Edgar Filing: KILROY REALTY CORP

KRC 9/30/2012 10Q

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 September 30, 2012



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 October 29, 2012, 74,692,939 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 September 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 September 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;


◦	Note 7, Preferred and Common Stock of the Company;


◦	Note 8, Preferred and Common Units of the Operating Partnership;


◦	Note 15, Net (Loss) Income Available to Common Stockholders Per Share of the Company;


◦	Note 16, Net (Loss) 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.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS



		Page
	PART I-FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION	1
	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	1
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2012 and 2011 (unaudited)	2
	Consolidated Statements of Equity for the Nine Months ended September 30, 2012 and 2011 (unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2012 and 2011 (unaudited)	4

Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY, L.P.	6
	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	6
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2012 and 2011 (unaudited)	7
	Consolidated Statements of Capital for the Nine Months ended September 30, 2012 and 2011 (unaudited)	8
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2012 and 2011 (unaudited)	9
	Notes to Consolidated Financial Statements	11

Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60

Item 4.	CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)	60

	PART II-OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	62

Item 1A.	RISK FACTORS	62

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	62

Item 3.	DEFAULTS UPON SENIOR SECURITIES	62

Item 4.	MINE SAFETY DISCLOSURES	62

Item 5.	OTHER INFORMATION	62

Item 6.	EXHIBITS	63

SIGNATURES		64

PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	September 30, 2012			December 31, 2011
	(unaudited)
ASSETS
REAL ESTATE ASSETS:
Land and improvements (Note 2)	$	562,071		$	537,574
Buildings and improvements (Note 2)	3,169,224			2,830,310
Undeveloped land and construction in progress (Note 2)	668,058			430,806
Total real estate held for investment	4,399,353			3,798,690
Accumulated depreciation and amortization	(725,728		)	(742,503		)
Total real estate assets held for investment, net ($296,656 and $101,352 of VIE, Note 1)	3,673,625			3,056,187
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 13)	166,019			84,156
CASH AND CASH EQUIVALENTS	16,113			4,777
RESTRICTED CASH	5,884			358
MARKETABLE SECURITIES (Note 12)	6,812			5,691
CURRENT RECEIVABLES, NET (Note 4)	7,113			8,395
DEFERRED RENT RECEIVABLES, NET (Note 4)	110,128			101,142
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)	187,307			155,522
DEFERRED FINANCING COSTS, NET	18,442			18,368
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)	24,398			12,199
TOTAL ASSETS	$	4,215,841		$	3,446,795
LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
LIABILITIES:
Secured debt (Notes 2, 5 and 12)	$	520,867		$	351,825
Exchangeable senior notes, net (Notes 5 and 12)	162,885			306,892
Unsecured debt, net (Notes 5 and 12)	1,130,814			980,569
Unsecured line of credit (Notes 5 and 12)	27,000			182,000
Accounts payable, accrued expenses and other liabilities	127,472			81,713
Accrued distributions (Note 17)	28,845			22,692
Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)	120,407			79,781
Rents received in advance and tenant security deposits	31,728			26,917
Liabilities and deferred revenue of real estate assets held for sale (Note 13)	4,455			13,286
Total liabilities	2,154,473			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
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, no authorized shares at 9/30/12 and 1,500,000 shares authorized, none issued and outstanding at 12/31/2011	—			—
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			—
6.375% Series H Cumulative Redeemable Preferred stock, $.01 par value, 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference)	96,256			—
Common stock, $.01 par value, 150,000,000 shares authorized, 74,692,939 and 58,819,717 shares issued and outstanding, respectively	747			588
Additional paid-in capital	2,114,774			1,448,997
Distributions in excess of earnings	(288,765		)	(277,450		)
Total stockholders' equity	2,019,167			1,293,717
Noncontrolling interest:
Common units of the Operating Partnership (Note 6)	42,201			33,765
Total equity	2,061,368			1,327,482
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY	$	4,215,841		$	3,446,795

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUES:
Rental income	$	95,405		$	79,673		$	268,228		$	223,853
Tenant reimbursements	8,665			6,387			23,947			17,382
Other property income	223			339			1,625			2,136
Total revenues	104,293			86,399			293,800			243,371
EXPENSES:
Property expenses	21,871			18,132			57,906			49,091
Real estate taxes	9,312			7,352			25,138			21,941
Provision for bad debts	—			144			2			265
Ground leases	859			503			2,276			1,266
General and administrative expenses	8,727			6,355			26,745			20,355
Acquisition-related expenses	556			1,163			3,897			2,829
Depreciation and amortization	44,109			33,275			116,832			88,969
Total expenses	85,434			66,924			232,796			184,716
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains (Note 12)	330			30			703			272
Interest expense (Note 5)	(19,854		)	(22,896		)	(60,172		)	(62,671		)
Total other (expenses) income	(19,524		)	(22,866		)	(59,469		)	(62,399		)
(LOSS) INCOME FROM CONTINUING OPERATIONS	(665		)	(3,391		)	1,535			(3,744		)
DISCONTINUED OPERATIONS (Note 13)
Income from discontinued operations	3,187			5,126			9,127			13,818
Net gain on dispositions of discontinued operations	—			12,555			72,809			12,555
Total income from discontinued operations	3,187			17,681			81,936			26,373
NET INCOME	2,522			14,290			83,471			22,629
Net loss (income) attributable to noncontrolling common units of the Operating Partnership	67			(296		)	(1,708		)	(320		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION	2,589			13,994			81,763			22,309
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership (Note 6)	(747		)	(1,397		)	(3,541		)	(4,191		)
Preferred dividends (Note 7)	(2,533		)	(2,402		)	(7,254		)	(7,206		)
Original issuance costs of redeemed preferred stock and preferred units (Note 6 and 7)	(2,062		)	—			(6,980		)	—
Total preferred distributions and dividends	(5,342		)	(3,799		)	(17,775		)	(11,397		)
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	(2,753	)	$	10,195		$	63,988		$	10,912
Loss from continuing operations available to common stockholders per common share - basic (Note 15)	$	(0.08	)	$	(0.12	)	$	(0.25	)	$	(0.28	)
Loss from continuing operations available to common stockholders per common share - diluted (Note 15)	$	(0.08	)	$	(0.12	)	$	(0.25	)	$	(0.28	)
Net (loss) income available to common stockholders per share - basic (Note 15)	$	(0.04	)	$	0.17		$	0.92		$	0.18
Net (loss) income available to common stockholders per share - diluted (Note 15)	$	(0.04	)	$	0.17		$	0.92		$	0.18
Weighted average common shares outstanding - basic (Note 15)	71,889,475			58,355,127			67,975,309			56,136,477
Weighted average common shares outstanding - diluted (Note 15)	71,889,475			58,355,127			67,975,309			56,136,477
Dividends declared per common share	$	0.35		$	0.35		$	1.05		$	1.05

See accompanying notes to consolidated financial statements.

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											22,309			22,309			320			22,629
Issuance of common stock				6,037,500		61		220,954						221,015						221,015
Issuance of share-based compensation awards				68,727		1		2,446						2,447						2,447
Noncash amortization of share-based compensation								4,201						4,201						4,201
Repurchase of common stock and restricted stock units				(11,485	)			(736		)				(736		)				(736		)
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								(3,269		)				(3,269		)	3,269			—
Preferred distributions and dividends											(11,397		)	(11,397		)				(11,397		)
Dividends declared per common share and common unit ($1.05 per share/unit)											(60,136		)	(60,136		)	(1,805		)	(61,941		)
BALANCE AS OF SEPTEMBER 30, 2011	$	121,582		58,464,412		$	585	$	1,435,580		$	(296,476	)	$	1,261,271		$	33,072		$	1,294,343

				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											81,763			81,763			1,708			83,471
Issuance of Series G Preferred stock and Series H Preferred Stock (Note 7)	192,411													192,411						192,411
Redemption of Series E and Series F Preferred stock (Note 7)	(121,582		)								(4,918		)	(126,500		)				(126,500		)
Redemption of Series A Preferred units (Note 6)											(2,062		)	(2,062		)				(2,062		)
Issuance of common stock (Note 7)				15,813,189		159		662,212						662,371						662,371
Issuance of share-based compensation awards (Note 9)				62,137				957						957						957
Noncash amortization of share-based compensation (Note 9)								6,182						6,182						6,182
Repurchase of common stock and restricted stock units (Note 9)				(22,312	)			(603		)				(603		)				(603		)
Settlement of restricted stock units for shares of common stock (Note 9)				5,208				(133		)				(133		)				(133		)
Exercise of stock options				5,000				129						129						129
Issuance of common units (Note 8)																	5,604			5,604
Exchange of common units of the Operating Partnership				10,000				231						231			(231		)	—
Adjustment for noncontrolling interest								(3,198		)				(3,198		)	3,198			—
Preferred distributions and dividends											(10,795		)	(10,795		)				(10,795		)
Dividends declared per common share and common unit ($1.05 per share/unit)											(75,303		)	(75,303		)	(1,843		)	(77,146		)
BALANCE AS OF SEPTEMBER 30, 2012	$	192,411		74,692,939		$	747	$	2,114,774		$	(288,765	)	$	2,019,167		$	42,201		$	2,061,368

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	83,471		$	22,629
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	122,754			96,971
(Decrease) increase in provision for bad debts	(192		)	141
Depreciation of furniture, fixtures and equipment	896			839
Noncash amortization of share-based compensation awards	5,544			3,365
Noncash amortization of deferred financing costs and debt discounts and premiums	7,078			10,164
Noncash amortization of net (below)/above market rents (Note 3)	(4,616		)	1,519
Net gain on dispositions of discontinued operations (Note 13)	(72,809		)	(12,555		)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements	(6,851		)	(7,005		)
Straight-line rents	(16,433		)	(15,543		)
Net change in other operating assets	(2,529		)	(4,326		)
Net change in other operating liabilities	31,965			18,496
Insurance proceeds received for property damage	(951		)	(630		)
Net cash provided by operating activities	147,327			114,065
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for acquisition of operating properties, net of cash acquired (Note 2)	(393,133		)	(481,756		)
Expenditures for acquisition of development and redevelopment properties (Note 2)	(163,271		)	—
Expenditures for operating properties	(60,967		)	(41,087		)
Expenditures for development and redevelopment properties and undeveloped land	(52,937		)	(18,682		)
Net proceeds received from dispositions of operating properties (Note 13)	141,810			—
Insurance proceeds received for property damage	951			—
Increase in acquisition-related deposits	(8,250		)	(11,000		)
Increase in restricted cash (Note 2)	(5,526		)	(690		)
Net cash used in investing activities	(541,323		)	(553,215		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series G and Series H preferred stock (Note 7)	192,411			—
Redemption of Series E and Series F preferred stock (Note 7)	(126,500		)	—
Redemption of Series A preferred units (Note 6)	(75,000		)	—
Net proceeds from issuance of common stock (Note 7)	662,371			221,015
Borrowings on unsecured line of credit	418,000			302,000
Repayments on unsecured line of credit	(573,000		)	(461,000		)
Proceeds from issuance of secured debt	97,000			135,000
Principal payments on secured debt	(104,578		)	(5,295		)
Proceeds from the issuance of unsecured debt (Note 5)	150,000			324,476
Repayments of exchangeable senior notes (Note 5)	(148,000		)	—
Financing costs	(5,396		)	(8,584		)
Decrease in loan deposits	—			2,859
Repurchase of common stock and restricted stock units (Note 9)	(736		)	(736		)
Proceeds from exercise of stock options	129			395
Dividends and distributions paid to common stockholders and common unitholders	(70,517		)	(58,942		)
Dividends and distributions paid to preferred stockholders and preferred unitholders	(10,852		)	(11,397		)
Net cash provided by financing activities	405,332			439,791
Net increase in cash and cash equivalents	11,336			641
Cash and cash equivalents, beginning of period	4,777			14,840
Cash and cash equivalents, end of period	$	16,113		$	15,481

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)

(unaudited, in thousands)



	Nine Months Ended September 30,
	2012		2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $11,531 and $5,361 as of September 30, 2012 and 2011, respectively	$	49,378	$	42,070
NONCASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment properties	$	8,299	$	13,506
Tenant improvements funded directly by tenants	$	16,303	$	3,037
Assumption of secured debt in connection with property acquisitions (Notes 2 and 5)	$	177,678	$	30,042
Assumption of other assets and liabilities in connection with operating and development property acquisitions, net (Note 2)	$	11,667	$	4,515
Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange	$	—	$	23,285
NONCASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common stockholders and common unitholders	$	26,782	$	21,064
Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders	$	1,693	$	1,909
Issuance of share-based compensation awards, net (Note 9)	$	30,929	$	7,505
Issuance of common units in the Operating Partnership in connection with an operating property acquisition (Note 2)	$	5,604	$	—
Exchange of common units of the Operating Partnership into shares of the Company's common stock	$	231	$	91

See accompanying notes to consolidated financial statements.

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

KILROY REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands, except unit data)



	September 30, 2012			December 31, 2011
	(unaudited)
ASSETS
REAL ESTATE ASSETS:
Land and improvements (Note 2)	$	562,071		$	537,574
Buildings and improvements (Note 2)	3,169,224			2,830,310
Undeveloped land and construction in progress (Note 2)	668,058			430,806
Total real estate held for investment	4,399,353			3,798,690
Accumulated depreciation and amortization	(725,728		)	(742,503		)
Total real estate assets held for investment, net ($296,656 and $101,352 of VIE, Note 1)	3,673,625			3,056,187
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 13)	166,019			84,156
CASH AND CASH EQUIVALENTS	16,113			4,777
RESTRICTED CASH	5,884			358
MARKETABLE SECURITIES (Note 12)	6,812			5,691
CURRENT RECEIVABLES, NET (Note 4)	7,113			8,395
DEFERRED RENT RECEIVABLES, NET (Note 4)	110,128			101,142
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)	187,307			155,522
DEFERRED FINANCING COSTS, NET	18,442			18,368
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)	24,398			12,199
TOTAL ASSETS	$	4,215,841		$	3,446,795
LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
LIABILITIES:
Secured debt (Notes 2, 5 and 12)	$	520,867		$	351,825
Exchangeable senior notes, net (Notes 5 and 12)	162,885			306,892
Unsecured debt, net (Notes 5 and 12)	1,130,814			980,569
Unsecured line of credit (Notes 5 and 12)	27,000			182,000
Accounts payable, accrued expenses and other liabilities	127,472			81,713
Accrued distributions (Note 17)	28,845			22,692
Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)	120,407			79,781
Rents received in advance and tenant security deposits	31,728			26,917
Liabilities and deferred revenue of real estate assets held for sale (Note 13)	4,455			13,286
Total liabilities	2,154,473			2,045,675
COMMITMENTS AND CONTINGENCIES (Note 11)
7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS	—			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			—
6.375% Series H Cumulative Redeemable Preferred units, 4,000,000 units issued and outstanding ($100,000 liquidation preference)	96,256			—
Common units, 74,692,939 and 58,819,717 held by the general partner and 1,826,503 and 1,718,131 held by common limited partners issued and outstanding, respectively	1,866,172			1,203,259
Total partners' capital	2,058,583			1,324,841
Noncontrolling interest in consolidated subsidiaries	2,785			2,641
Total capital	2,061,368			1,327,482
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL	$	4,215,841		$	3,446,795

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except unit and per unit data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUES:
Rental income	$	95,405		79,673			$	268,228		$	223,853
Tenant reimbursements	8,665			6,387			23,947			17,382
Other property income	223			339			1,625			2,136
Total revenues	104,293			86,399			293,800			243,371
EXPENSES:
Property expenses	21,871			18,132			57,906			49,091
Real estate taxes	9,312			7,352			25,138			21,941
Provision for bad debts	—			144			2			265
Ground leases	859			503			2,276			1,266
General and administrative expenses	8,727			6,355			26,745			20,355
Acquisition-related expenses	556			1,163			3,897			2,829
Depreciation and amortization	44,109			33,275			116,832			88,969
Total expenses	85,434			66,924			232,796			184,716
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains (Note 12)	330			30			703			272
Interest expense (Note 5)	(19,854		)	(22,896		)	(60,172		)	(62,671		)
Total other (expenses) income	(19,524		)	(22,866		)	(59,469		)	(62,399		)
(LOSS) INCOME FROM CONTINUING OPERATIONS	(665		)	(3,391		)	1,535			(3,744		)
DISCONTINUED OPERATIONS (Note 13)
Income from discontinued operations	3,187			5,126			9,127			13,818
Net gain on dispositions of discontinued operations	—			12,555			72,809			12,555
Total income from discontinued operations	3,187			17,681			81,936			26,373
NET INCOME	2,522			14,290			83,471			22,629
Net income attributable to noncontrolling interests in consolidated subsidiaries	(48		)	(30		)	(144		)	(95		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.	2,474			14,260			83,327			22,534
Preferred distributions (Note 8)	(3,280		)	(3,799		)	(10,795		)	(11,397		)
Original issuance costs of redeemed preferred units (Note 6 and 8)	(2,062		)	—			(6,980		)	—
Total preferred distributions	(5,342		)	(3,799		)	(17,775		)	(11,397		)
NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS	$	(2,868	)	$	10,461		$	65,552		$	11,137
Loss from continuing operations available to common unitholders per common unit - basic (Note 16)	$	(0.08	)	$	(0.12	)	$	(0.25	)	$	(0.28	)
Loss from continuing operations available to common unitholders per common unit - diluted (Note 16)	$	(0.08	)	$	(0.12	)	$	(0.25	)	$	(0.28	)
Net (loss) income available to common unitholders per unit - basic (Note 16)	$	(0.04	)	$	0.17		$	0.92		$	0.18
Net (loss) income available to common unitholders per unit - diluted (Note 16)	$	(0.04	)	$	0.17		$	0.92		$	0.18
Weighted average common units outstanding - basic (Note 16)	73,680,259			60,073,258			69,717,834			57,857,538
Weighted average common units outstanding - diluted (Note 16)	73,680,259			60,073,258			69,717,834			57,857,538
Distributions declared per common unit	$	0.35		$	0.35		$	1.05		$	1.05

See accompanying notes to consolidated financial statements.

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 Partners' Capital			Noncontrolling Interests in Consolidated Subsidiaries			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						22,534			22,534			95			22,629
Issuance of common units				6,037,500		221,015			221,015						221,015
Issuance of share-based compensation awards				68,727		2,447			2,447						2,447
Noncash amortization of share-based compensation						4,201			4,201						4,201
Repurchase/redemption of common units and restricted stock units				(11,485	)	(736		)	(736		)				(736		)
Exercise of stock options				15,000		395			395						395
Other						20			20			(20		)	—
Preferred distributions						(11,397		)	(11,397		)				(11,397		)
Distributions declared per common unit ($1.05 per unit)						(61,941		)	(61,941		)				(61,941		)
BALANCE AS OF SEPTEMBER 30, 2011	$	121,582		60,182,543		$	1,171,049		$	1,292,631		$	1,712		$	1,294,343

	Partners' Capital								Total Partners' Capital			Noncontrolling Interests in Consolidated Subsidiaries
	Preferred Units			Number of Common Units		Common Units			Total Partners' Capital			Noncontrolling Interests in Consolidated Subsidiaries			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						83,327			83,327			144			83,471
Issuance of Series G Preferred units and Series H Preferred units (Note 8)	192,411								192,411						192,411
Redemption of Series E and Series F Preferred units (Note 8)	(121,582		)			(4,918		)	(126,500		)				(126,500		)
Redemption of Series A Preferred units (Note 6)						(2,062		)	(2,062		)				(2,062		)
Issuance of common units (Note 8)				15,813,189		662,371			662,371						662,371
Issuance of common units in connection with an operating property acquisition ( Notes 2 and 8)				118,372		5,604			5,604						5,604
Issuance of share-based compensation awards (Note 9)				62,137		957			957						957
Noncash amortization of share-based compensation (Note 9)						6,182			6,182						6,182
Repurchase/redemption of common units and restricted stock units (Note 9)				(22,312	)	(603		)	(603		)				(603		)
Settlement of restricted stock units (Note 9)				5,208		(133		)	(133		)				(133		)
Exercise of stock options				5,000		129			129						129
Preferred distributions						(10,795		)	(10,795		)				(10,795		)
Distributions declared per common unit ($1.05 per unit)						(77,146		)	(77,146		)				(77,146		)
BALANCE AS OF SEPTEMBER 30, 2012	$	192,411		76,519,442		$	1,866,172		$	2,058,583		$	2,785		$	2,061,368

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	83,471		$	22,629
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	122,754			96,971
(Decrease) increase in provision for bad debts	(192		)	141
Depreciation of furniture, fixtures and equipment	896			839
Noncash amortization of share-based compensation awards	5,544			3,365
Noncash amortization of deferred financing costs and debt discounts and premiums	7,078			10,164
Noncash amortization of net (below)/above market rents (Note 3)	(4,616		)	1,519
Net gain on dispositions of discontinued operations (Note 13)	(72,809		)	(12,555		)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements	(6,851		)	(7,005		)
Straight-line rents	(16,433		)	(15,543		)
Net change in other operating assets	(2,529		)	(4,326		)
Net change in other operating liabilities	31,965			18,496
Insurance proceeds received for property damage	(951		)	(630		)
Net cash provided by operating activities	147,327			114,065
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for acquisition of operating properties, net of cash acquired (Note 2)	(393,133		)	(481,756		)
Expenditures for acquisition of development and redevelopment properties (Note 2)	(163,271		)	—
Expenditures for operating properties	(60,967		)	(41,087		)
Expenditures for development and redevelopment properties and undeveloped land	(52,937		)	(18,682		)
Net proceeds received from dispositions of operating properties (Note 13)	141,810			—
Insurance proceeds received for property damage	951			—
Increase in acquisition-related deposits	(8,250		)	(11,000		)
Increase in restricted cash (Note 2)	(5,526		)	(690		)
Net cash used in investing activities	(541,323		)	(553,215		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series G and Series H preferred units (Note 8)	192,411			—
Redemption of Series E and Series F preferred units (Note 8)	(126,500		)	—
Redemption of Series A preferred units (Note 6)	(75,000		)	—
Net proceeds from issuance of common units (Note 8)	662,371			221,015
Borrowings on unsecured line of credit	418,000			302,000
Repayments on unsecured line of credit	(573,000		)	(461,000		)
Proceeds from issuance of secured debt	97,000			135,000
Principal payments on secured debt	(104,578		)	(5,295		)
Proceeds from the issuance of unsecured debt (Note 5)	150,000			324,476
Repayments of exchangeable senior notes (Note 5)	(148,000		)	—
Financing costs	(5,396		)	(8,584		)
Decrease in loan deposits	—			2,859
Repurchase/redemption of common units and restricted stock units (Note 9)	(736		)	(736		)
Proceeds from exercise of stock options	129			395
Distributions paid to common unitholders	(70,517		)	(58,942		)
Distributions paid to preferred unitholders	(10,852		)	(11,397		)
Net cash provided by financing activities	405,332			439,791
Net increase in cash and cash equivalents	11,336			641
Cash and cash equivalents, beginning of period	4,777			14,840
Cash and cash equivalents, end of period	$	16,113		$	15,481

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)

(unaudited, in thousands)



	Nine Months Ended September 30,
	2012		2011
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $11,531 and $5,361 as of September 30, 2012 and 2011, respectively	$	49,378	$	42,070
NONCASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment properties	$	8,299	$	13,506
Tenant improvements funded directly by tenants	$	16,303	$	3,037
Assumption of secured debt in connection with property acquisitions (Notes 2 and 5)	$	177,678	$	30,042
Assumption of other assets and liabilities in connection with operating and development property acquisitions, net (Note 2)	$	11,667	$	4,515
Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange	$	—	$	23,285
NONCASH FINANCING TRANSACTIONS:
Accrual of distributions payable to common unitholders	$	26,782	$	21,064
Accrual of distributions payable to preferred unitholders	$	1,693	$	1,909
Issuance of common units in connection with an operating property acquisition (Note 2)	$	5,604	$	—
Issuance of share-based compensation awards, net (Note 9)	$	30,929	$	7,505

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 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.

Our portfolio of operating properties was comprised of the following office buildings (the"Office Properties") and industrial buildings (the "Industrial Properties") at September 30, 2012:



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied
Stabilized Properties	111	12,656,542	497	91.1	%
Properties Held for Sale ⁽¹⁾	44	3,721,989	68	86.7	%

________________________


(1)	Includes all Industrial Properties and five Office Properties (see Note 13 for additional information).

As of September 30, 2012, our stabilized portfolio of operating properties excluded all thirty-nine Industrial Properties and five Office Properties since these forty-four properties were classified as "held-for-sale" at September 30, 2012 (see Note 13 for further discussion). Our stabilized portfolio includes all of our properties with the exception of properties held-for-sale, undeveloped land, development and redevelopment properties currently under construction or committed for construction, and "lease-up" properties. 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 at September 30, 2012.

As of September 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. As of September 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 ten office properties located in the state of Washington.

As of September 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 September 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 Seventh Amended and Restated Agreement of Limited Partnership (as amended, the "Partnership Agreement") (see Note 6).

Kilroy Realty Finance, Inc., which is a wholly-owned subsidiary of the Company, 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 are wholly-owned.

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.

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.

Consolidated Variable Interest Entities

As of September 30, 2012 the consolidated financial statements of the Company and the Operating Partnership also included four variable interest entities ("VIEs") in which we are deemed to be the primary beneficiary. During the nine months ended September 30, 2012, two operating properties and two development projects were acquired in four separate transactions and transferred to four 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 (each, a "Section 1031 Exchange"). To realize the tax deferral available under the Section 1031 Exchange, the Company must complete the Section 1031 Exchanges, if any, and take title to the to-be-exchanged properties within 180 days of the acquisition dates (see Note 2). The VIEs will be terminated upon the completion of the Section 1031 Exchanges or the expiration of the 180-day period, as applicable. The impact of consolidating the VIEs increased the Company's total assets and liabilities by approximately $317.1 million (of which $296.7 million is related to real estate held for investment on our consolidated balance sheet) and $94.4 million, respectively, at September 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 (of which $101.4 million is related to real estate held for investment on our consolidated balance sheet) 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 September 30, 2012.

Change in Segment Reporting

Prior to the quarter ended September 30, 2012, we had one reportable segment which was our Office Properties segment and one non-reportable segment, which was our Industrial Properties segment. During the three months ended September 30, 2012, we determined that all of our Industrial Properties and five of our Office Properties met the criteria to be reported as held for sale on our consolidated balance sheets and therefore the results for all of our Industrial Properties were reported in discontinued operations for the three and nine months ended September 30, 2012 (see Note 14). As a result, beginning with the reporting period ended September 30, 2012, we only have one segment which is our Office Properties segment (see Note 14).

Reclassifications

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

In October 2012, the FASB issued Accounting Standards Update 2012-04, Technical Corrections and Improvements ("ASU 2012-04"), which makes certain technical corrections and “conforming fair value amendments” to the FASB Accounting Standards Codification. The amendments affect various Codification topics and apply to all reporting entities within the scope of those topics. These provisions of the amendment are effective upon issuance, except for amendments that are subject to transition guidance,

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

which will be effective for fiscal periods beginning after December 15, 2012. The provisions of ASU 2012-04 are not expected to have a material impact on our consolidated financial statements.

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.

2. Acquisitions

Operating Properties

During the nine months ended September 30, 2012, we acquired the twelve operating office properties listed below from unrelated third parties. Unless otherwise noted, we funded these acquisitions with proceeds from the Company's public offerings of common stock in February 2012 and August 2012 (see Note 7), borrowings under the unsecured line of credit (see Note 5), disposition proceeds (see Note 13), the assumption of existing debt and the issuance of common units of the Operating Partnership.



Property	Date of Acquisition	Number of Buildings	Rentable Square Feet	Occupancy as of September 30, 2012	Purchase Price (in millions)⁽¹⁾
4100-4700 Bohannon Drive
Menlo Park, CA	February 29, 2012	7	374,139	78.4%	$	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
10900 NE 4th Street
Bellevue, WA ⁽²⁾⁽⁴⁾	July 24, 2012	1	416,755	90.5%	186.1
6255 W. Sunset Boulevard
Los Angeles, CA ⁽⁵⁾	July 31, 2012	1	321,883	87.3%	78.8
Total		12	1,532,764		$	572.0

________________________


(1)	Excludes acquisition-related costs and includes assumed unpaid leasing commissions, tenant improvements, and other property related liabilities.


(2)	As of September 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.)


(4)	In connection with this acquisition, we assumed secured debt with an outstanding principal balance of $83.6 million and a premium of $1.4 million as a result of recording

this debt at fair value on the acquisition date (see Note 5).

(5) As part of the consideration for this transaction, we issued 118,372 common units of the Operating Partnership "OP units" valued at $47.34, which was the Company's closing stock price on the NYSE on the acquisition date. In connection with this acquisition we also assumed secured debt with an outstanding principal balance of $53.9 million and a premium of $3.1 million as a result of recording this debt at fair value on the acquisition date (see Note 5). We also assumed $4.7 million of accrued liabilities in connection with this acquisition which are not included in the purchase price above.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 respective acquisition dates:



	4100-4700 Bohannon Drive, Menlo Park, CA ⁽¹⁾		10900 NE 4th Street, Bellevue, WA ⁽¹⁾		All Other Acquisitions ⁽²⁾		Total
	(in thousands)
Assets
Land and improvements⁽³⁾	$	38,810	$	25,080	$	18,111	$	82,001
Buildings and improvements⁽⁴⁾	124,617		150,877		204,288		479,782
Cash and cash equivalents	—		—		3,973		3,973
Restricted cash	—		—		5,329		5,329
Deferred leasing costs and acquisition-related intangible assets⁽⁵⁾	9,470		16,469		29,790		55,729
Prepaid expenses and other assets	—		—		184		184
Total assets acquired	172,897		192,426		261,675		626,998

Liabilities
Deferred revenue and acquisition-related intangible liabilities⁽⁶⁾	10,380		4,940		19,250		34,570
Secured debt⁽⁷⁾	—		84,984		92,694		177,678
Accounts payable, accrued expenses and other liabilities	137		627		5,584		6,348
Total liabilities assumed	10,517		90,551		117,528		218,596
Net assets and liabilities acquired⁽⁸⁾	$	162,380	$	101,875