2,291

 
900

 
5,314

Net gain on dispositions of discontinued operations

 

 
72,809

 

Total income from discontinued operations

 
2,291

 
73,709

 
5,314

NET INCOME
2,277

 
3,472

 
80,948

 
8,339

Net loss (income) attributable to noncontrolling common units of the Operating Partnership
20

 
10

 
(1,775
)
 
(24
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
2,297

 
3,482

 
79,173

 
8,315

PREFERRED DISTRIBUTIONS AND DIVIDENDS:
 
 
 
 
 
 
 
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership
(1,397
)
 
(1,397
)
 
(2,794
)
 
(2,794
)
Preferred dividends (Note 7)
(1,700
)
 
(2,402
)
 
(4,721
)
 
(4,804
)
Original issuance costs of redeemed preferred stock (Note 7)

 

 
(4,918
)
 

Total preferred distributions and dividends
(3,097
)
 
(3,799
)
 
(12,433
)
 
(7,598
)
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
(800
)
 
$
(317
)
 
$
66,740

 
$
717

Loss from continuing operations available to common stockholders per common share - basic (Note 15)
$
(0.02
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.09
)
Loss from continuing operations available to common stockholders per common share - diluted (Note 15)
$
(0.02
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.09
)
Net (loss) income available to common stockholders per share - basic (Note 15)
$
(0.02
)
 
$
(0.01
)
 
$
1.00

 
$
0.00

Net (loss) income available to common stockholders per share - diluted (Note 15)
$
(0.02
)
 
$
(0.01
)
 
$
1.00

 
$
0.00

Weighted average common shares outstanding - basic (Note 15)
68,344,734

 
57,685,710

 
65,996,719

 
55,008,765

Weighted average common shares outstanding - diluted (Note 15)
68,344,734

 
57,685,710

 
65,996,719

 
55,008,765

Dividends declared per common share
$
0.35

 
$
0.35

 
$
0.70

 
$
0.70

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
 
 
 
 
 
 
 
 
8,315

 
8,315

 
24

 
8,339

Issuance of common stock
 
 
6,037,500

 
61

 
220,954

 
 
 
221,015

 
 
 
221,015

Issuance of share-based compensation awards
 
 
68,727

 
1

 
2,155

 
 
 
2,156

 
 
 
2,156

Noncash amortization of share-based compensation
 
 
 
 
 
 
2,813

 
 
 
2,813

 
 
 
2,813

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

 
 
 
395

 
 
 
395

 
 
 
395

Exchange of common units of the Operating Partnership
 
 
5,000

 
 
 
91

 
 
 
91

 
(91
)
 

Adjustment for noncontrolling interest
 
 
 
 
 
 
(3,223
)
 
 
 
(3,223
)
 
3,223

 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(7,598
)
 
(7,598
)
 
 
 
(7,598
)
Dividends declared per common share and common unit ($0.70 per share/unit)
 
 
 
 
 
 
 
 
(39,381
)
 
(39,381
)
 
(1,204
)
 
(40,585
)
BALANCE AS OF JUNE 30, 2011
$
121,582

 
58,464,412

 
$
585

 
$
1,433,951

 
$
(285,916
)
 
$
1,270,202

 
$
33,331

 
$
1,303,533

 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
79,173

 
79,173

 
1,775

 
80,948

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

 
 
 
 
 
 
 
 
 
96,155

 
 
 
96,155

Redemption of Series E and Series F Preferred stock (Note 7)
(121,582
)
 
 
 
 
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common stock (Note 7)
 
 
10,063,189

 
101

 
408,374

 
 
 
408,475

 
 
 
408,475

Issuance of share-based compensation awards (Note 9)
 
 
62,137

 
 
 
657

 
 
 
657

 
 
 
657

Noncash amortization of share-based compensation (Note 9)
 
 
 
 
 
 
3,827

 
 
 
3,827

 
 
 
3,827

Repurchase of common stock and restricted stock units (Note 9)
 
 
(22,312
)
 
 
 
(603
)
 
 
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
 
 
129

 
 
 
129

 
 
 
129

Adjustment for noncontrolling interest
 
 
 
 
 
 
(4,950
)
 
 
 
(4,950
)
 
4,950

 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(7,515
)
 
(7,515
)
 
 
 
(7,515
)
Dividends declared per common share and common unit ($0.70 per share/unit)
 
 
 
 
 
 
 
 
(48,785
)
 
(48,785
)
 
(1,204
)
 
(49,989
)
BALANCE AS OF JUNE 30, 2012
$
96,155

 
68,927,731

 
$
689

 
$
1,856,431

 
$
(259,495
)
 
$
1,693,780

 
$
39,286

 
$
1,733,066

See accompanying notes to consolidated financial statements.


3






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Six Months Ended June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
80,948

 
$
8,339

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
76,792

 
61,029

Increase in provision for bad debts
2

 
146

Depreciation of furniture, fixtures and equipment
584

 
530

Noncash amortization of share-based compensation awards
3,419

 
2,239

Noncash amortization of deferred financing costs and debt discounts and premiums
5,310

 
6,884

Noncash amortization of net (below)/above market rents (Note 3)
(2,589
)
 
1,398

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

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(4,465
)
 
(4,668
)
Straight-line rents
(10,575
)
 
(8,906
)
Net change in other operating assets
(4,318
)
 
(2,493
)
Net change in other operating liabilities
7,285

 
(8,033
)
Insurance proceeds received for property damage
(951
)
 

Net cash provided by operating activities
78,633

 
56,465

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties, net of cash acquired (Note 2)
(272,256
)
 
(378,554
)
Expenditures for acquisition of development properties (Note 2)
(79,157
)
 

Expenditures for operating properties
(40,218
)
 
(28,230
)
Expenditures for development and redevelopment properties and undeveloped land
(26,084
)
 
(12,347
)
Net proceeds received from dispositions of operating properties (Note 14)
143,161

 

Insurance proceeds received for property damage
951

 

Increase in acquisition-related deposits
(28,250
)
 
(16,500
)
Decrease in restricted cash
261

 
112

Net cash used in investing activities
(301,592
)
 
(435,519
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred stock (Note 7)
96,155

 

Redemption of Series E and Series F preferred stock (Note 7)
(126,500
)
 

Net proceeds from issuance of common stock (Note 7)
408,475

 
221,015

Borrowings on unsecured line of credit
253,000

 
302,000

Repayments on unsecured line of credit
(333,000
)
 
(216,000
)
Proceeds from issuance of secured debt
97,000

 
135,000

Principal payments on secured debt
(103,254
)
 
(3,403
)
Proceeds from the issuance of unsecured debt (Note 5)
150,000

 

Repayments of exchangeable senior notes (Note 5)
(148,000
)
 

Financing costs
(3,644
)
 
(5,201
)
Decrease in loan deposits

 
2,027

Repurchase of common stock and restricted stock units (Note 9)
(603
)
 
(732
)
Proceeds from exercise of stock options
129

 
395

Dividends and distributions paid to common stockholders and common unitholders
(45,713
)
 
(37,877
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(7,752
)
 
(7,598
)
Net cash provided by financing activities
236,293

 
389,626

Net increase in cash and cash equivalents
13,334

 
10,572

Cash and cash equivalents, beginning of period
4,777

 
14,840

Cash and cash equivalents, end of period
$
18,111

 
$
25,412


4






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

 
Six Months Ended June 30,
 
2012
 
2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $7,021 and $3,327 as of June 30, 2012 and 2011, respectively
$
36,935

 
$
34,568

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
13,062

 
$
9,966

Tenant improvements funded directly by tenants to third parties
$
9,838

 
$
3,027

Assumption of secured debt with property acquisitions (Notes 2 and 5)
$
35,690

 
$
30,042

Assumption of other assets and liabilities with operating and development property acquisitions, net (Note 2)
$
4,940

 
$
4,438

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of dividends and distributions payable to common stockholders and common unitholders
$
24,726

 
$
21,064

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
1,577

 
$
1,909

Issuance of share-based compensation awards, net (Note 9)
$
30,762

 
$
7,216

Exchange of common units of the Operating Partnership into shares of the Company's common stock
$

 
$
91


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)
 
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
576,433

 
$
537,574

Buildings and improvements (Note 2)
3,137,665

 
2,830,310

Undeveloped land and construction in progress (Note 2)
557,657

 
430,806

Total real estate held for investment
4,271,755

 
3,798,690

Accumulated depreciation and amortization
(801,083
)
 
(742,503
)
Total real estate assets held for investment, net
3,470,672

 
3,056,187

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

 
84,156

CASH AND CASH EQUIVALENTS
18,111

 
4,777

RESTRICTED CASH
97

 
358

MARKETABLE SECURITIES (Note 12)
6,546

 
5,691

CURRENT RECEIVABLES, NET (Note 4)
7,643

 
8,395

DEFERRED RENT RECEIVABLES, NET (Note 4)
110,689

 
101,142

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
168,488

 
155,522

DEFERRED FINANCING COSTS, NET
18,919

 
18,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
46,357

 
12,199

TOTAL ASSETS
$
3,847,522

 
$
3,446,795

LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 2, 5 and 12)
$
381,097

 
$
351,825

Exchangeable senior notes, net (Notes 5 and 12)
161,844

 
306,892

Unsecured debt, net (Notes 5 and 12)
1,130,732

 
980,569

Unsecured line of credit (Notes 5 and 12)
102,000

 
182,000

Accounts payable, accrued expenses and other liabilities
98,940

 
81,713

Accrued distributions (Note 17)
25,975

 
22,692

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
108,462

 
79,781

Rents received in advance and tenant security deposits
31,768

 
26,917

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

 
13,286

Total liabilities
2,040,818

 
2,045,675

COMMITMENTS AND CONTINGENCIES (Note 11)

 

7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
73,638

 
73,638

CAPITAL:
 
 
 
Partners' Capital (Note 8):
 
 
 
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, 68,927,731 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
1,634,174

 
1,203,259

Total partners' capital
1,730,329

 
1,324,841

Noncontrolling interest in consolidated subsidiaries
2,737

 
2,641

Total capital
1,733,066

 
1,327,482

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
$
3,847,522

 
$
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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
Rental income
$
94,265

 
80,158

 
$
184,484

 
$
157,155

Tenant reimbursements
9,065

 
7,130

 
17,369

 
13,152

Other property income
592

 
1,102

 
1,479

 
1,856

Total revenues
103,922

 
88,390

 
203,332

 
172,163

EXPENSES:
 
 
 
 
 
 
 
Property expenses
21,196

 
17,356

 
38,731

 
34,865

Real estate taxes
8,881

 
8,127

 
17,270

 
16,017

Provision for bad debts

 
120

 
2

 
146

Ground leases
615

 
424

 
1,417

 
763

General and administrative expenses
9,251

 
7,440

 
18,018

 
14,000

Acquisition-related expenses
1,813

 
1,194

 
3,341

 
1,666

Depreciation and amortization
40,624

 
31,378

 
77,370

 
59,819

Total expenses
82,380

 
66,039

 
156,149

 
127,276

OTHER (EXPENSES) INCOME:
 
 
 
 
 
 
 
Interest income and other net investment (losses) gains (Note 12)
(110
)
 
58

 
374

 
242

Interest expense (Note 5)
(19,155
)
 
(21,228
)
 
(40,318
)
 
(42,104
)
Total other (expenses) income
(19,265
)
 
(21,170
)
 
(39,944
)
 
(41,862
)
INCOME FROM CONTINUING OPERATIONS
2,277

 
1,181

 
7,239

 
3,025

DISCONTINUED OPERATIONS (Note 14)
 
 
 
 
 
 
 
Income from discontinued operations

 
2,291

 
900

 
5,314

Net gain on dispositions of discontinued operations

 

 
72,809

 

Total income from discontinued operations

 
2,291

 
73,709

 
5,314

NET INCOME
2,277

 
3,472

 
80,948

 
8,339

Net income attributable to noncontrolling interests in consolidated subsidiaries
(43
)
 
(32
)
 
(96
)
 
(65
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
2,234

 
3,440

 
80,852

 
8,274

Preferred distributions (Note 8)
(3,097
)
 
(3,799
)
 
(7,515
)
 
(7,598
)
Original issuance costs of redeemed preferred units (Note 8)

 

 
(4,918
)
 

Total preferred distributions
(3,097
)
 
(3,799
)
 
(12,433
)
 
(7,598
)
NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS
$
(863
)
 
$
(359
)
 
$
68,419

 
$
676

Loss from continuing operations available to common unitholders per common unit - basic (Note 16)
$
(0.02
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.09
)
Loss from continuing operations available to common unitholders per common unit - diluted (Note 16)
$
(0.02
)
 
$
(0.05
)
 
$
(0.09
)
 
$
(0.09
)
Net (loss) income available to common unitholders per unit - basic (Note 16)
$
(0.02
)
 
$
(0.01
)
 
$
1.00

 
$
0.00

Net (loss) income available to common unitholders per unit - diluted (Note 16)
$
(0.02
)
 
$
(0.01
)
 
$
1.00

 
$
0.00

Weighted average common units outstanding - basic (Note 16)
70,062,865

 
59,407,687

 
67,714,850

 
56,731,316

Weighted average common units outstanding - diluted (Note 16)
70,062,865

 
59,407,687

 
67,714,850

 
56,731,316

Distributions declared per common unit
$
0.35

 
$
0.35

 
$
0.70

 
$
0.70

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
 
  
 
 
8,274

 
8,274

 
65

 
8,339

Issuance of common units
 
 
6,037,500

 
221,015

 
221,015

 
 
 
221,015

Issuance of share-based compensation awards
 
  
68,727

 
2,156

 
2,156

 
 
 
2,156

Noncash amortization of share-based compensation
 
  
 
 
2,813

 
2,813

 
 
 
2,813

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

 
395

 
395

 
 
 
395

Preferred distributions
 
  
 
 
(7,598
)
 
(7,598
)
 
 
 
(7,598
)
Distributions declared per common unit ($0.70 per unit)
 
  
 
 
(40,585
)
 
(40,585
)
 
 
 
(40,585
)
BALANCE AS OF JUNE 30, 2011
$
121,582

  
60,182,543

 
$
1,180,249

 
$
1,301,831

 
$
1,702

 
$
1,303,533

 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
  
 
 
80,852

 
80,852

 
96

 
80,948

Issuance of Series G Preferred units (Note 8)
96,155

 
 
 
 
 
96,155

 
 
 
96,155

Redemption of Series E and Series F Preferred units (Note 8)
(121,582
)
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common units (Note 8)
 
 
10,063,189

 
408,475

 
408,475

 
 
 
408,475

Issuance of share-based compensation awards (Note 9)
 
  
62,137

 
657

 
657

 
 
 
657

Noncash amortization of share-based compensation (Note 9)
 
  
 
 
3,827

 
3,827

 
 
 
3,827

Repurchase/redemption of common units and restricted stock units (Note 9)
 
  
(22,312
)
 
(603
)
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
129

 
129

 
 
 
129

Preferred distributions
 
  
 
 
(7,515
)
 
(7,515
)
 
 
 
(7,515
)
Distributions declared per common unit ($0.70 per unit)
 
  
 
 
(49,989
)
 
(49,989
)
 
 
 
(49,989
)
BALANCE AS OF JUNE 30, 2012
$
96,155

  
70,645,862

 
$
1,634,174

 
$
1,730,329

 
$
2,737

 
$
1,733,066


See accompanying notes to consolidated financial statements.


8






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Six Months Ended June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
80,948

 
$
8,339

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
76,792

 
61,029

Increase in provision for bad debts
2

 
146

Depreciation of furniture, fixtures and equipment
584

 
530

Noncash amortization of share-based compensation awards
3,419

 
2,239

Noncash amortization of deferred financing costs and debt discounts and premiums
5,310

 
6,884

Noncash amortization of net (below)/above market rents (Note 3)
(2,589
)
 
1,398

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

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(4,465
)
 
(4,668
)
Straight-line rents
(10,575
)
 
(8,906
)
Net change in other operating assets
(4,318
)
 
(2,493
)
Net change in other operating liabilities
7,285

 
(8,033
)
Insurance proceeds received for property damage
(951
)
 

Net cash provided by operating activities
78,633

 
56,465

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties, net of cash acquired (Note 2)
(272,256
)
 
(378,554
)
Expenditures for acquisition of development properties (Note 2)
(79,157
)
 

Expenditures for operating properties
(40,218
)
 
(28,230
)
Expenditures for development and redevelopment properties and undeveloped land
(26,084
)
 
(12,347
)
Net proceeds received from dispositions of operating properties (Note 14)
143,161

 

Insurance proceeds received for property damage
951

 

Increase in acquisition-related deposits
(28,250
)
 
(16,500
)
Decrease in restricted cash
261

 
112

Net cash used in investing activities
(301,592
)
 
(435,519
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred units (Note 8)
96,155

 

Redemption of Series E and Series F preferred units (Note 8)
(126,500
)
 

Net proceeds from issuance of common units (Note 8)
408,475

 
221,015

Borrowings on unsecured line of credit
253,000

 
302,000

Repayments on unsecured line of credit
(333,000
)
 
(216,000
)
Proceeds from issuance of secured debt
97,000

 
135,000

Principal payments on secured debt
(103,254
)
 
(3,403
)
Proceeds from the issuance of unsecured debt (Note 5)
150,000

 

Repayments of exchangeable senior notes (Note 5)
(148,000
)
 

Financing costs
(3,644
)
 
(5,201
)
Decrease in loan deposits

 
2,027

Repurchase/redemption of common units and restricted stock units (Note 9)
(603
)
 
(732
)
Proceeds from exercise of stock options
129

 
395

Distributions paid to common unitholders
(45,713
)
 
(37,877
)
Distributions paid to preferred unitholders
(7,752
)
 
(7,598
)
Net cash provided by financing activities
236,293

 
389,626

Net increase in cash and cash equivalents
13,334

 
10,572

Cash and cash equivalents, beginning of period
4,777

 
14,840

Cash and cash equivalents, end of period
$
18,111

 
$
25,412

 

9






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)
 
 
 
Six Months Ended June 30,
 
2012
  
2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
  
 
Cash paid for interest, net of capitalized interest of $7,021 and $3,327 as of June 30, 2012 and 2011, respectively
$
36,935

 
$
34,568

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
13,062

 
$
9,966

Tenant improvements funded directly by tenants to third parties
$
9,838

 
$
3,027

Assumption of secured debt with property acquisitions (Notes 2 and 5)
$
35,690

 
$
30,042

Assumption of other assets and liabilities with operating and development property acquisitions, net (Note 2)
$
4,940

 
$
4,438

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of distributions payable to common unitholders
$
24,726

 
$
21,064

Accrual of distributions payable to preferred unitholders
$
1,577

 
$
1,909

Issuance of share-based compensation awards, net (Note 9)
$
30,762

 
$
7,216

See accompanying notes to consolidated financial statements.


10


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 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 June 30, 2012. As of June 30, 2012, all of our properties are owned and all of our business is currently conducted in the state of California with the exception of nine office properties located in the state of Washington.
 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage Occupied
Office Properties(1)
114

 
12,227,267

 
457

 
89.3
%
Industrial Properties
39

 
3,413,354

 
59

 
92.5
%
Total Stabilized Portfolio
153

 
15,640,621

 
516

 
90.0
%
________________________
(1)
Includes ten office properties acquired in three transactions during the six months ended June 30, 2012 encompassing 794,126 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 June 30, 2012, we had one office development property under construction which is expected to encompass approximately 341,000 rentable square feet upon completion, and 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 and no held-for-sale properties as of June 30, 2012.
     As of June 30, 2012, the Company owned a 97.6% general partnership interest in the Operating Partnership. The remaining 2.4% common limited partnership interest in the Operating Partnership as of June 30, 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, Kilroy Realty 303, LLC, Fremont Lake Union Center, LLC, KR 690 Middlefield, LLC and KR MML 12701, 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 June 30, 2012 the consolidated financial statements of the Company and the Operating Partnership also included two variable interest entities ("VIE") in which we are deemed to be the primary beneficiary. During the six months ended June 30, 2012, eight office buildings were acquired in two transactions and transferred to two special purpose VIEs to facilitate potential like−kind exchanges 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 the Section 1031 Exchanges, if any, and take title to the properties within 180 days of the acquisition dates (see Note 2). The VIEs will be terminated upon the completion of the Section 1031 Exchanges. The impact of consolidating the VIEs increased the Company's total assets and liabilities by approximately $212.1 million and $12.7 million, respectively, at June 30, 2012. As of December 31, 2011, the consolidated financial statements of the Company and the Operating Partnership included one VIE of which we were deemed to be the primary beneficiary, 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 June 30, 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
Operating Properties
During the six months ended June 30, 2012, we acquired the ten operating office properties listed below from unrelated third parties. Unless otherwise noted, we funded these acquisitions with proceeds from the Company's public offering of common stock in February 2012 (see Note 7), borrowings under the unsecured line of credit (see Note 5), and disposition proceeds (see Note 14).
Property
 
Date of Acquisition
 
Number of
Buildings
 
Rentable Square
Feet
 
Occupancy as of June 30, 2012
 
Purchase
Price
(in millions)(1)
4100-4700 Bohannon Drive
 
 
 
 
 
 
 
 
 
 
Menlo Park, CA (2)
 
February 29, 2012
 
7
 
374,139

 
77.0%
 
$
162.5

701 and 801 N. 34th Street
 
 
 
 
 
 
 
 
 
 
Seattle, WA (3)
 
June 1, 2012
 
2
 
308,407

 
99.4%
 
105.4

837 N. 34th Street
 
 
 
 
 
 
 
 
 
 
Seattle, WA (2)
 
June 1, 2012
 
1
 
111,580

 
100.0%
 
39.2

Total
 
 
 
10
 
794,126

 
 
 
$
307.1

________________________
(1)
Excludes acquisition-related costs and includes assumed unpaid leasing commissions, tenant improvements, and other property related liabilities.
(2)
As of June 30, 2012, these properties are temporarily being held in separate VIEs to facilitate potential Section 1031 Exchanges (see Note 1).
(3)
We acquired these properties through the acquisition of the ownership interest of the bankruptcy remote LLC that owns the properties. In connection with this acquisition we also acquired cash of approximately $4.0 million, other assets of approximately $0.2 million and we assumed current liabilities of approximately $0.6 million and secured debt with an outstanding principal balance of $34.0 million and a premium of $1.7 million as a result of recording the debt at fair value at the acquisition date (see Note 5.)
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 (1)
 
All Other
Acquisitions (2) 
 
Total
 
(in thousands)
Assets
 
 
 
 
 
Land and improvements(3)
$
38,810

 
$

 
$
38,810

Buildings and improvements(4)
124,617

 
143,968

 
268,585

Cash and cash equivalents

 
3,973

 
3,973

Deferred leasing costs and acquisition-related intangible assets(5)
9,470

 
15,980

 
25,450

Prepaid expenses and other assets

 
184

 
184

Total assets acquired
172,897

 
164,105

 
337,002

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred revenue and acquisition-related intangible liabilities(6)
10,380

 
13,650

 
24,030

Secured debt(7)

 
35,690

 
35,690

Accounts payable, accrued expenses and other liabilities
137

 
554

 
691

Total liabilities assumed
10,517

 
49,894

 
60,411

Net assets and liabilities acquired(8)
$
162,380

 
$
114,211

 
$
276,591

________________________
(1)
The purchase of 4100-4700 Bohannon Drive, Menlo Park, CA, represents the largest acquisition and approximately 53% of the total aggregate purchase price of the operating properties acquired during the six months ended June 30, 2012.
(2)
The purchase price of all other acquisitions completed during the six months ended June 30, 2012 were individually less than 5% and in aggregate less than 10% of the Company's total assets as of December 31, 2011.
(3)
In connection with the acquisitions of 701, 801, and 837 N. 34th Street, Lake Union, WA, we assumed the lessee obligations under a ground lease with an initial expiration in December 2041. The ground lease obligation contains three 10-year extension options and one 45-year extension option (see Note 11 for additional information pertaining to this ground lease).
(4)
Represents buildings, building improvements and tenant improvements.
(5)
Represents in-place leases (approximately $17.3 million with a weighted average amortization period of 6.1 years), above-market leases (approximately $0.1 million with a weighted average amortization period of 2.7 years), leasing commissions (approximately $7.5 million with a weighted average amortization period of 3.9 years), and a below-market ground lease obligation (approximately $0.5 million with a weighted average amortization period of 59.6 years).
(6)
Represents below-market leases (approximately $22.9 million with a weighted average amortization period of 7.2 years) and an above-market ground lease obligation (approximately $1.1 million with a weighted average amortization period of 29.6 years).
(7)
Represents the fair value of the mortgage loan assumed, which includes an unamortized premium of approximately $1.7 million at the date of acquisition (see Note 5).    
(8)
Reflects the purchase price plus cash received, net of assumed secured debt and other lease-related obligations.

13

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


Development Projects
On May 9, 2012 the Company acquired a 100% pre-leased development opportunity at 690 E. Middlefield Road in Mountain View, California, from an unaffiliated third party, for a total purchase price of $84.0 million, which was comprised of a cash purchase price of $74.5 million plus $9.5 million of assumed leasing commissions and other net accrued liabilities. The development project is expected to comprise two office buildings totaling approximately 341,000 square-feet office campus upon completion, and is 100% pre-leased to a single tenant. The related assets and liabilities of the acquired project 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:
 
Total
 
(in thousands)
Assets
 
Undeveloped land and construction in progress
$
84,014

Prepaid expenses and other assets
1,300

Total assets acquired
85,314

 
 
Liabilities
 
Accounts payable, accrued expenses and other liabilities
6,157

Total liabilities assumed
6,157

Net assets and liabilities acquired
$
79,157



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 June 30, 2012 and December 31, 2011:
 

14

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


 
June 30, 2012
 
December 31, 2011
 
(in thousands)
Deferred Leasing Costs and Acquisition-related Intangible Assets, net(1):
 
 
 
Deferred leasing costs
$
149,603

 
$
142,652

Accumulated amortization
(53,642
)
 
(52,974
)
Deferred leasing costs, net
95,961

 
89,678

Above-market operating leases
26,677

 
28,143

Accumulated amortization
(9,232
)
 
(8,101
)
Above-market operating leases, net
17,445

 
20,042

In-place leases
74,915

 
61,355